AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1997
REGISTRATION NO. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WEBSTER PREFERRED CAPITAL CORPORATION
(Exact name of registrant as specified in its governing instruments)
Webster Plaza
145 Bank Street
Waterbury, Connecticut 06702
(203) 578-2271
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
John V. Brennan
Webster Preferred Capital Corporation
Webster Plaza
145 Bank Street
Waterbury, Connecticut 06702
(203) 578-2335
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
Stuart G. Stein, Esq. Kenneth T. Cote, Esq.
Hogan & Hartson L.L.P. Brown & Wood LLP
555 Thirteenth Street, N.W. One World Trade Center
Washington, D.C. 20004 New York, NY 10048
(202) 637-8575 (212) 839-5564
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) 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. [ ]
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. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Title of securities being Amount being Proposed maximum Proposed maximum Amount of
registered registered offering price per aggregate offering registration fee
unit price
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Auction Market
Cumulative Preferred Stock, par
value $1.00 per share 2,600 $25,000 $65,000,000
Series B __% Cumulative Preferred
Stock, par value $1.00 per share 1,150,000 $10 $11,500,000 $23,182*
- ------------------------------------------------------------------------------------------------------------------------------------
* Registration fee determined pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
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.
================================================================================
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED ____________, 1997
PROSPECTUS
WEBSTER PREFERRED CAPITAL CORPORATION
--------------------
2,600 SHARES SERIES A AUCTION MARKET CUMULATIVE PREFERRED 1,000,000 SHARES SERIES B ____% CUMULATIVE PREFERRED
STOCK (LIQUIDATION PREFERENCE $25,000.00 PER SHARE) STOCK (LIQUIDATION PREFERENCE $10.00 PER SHARE)
--------------------
Webster Preferred Capital Corporation (the "Company") is hereby
offering (the "Offering") 2,600 shares of its Series A Auction Market Cumulative
Preferred Stock, liquidation preference $25,000.00 per share (the "AMPS(R)") and
1,000,000 shares of its Series B ___% Cumulative Preferred Stock, liquidation
preference $10.00 per share (the "Series B Preferred Shares," and together with
the AMPS, the "Preferred Shares"). The AMPS are being sold in minimum
investments of $25,000.00 and thereafter in multiples of $25,000.00. Although
there is no minimum investment in the Series B Preferred Shares, such shares are
subject to a maximum investment of $50,000.00 (or 5,000 shares).
The Applicable Dividend Rate on the AMPS for the initial Dividend
Period ending _____ ___, 199__ will be ___% per annum. Dividends on the shares
of AMPS will be payable in arrears, will be cumulative from the Date of Original
Issue and will be payable, when, as and if (continued on next page . . .)
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE PREFERRED
SHARES OFFERED HEREBY. AMONG THE RISKS THAT PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER ARE THE FOLLOWING:
o The Company is a wholly-owned subsidiary of Webster Bank and will
continue to be controlled by Webster Bank after the Offering;
o The AMPS will not be listed on any securities exchange. Application
has been made to list the Series B Preferred Shares on the Nasdaq
Stock Market's National Market Tier (the "Nasdaq Stock Market").
However, there can be no assurance that the Series B Preferred Shares
will be listed, or that an active, or any, trading market will develop
or be maintained.
o Federal regulators of Webster Bank could impose restrictions on the
operations of the Company or the Company's ability to pay dividends;
o Substantially all of the properties securing the Company's mortgage
portfolio are located in Connecticut;
o The Company would be subject to federal and Connecticut state income
tax on its taxable income at regular corporate rates if it fails to
qualify as a REIT (as defined below) for federal income tax purposes;
and
o The Company has a limited operating history.
--------------------
THE PREFERRED SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "SEC"), ANY STATE SECURITIES COMMISSION, THE
OFFICE OF THRIFT SUPERVISION (THE "OTS") OR THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), NOR HAS THE SEC, ANY STATE
SECURITIES COMMISSION, THE OTS OR THE FDIC PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PREFERRED SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE FDIC, THE BANK INSURANCE FUND, THE
SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
- -------------------------------------------------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discount(1) Company (2)
- -------------------------------------------------------------------------------------------------------------------------
Per AMPS $25,000.00 $ $
Per Series B Preferred Share $ 10.00 $ $
----------------- -----------------
Total(3) $ $
================= =================
- -------------------------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $_______.
(3) The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to an additional 150,000
Series B Preferred Shares at the Price to Public, less the Underwriting
Discount, solely to cover over-allotments, if any. If all such shares are
purchased, the total Underwriting Discount and Proceeds to Company will be
$________ and $_________, respectively. See "Underwriting."
--------------------
The Preferred Shares are offered by the Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that one certificate for the AMPS will be delivered
to the nominee of The Depository Trust Company on or about ________ __, 1997. It
is expected that delivery of the Series B Preferred Shares offered hereby will
be made in New York, New York on or about ________ __, 1997.
- -------------
(R)Registered trademark of Merrill Lynch & Co., Inc.
--------------------
MERRILL LYNCH & CO. KEEFE, BRUYETTE & WOODS, INC.
The date of this Prospectus is _________ __, 1997.
(. . . continued from previous page)
declared by the Board of Directors of the Company, out of funds legally
available therefor, commencing on the ______ __, 199__ initial Dividend Payment
Date. After the initial Dividend Period, each subsequent Dividend Period will
(except for certain adjustments) be 28 days in length, and (except as otherwise
provided herein) the dividend rate on the shares of AMPS will be the Applicable
Dividend Rate per annum determined pursuant to periodic Auctions conducted in
accordance with procedures described in Appendix B hereto. Auctions for the AMPS
will be held on the Business Day next preceding the Dividend Payment Date ending
any Dividend Period. If all of the outstanding shares of AMPS are subject to
Submitted Hold Orders, the Applicable Dividend Rate for the next Dividend Period
for the AMPS will be equal to the All Hold Rate in effect on the date of the
applicable Auction. If Sufficient Clearing Bids have not been made in an Auction
other than because all of the outstanding shares of AMPS are the subject of
Submitted Hold Orders, then the Applicable Dividend Rate for the next succeeding
Dividend Period will be the Maximum Applicable Rate on the related Auction Date.
The AMPS may be redeemed for cash at the option of the Company, in
whole or in part, on any Dividend Payment Date (except during the initial
Dividend Period) at a Redemption Price of $25,000.00 per share, plus the
quarterly accrued and unpaid dividend, if any, thereon. Upon a default in the
Required Asset Coverage, the Company will have to either restore such Coverage
or redeem enough Preferred Shares to restore such Coverage. Any redemption could
be subject to the prior approval of the OTS. See "Description of Preferred
Shares -- Auction Market Preferred Stock--Redemption."
Dividends on the Series B Preferred Shares are cumulative, and payable
at the rate of ___% per annum of the $10.00 liquidation preference (an amount
equal to $_____ per annum per share), if, when and as declared by the Board of
Directors of the Company. Dividends on the Series B Preferred Shares are payable
quarterly in arrears on the fifteenth day of January, April, July and October in
each year, commencing January 15, 1998.
The Series B Preferred Shares are not redeemable prior to ________ __,
2002 (except upon the occurrence of a Tax Event, as defined in "Description of
Preferred Shares--Series B Preferred Shares--Redemption" or a default in the
Required Asset Coverage). On and after ________ __, 2002, the Series B Preferred
Shares may be redeemed for cash at the option of the Company, in whole or in
part, at a redemption price of $10.00 per share, plus the quarterly accrued and
unpaid dividend, if any, thereon, subject to the receipt of prior approval from
the OTS. Upon a default in the Required Asset Coverage, the Company will have to
either restore such Coverage or redeem enough Preferred Shares to restore such
Coverage. Any redemption could be subject to the prior approval of the OTS. See
"Description of Preferred Shares--Series B Preferred Shares--Redemption."
The Preferred Shares are not subject to any sinking fund or mandatory
redemption and are not convertible into any other securities of the Company.
The Preferred Shares are not exchangeable into preferred shares of Webster Bank.
The Company is required to maintain (i) a Required Asset Coverage
designed to ensure that the Company continues to own Eligible Assets with a
Market Value in excess of the liquidation preference on the outstanding
Preferred Shares, and (ii) a Required Dividend Coverage designed to ensure that
the Company has sufficient Liquid Assets to pay dividends accumulated on the
Preferred Shares.
Prior to this Offering, there has been no market for the Preferred
Shares. The AMPS will not be listed on any exchange. Application has been made
to list the Series B Preferred Shares on the Nasdaq Stock Market. However, there
can be no assurance that an active, or any, trading market will develop or be
maintained for the Preferred Shares.
The Company is a wholly-owned subsidiary of Webster Bank and was formed
by Webster Bank to provide a cost-effective means of raising funds, including
equity capital, for Webster Bank's parent, Webster Financial Corporation
("Webster"). All of the Company's current mortgage assets have been contributed
by or purchased from Webster Bank.
The Company expects to qualify as a real estate investment trust
("REIT") for federal income tax purposes, commencing with the taxable year
ending December 31, 1997. Individuals or entities are not permitted to purchase
in the Offering, or thereafter to beneficially own, Series B Preferred Shares
with an aggregate liquidation value of more than $50,000 (or 5,000 shares). See
"Description of Capital Stock of the Company--Restrictions on Ownership and
Transfer."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
SERIES B PREFERRED SHARES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE
STABILIZING TRANSACTIONS, THE PURCHASE OF SERIES B PREFERRED SHARES TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
ii
The information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. Unless otherwise indicated,
all information in this Prospectus assumes that the over-allotment option
described in "Underwriting" is not exercised. Capitalized terms used herein and
not otherwise defined are as defined in the Glossary appearing elsewhere in this
Prospectus.
THE COMPANY
Webster Preferred Capital Corporation is a Connecticut corporation
incorporated in March 1997. The Company was formed by Webster Bank to provide a
cost-effective means of raising funds, including equity capital, on a
consolidated basis for Webster Bank's parent, Webster. The Company will acquire,
hold and manage real estate mortgage assets ("Mortgage Assets"). In March 1997,
Webster Bank contributed $617.0 million of Mortgage Assets, net as part of the
formation of the Company. As of June 30, 1997, all of the Mortgage Assets owned
by the Company are whole loans secured by first mortgages or deeds of trusts on
single family (one to four units) residential real estate properties
("Residential Mortgage Loans"). Although the Company may acquire and hold a
variety of Mortgage Assets, its present intention is to acquire only Residential
Mortgage Loans and investment grade mortgage securities representing interests
in or obligations backed by pools of Mortgage Loans ("Mortgage-Backed
Securities"). As of June 30, 1997, approximately 35.4% of the Company's Mortgage
Loans are fixed rate loans and approximately 64.6% are adjustable rate loans.
Prior to completion of the Offering, Webster Bank will contribute at least
$_____ of Mortgage-Backed Securities to the Company, and during the first
quarter of 1998, Webster Bank anticipates contributing approximately $___
million of additional Mortgage Assets or cash to the Company.
The Company is required to maintain (i) a Required Asset Coverage
designed to ensure that the Company continues to own Eligible Assets with a
Market Value in excess of the liquidation preference on the outstanding
Preferred Shares, and (ii) a Required Dividend Coverage designed to ensure that
the Company has sufficient Liquid Assets to pay dividends accumulated on the
Preferred Shares.
All of the Company's common stock, par value $.01 per share ("Common
Stock"), is owned by Webster Bank. Webster Bank has indicated to the Company
that, for as long as any Preferred Shares are outstanding, Webster Bank intends
to maintain direct ownership of 100% of the outstanding Common Stock of the
Company. The Preferred Shares are not exchangeable into preferred shares of
Webster Bank.
The Company will elect to be treated as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), and will generally not be subject
to federal and Connecticut state income tax to the extent that it distributes
its earnings to its stockholders and maintains its qualification as a REIT.
Furthermore, the Company and Webster Bank will benefit significantly from
federal and state tax treatment of dividends paid by the Company as a result of
its qualification as a REIT.
The principal executive offices of the Company are located at Webster
Plaza, 145 Bank Street, Waterbury, Connecticut 06702, and its telephone number
is (203) 578-2271.
WEBSTER BANK
Webster Bank is a federal savings bank with approximately $6.4 billion
in assets. It is a wholly-owned subsidiary of Webster, and is headquartered in
Waterbury, Connecticut. As a result of the Offering, Webster Bank will benefit
from federal and state tax treatment of dividends paid by the Company as a
result of its qualification as a REIT, and will be entitled to receive advisory
and servicing fees and dividends in respect of the Common Stock. Webster Bank
also will be entitled to retain any ancillary fees, including, but not limited
to, late payment charges, prepayment fees, penalties and assumption fees
collected in connection with the Mortgage Loans serviced by it. In addition,
Webster Bank, as Servicer, will receive any benefit derived from interest earned
on collected principal and interest payments between the date of collection and
the
1
date of remittance to the Company and from interest earned on tax and insurance
impound funds with respect to Mortgage Loans serviced by the Servicer.
RISK FACTORS
The purchase of Preferred Shares offered hereby is subject to certain
risks. See "Risk Factors" commencing on page 13. Among such risks are the
following:
o The Company will be controlled by Webster Bank and dependent in
virtually every phase of its operations on the diligence and skill of
the officers and employees of Webster Bank and its affiliates.
o The AMPS will not be listed on any securities exchange. Application has
been made to list the Series B Preferred Shares on the Nasdaq Stock
Market. However, there can be no assurance that the Series B Preferred
Shares will be listed, or that an active, or any, trading market will
develop or be maintained.
o Webster Bank and the Company, as a subsidiary of Webster Bank, are
regulated organizations subject to the risk that federal regulators
will restrict the payment of dividends, including dividends to the
holders of Preferred Shares, or require the redemption of shares of the
preferred stock, par value $1.00 per share, of the Company (the
"Preferred Stock"). Under certain circumstances, federal regulators
could subject Webster Bank or the Company to other restrictions,
including, among other things, requiring either organization to alter,
reduce or terminate its activities, restricting the transfer of assets,
restricting transactions between the two organizations, requiring
Webster Bank to divest or liquidate the Company, or requiring that
Webster Bank be sold. Under certain circumstances, certain of these
restrictions could result in the Company's failure to qualify as a
REIT.
o Risks associated with mortgage loans generally, and particularly the
geographic concentration of substantially all of the Company's mortgage
loan portfolio in Connecticut, could adversely affect the value of the
Preferred Shares and the Mortgage Assets held by the Company.
o If the Company fails to maintain its qualification as a REIT for
federal income tax purposes, it will be subject to federal and
Connecticut state income tax on its taxable income at regular corporate
rates, resulting in a decrease in cash available for distribution.
o The Company has a limited operating history.
THE OFFERING
For a more complete description of the terms of the Preferred Shares
specified in the following summary, see "Description of Preferred Shares."
GENERAL
- --------
Issuer................................ Webster Preferred Capital Corporation, a
Connecticut corporation and a
wholly-owned subsidiary of Webster Bank.
Securities Offered.................... 2,600 AMPS. The AMPS are being sold in
minimum investments of $25,000.00 and
thereafter in multiples of $25,000.00.
1,000,000 Series B Preferred Shares. The
Company has granted the Underwriters an
option, exercisable for 30 days after
the date of this Prospectus, to purchase
up to an additional 150,000 Series B
Preferred Shares solely to cover
over-allotments, if any. Although there
is no minimum investement in the Series
B Preferred Shares, such shares are
subject to a maximum investment of
$50,000 (or 5,000 shares).
Ranking............................... The AMPS and the Series B Preferred
Shares are of equal rank with respect to
dividend rights and rights upon
liquidation. The Preferred Shares rank
senior to the Company's Common Stock
with respect to
2
dividend rights and rights upon
liquidation. Additional shares of
Preferred Stock ranking senior to the
Preferred Shares may not be issued
without the approval of persons holding
at least 67% of the aggregate
liquidation value of the Preferred
Shares.
Required Asset Coverage............... The Company is required to maintain a
Required Asset Coverage designed to
ensure that the Company continues to own
Eligible Assets with a Market Value in
excess of the aggregate redemption price
of the outstanding Preferred Shares.
Although the Company is expected to hold
a majority of its assets as Residential
Mortgage Loans, such assets will not
constitute Eligible Assets. Eligible
Assets include Mortgage-Backed
Securities, cash and certain other
Liquid Assets and marketable securities.
As of each Evaluation Date, the Company
will value the Eligible Assets to
determine whether their Adjusted Value
meets the Required Asset Coverage as set
forth under the heading "Required Asset
Coverage." The Company estimates that at
the Date of Original Issue, based on the
anticipated composition of the Company's
portfolio and current market valuations,
the Market Value of Eligible Assets will
be approximately $____ million and the
Adjusted Value of Eligible Assets will
be approximately $_____ million.
Assuming issuance of the Preferred
Shares offered hereby, the aggregate
liquidation preference would be $75.0
million (or $76.5 million if the
Underwriters' over-allotment option is
exercised). The Required Asset Coverage
on that date is expected to be
approximately $____ million. The Market
Value of the Company's Eligible Assets
will fluctuate with general changes in
interest rates, and can be expected to
vary from time to time depending on
market conditions. The Adjustment
Factors applicable to different types of
Eligible Assets used to calculate
Adjusted Value vary because of
differences in volatility of the market
prices of such assets. While there can
be no assurance that the Market Value or
Adjusted Value of the Eligible Assets
will be maintained, if the Required
Asset Coverage is not maintained, or
restored as required, the Company would
be obligated, subject to any required
regulatory approval, to redeem such
number of Preferred Shares as would
cause the Required Asset Coverage to be
restored. See "Required Asset Coverage."
Required Dividend Coverage............ The Company is required to maintain a
Required Dividend Coverage designed to
ensure that the Company has sufficient
Liquid Assets to pay dividends
accumulated on the Preferred Shares. On
each Evaluation Date and Dividend
Payment Date, the Company is required to
deposit or have on deposit with the
Custodian and thereafter to maintain on
deposit until the Business Day prior to
the next ensuing related Dividend
Payment Date sufficient Liquid Assets to
pay the dividends which will accumulate
on the then outstanding Preferred Shares
from and after such Date of Original
Issue, the most recent Dividend Payment
Date or such Dividend Payment Date, as
the
3
case may be, until the next scheduled
Dividend Payment Date for each
outstanding Preferred Share at the
Applicable Dividend Rate for each share
of AMPS outstanding and at ____% per
annum for each Series B Preferred Share
outstanding. The source of funds for the
Company to pay dividends will be its
cash or funds received from interest and
principal payments on its Mortgage
Assets. See "Required Dividend
Coverage."
Liquidation Preference................ The liquidation preference for each
share of AMPS is $25,000.00, plus an
amount equal to the accrued and unpaid
dividends, if any, thereon. The
liquidation preference for each Series B
Preferred Share is $10.00, plus an
amount equal to the accrued and unpaid
dividends, if any, thereon. See
"Description of Preferred Shares--Rights
Upon Liquidation."
Voting Rights......................... Holders of Preferred Shares will not
have any voting rights, except as
expressly provided herein. On any matter
on which holders of the Preferred Shares
may vote, each Preferred Share will be
entitled to vote proportionately based
upon the liquidation preference
associated with such Preferred Share. In
certain circumstances when the Company
has failed to declare or pay dividends,
holders of Preferred Shares have the
right to elect two directors to the
Board of Directors of the Company. See
"Description of Preferred Shares--Voting
Rights."
Listing on Nasdaq Stock Market........ Prior to this Offering, there has been
no market for the Preferred Shares. The
AMPS will not be listed on any exchange.
Application has been made to list the
Series B Preferred Shares on the Nasdaq
Stock Market. However, there can be no
assurance that an active, or any,
trading market will develop or be
maintained for the Preferred Shares.
Ratings............................... The AMPS will be rated _______ by S&P
and _______ by Fitch. The Series B
Preferred Shares will be rated _______
by S&P and _______ by Fitch. 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.
SERIES B PREFERRED SHARES
- -------------------------
Series B Ownership Limits............. Beneficial ownership by any individual
or entity of Series B Preferred Shares
with more than $50,000 of aggregate
liquidation value is restricted in order
to preserve the Company's status as a
REIT for federal income tax purposes.
See "Description of Capital
Stock--Restrictions on Ownership and
Transfer."
Dividends on the Series B
Preferred Shares...................... Dividends on the Series B Preferred
Shares are payable at the rate of
_______% per annum of the liquidation
preference (an amount equal to $_______
per annum per share), if, when and as
declared by the Board of Directors of
the Company. Dividends on the Series B
Preferred Shares are cumulative and
payable quarterly in arrears on the
fifteenth day of January, April, July
and October in each year, commencing
January 15, 1998. If no dividend is
declared on the Preferred Shares for a
dividend period, the payment of
dividends on the Common Stock will be
prohibited for that period. See
"Description of Preferred Shares--Series
B Preferred Shares--Dividends."
4
Redemption of Series B
Preferred Shares...................... The Series B Preferred Shares are not
redeemable prior to ________ __, 2002
(except upon the occurrence of a Tax
Event or upon a default in the Required
Asset Coverage). On and after ________
__, 2002, the Series B Preferred Shares
may be redeemed for cash at the option
of the Company, in whole or in part, at
a redemption price of $10.00 per share,
plus the accrued and unpaid dividend, if
any, thereon. Upon the occurrence of a
Tax Event, the Company will have the
right to redeem the Series B Preferred
Shares in whole (but not in part) at a
redemption price of $10.00 per share,
plus the accrued and unpaid dividend, if
any, thereon. Upon a default in the
Required Asset Coverage, the Company
will have to either restore such
Coverage or redeem enough Preferred
Shares to restore such Coverage. Any
such redemptions could be subject to the
prior approval of the OTS. See
"Description of Preferred Shares--Series
B Preferred Shares--Redemption."
AMPS
- ----
Dividends on the AMPS................ The Applicable Dividend Rate on the AMPS
for the initial Dividend Period ending
______ ___, 199__ will be ___% per
annum. Dividends on the shares of AMPS
will be payable in arrears, will be
cumulative from the Date of Original
Issue and will be payable, when, as and
if declared by the Board of Directors of
the Company, out of funds legally
available therefor, commencing on
________ ___, 199__.
After the initial Dividend Period, each
subsequent Dividend Period will (except
for certain adjustments) be 28 days in
length, and except as provided below,
the dividend rate on the AMPS will be
the Applicable Dividend Rate per annum
that the Auction Agent advises the
Company has resulted from an Auction.
Auctions for AMPS will be held on the
Business Day next preceding the Dividend
Payment Date ending any Dividend Period.
See "Description of Preferred Shares --
Auction Market Preferred Stock --
Notification of Results; Settlement" and
"Description of Preferred Shares --
Auction Market Preferred Stock --
Dividends -- Determination of Dividend
Rate." If all of the outstanding shares
of AMPS are subject to Submitted Hold
Orders, the Applicable Dividend Rate for
the next Dividend Period will be equal
to the All Hold Rate in effect on the
date of the applicable Auction. If
Sufficient Clearing Bids have not been
made in an Auction other than because
all of the outstanding shares of AMPS
are the subject of Submitted Hold
Orders, then the Applicable Dividend
Rate for the next succeeding Dividend
Period will be the Maximum Applicable
Rate on the related Auction Date.
As described below, the Maximum
Applicable Rate with respect to any
Dividend Period will be based upon the
Rate Multiple in effect on the related
Auction Date. The Maximum Applicable
Rate cannot in any event exceed 20% per
annum. The Rate Multiple will be
determined as set forth below based on
the prevailing rating of the AMPS in
effect at the close of business on the
Business Day preceding the applicable
Auction Date:
5
Maximum Applicable Rate
Prevailing Rate
Rating Multiple
------------ --------
AA- or Above 150%
A- to A+ 200%
BBB- to BBB + 250%
BB- to BB+ 275%
Below BB- 300%
In the event the AMPS is not rated by
S&P or Fitch, the Rate Multiple will be
300%.
Notwithstanding the foregoing, with
respect to any Auction Date, the Company
may, by telephonic and written notice to
the Auction Agent delivered by 10:00
a.m. on such Auction Date, increase (but
not thereafter decrease) the percentage
Rate Multiple to be in effect on and
after such Auction Date.
If the Company fails to pay to the
Auction Agent by 1:30 p.m., New York
City time, on the Business Day next
preceding the Dividend Payment Date or
the Redemption Date the full amount of
any dividend on any shares of AMPS, or
the Redemption Price for any shares of
AMPS called for redemption (in either
case, a "Default"), and if the Company
has ordered its bank in a timely manner
to make payment and the Auction Agent is
unable to confirm receipt of funds by
the time referred to above and such
funds are not received within three
Business Days thereafter, (A) Auctions
will be discontinued, (B) the dividend
rate established in the immediately
preceding Auction shall be disregarded
and (C) the Applicable Dividend Rate for
shares of AMPS for each Dividend Period
commencing after the last Dividend
Payment Date will be the Default Rate.
With respect to any such failure, the
"Default Rate" will be the rate per
annum equal to the lesser of (i) 20% and
(ii) 300% of the applicable Benchmark
Rate determined as of the Business Day
next preceding the date on which such
Default occurred.
Dividends will be paid through the
securities depository, initially The
Depository Trust Company or a successor
entity acting as securities depository
(the "Securities Depository"), on each
Dividend Payment Date. The Securities
Depository's normal procedures now
provide for it to distribute dividends
in same-day funds to Agent Members. The
Agent Members' normal procedures now
provide for them to distribute such
dividends to the persons for whom they
are acting as agent in same-day funds on
each Dividend Payment Date. See
"Description of Preferred Shares --
Auction Procedures for AMPS --
Securities Depository" and "Description
of Preferred Shares -- Description of
Auction Market Preferred Stock --
Dividends."
Redemption of the AMPS................ The AMPS may be redeemed for cash at the
option of the Company, in whole or in
part, on any Dividend Payment Date
(except during the initial Dividend
Period) at a Redemption Price of
$25,000.00 per share, plus the quarterly
accrued and unpaid dividend, if any,
thereon. Upon a default in the Required
Asset Coverage, the Company will have to
either restore such Coverage or redeem
enough Preferred Shares to restore such
Coverage. Any such redemptions could be
subject to the prior approval of the
OTS. See "Description of Preferred
Shares--Auction Market Preferred
Stock--Redemption."
Auction Procedures for the AMPS....... The Bank of New York will act as the
Auction Agent pursuant to an Auction
Agent Agreement relating to the AMPS.
See "Description of Preferred Shares --
Auction Procedures for AMPS -- Auction
Agent Agreement." Prior to the
Submission Deadline on each Auction
Date, each Existing Holder may submit
Hold, Bid or Sell Orders through a
Broker-Dealer to the Auction Agent. An
Existing Holder may submit different
types of Orders in an Auction with
respect to shares then held by such
Existing Holder. If an Existing Holder
offers to purchase additional shares of
6
AMPS, such Existing Holder, for purposes
of such offer to purchase additional
shares, will be treated as a Potential
Holder as described below. Bids by
Existing Holders with rates higher than
the Maximum Applicable Rate will be
treated as Sell Orders. A Hold Order
shall be deemed to have been submitted
on behalf of an Existing Holder if an
Order is not submitted on behalf of such
Existing Holder for any reason,
including the failure of a Broker-Dealer
to submit such Existing Holder's Order
to the Auction Agent.
Potential Holders of shares of AMPS may
submit Bids in which they will offer to
purchase shares of AMPS if the
Applicable Dividend Rate for the next
Dividend Period is not less than the
rate specified in such Bid. A Bid by a
Potential Holder with a rate higher than
the Maximum Applicable Rate will not be
considered.
If Sufficient Clearing Bids exist (that
is, the number of shares of AMPS subject
to Bids by Potential Holders is at least
equal to the number of shares of AMPS
subject or deemed subject to Sell Orders
by Existing Holders), the Applicable
Dividend Rate will be the lowest rate
specified in the submitted Bids that,
taking into account such rate, all lower
rates bid by Existing Holders and
Potential Holders and any Hold Orders,
would result in Existing Holders and
Potential Holders owning all of the
outstanding shares of AMPS. If
Sufficient Clearing Bids do not exist
(other than because all shares are the
subject of Submitted Hold Orders), then
the Applicable Dividend Rate for such
next succeeding Dividend Period will be
the Maximum Applicable Rate on the
Auction Date. In such event, Existing
Holders that have submitted Sell Orders
will not be able to sell in the Auction
any shares subject to such Sell Orders,
except to the extent there are Submitted
Bids by Potential Holders at rates less
than or equal to the Maximum Applicable
Rate. If all Existing Holders submit (or
are deemed to have submitted) only Hold
Orders, the Applicable Dividend Rate for
such next succeeding Dividend Period
will be the All Hold Rate in effect on
the related Auction Date. See
"Description of Preferred
Shares--Auction Market Preferred
Stock--Dividends."
The Auction Procedures include a pro
rata allocation of shares for purchase
and sale, which may result in an
Existing Holder selling or holding, or a
Potential Holder purchasing, a number of
shares of AMPS that is less than the
number of shares of AMPS specified in
its Order. See "Description of Preferred
Shares -- Auction Procedures for AMPS --
Acceptance and Rejection of Submitted
Bids and Submitted Sell Orders and
Allocations of Shares."
A Sell Order by an Existing Holder will
constitute an irrevocable offer to sell
the shares of AMPS subject thereto, and
a Bid placed by an Existing Holder will
also constitute an irrevocable offer to
sell the shares of AMPS subject thereto
if the rate specified in such Bid is
higher than the Applicable Dividend Rate
determined in the Auction, in each case
at a price per share equal to
$25,000.00. A Bid placed by a Potential
Holder shall constitute an irrevocable
offer to purchase the shares of AMPS
subject thereto, if the rate specified
in such Bid is less than or equal to the
Applicable Dividend Rate determined in
such Auction, at a price per share equal
to $25,000.00. Settlement of purchases
and sales will be made on the next
Business Day (also a Dividend Payment
Date)
7
after the Auction Date through the
Securities Depository. Purchasers will
make payment through their Agent Members
in same-day funds to the Securities
Depository against delivery of the
shares by book entry to their Agent
Members. The Securities Depository will
make payment to the sellers' Agent
Members in accordance with the
Securities Depository's normal
procedures, which now provide for
payment in same-day funds settled
through wire transfer of such funds to
Agent Members who currently distribute
such funds to the persons for whom they
are acting as agents in same-day funds.
See "Description of Preferred Shares --
Auction Market Preferred Stock --
Dividends -- General."
Restrictions on Transfer on AMPS;
Book-Entry............................ Shares of AMPS may be transferred only
pursuant to a Bid or Sell Order placed
in an Auction to or through a
Broker-Dealer, provided that in the case
of all transfers other than those
pursuant to Auctions, the Existing
Holder of the shares so transferred, its
Broker-Dealer or its Agent Member
advises the Auction Agent of such
transfer. All of the outstanding shares
of AMPS shall be represented by a single
certificate registered in the name of
the Securities Depository or its
nominee, and the holder shall not be
entitled to receive any certificate
representing any shares of AMPS which it
acquires. The holder's ownership of
shares of AMPS will be maintained in
book entry form by the Securities
Depository for the holder's Agent
Member, which in turn will maintain
records of the holder's beneficial
ownership. See "Description of Preferred
Shares -- Auction Procedures for AMPS --
Restrictions on Transfer; Book-Entry."
Use of Proceeds....................... The net proceeds to the Company from the
Offering will be used to purchase
additional Mortgage Assets. In addition,
in anticipation of the Offering, the
Company has been reinvesting its net
income in additional Mortgage Assets.
Accordingly, approximately $40 million
of the proceeds of the Offering will be
used to fund 1997 dividends of the
Company's net income on the currently
outstanding capital stock of the
Company. See "Use of Proceeds."
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. At June 30, 1997, the Company held $613.5 million of Mortgage
Assets, net, all of which were contributed by or purchased from Webster Bank.
Prior to completion of the Offering, Webster will contribute at least $____ of
Mortgage-Backed Securities
8
to the Company, and during the first quarter of 1998, Webster Bank anticipates
contributing approximately $____ million of additional Mortgage Assets or cash
to the Company.
The Company is required to maintain (i) a Required Asset Coverage
designed to ensure that the Company continues to own Eligible Assets with a
Market Value in excess of the liquidation preference on the outstanding
Preferred Shares, and (ii) a Required Dividend Coverage designed to ensure that
the Company has sufficient Liquid Assets to pay dividends accumulated on the
Preferred Shares. See "Required Asset Coverage" and "Required Dividend
Coverage." Although the Company is expected to hold a majority of its assets as
Residential Mortgage Loans, such assets will not constitute Eligible Assets.
Eligible Assets include Mortgage-Backed Securities, cash and certain Liquid
Assets and other marketable securities. See "Required Asset Coverage."
The Company's Mortgage Assets presently consist of whole loans
("Mortgage Loans"), all of which are Residential Mortgage Loans. Prior to
completion of the Offering, Webster Bank will contribute at least $____ of
Mortgage-Backed Securities to the Company. At the time of such contribution, all
such Mortgage-Backed Securities will be rated at least AA by at least one
nationally recognized independent rating organization or represent interests in
or obligations backed by pools of Mortgage Loans issued or guaranteed by Fannie
Mae, FHLMC or GNMA. Mortgage Loans underlying the Mortgage-Backed Securities are
secured by single family residential real estate properties located in the
United States. The Company has acquired all of its Mortgage Assets from Webster
Bank. Any future acquisitions from Webster Bank will be on terms that are
comparable to those that could be obtained by the Company if such Mortgage
Assets were purchased from unrelated third parties. It is the intention of
Webster Bank and the Company that loans purchased from Webster Bank will not
result in gain or loss to Webster Bank. Accordingly, the Company primarily
intends to purchase newly originated loans of Webster Bank, or more seasoned
loans at then current market rates. The Company may also from time to time
acquire additional Mortgage Assets from unrelated third parties. As of the date
of this Prospectus, the Company has not adopted any arrangements or procedures
by which it would purchase Mortgage Assets from unrelated third parties, and the
Company has not entered into any agreements with any third parties with respect
to the purchase of Mortgage Assets. The Company anticipates that it would
purchase Mortgage Assets from unrelated third parties only if neither Webster
Bank nor any affiliate of Webster Bank had an amount or type of Mortgage Asset
sufficient to meet the requirements of the Company.
Residential Mortgage Loans held by the Company represent first lien
positions and have been originated and underwritten in conformity with standards
generally applied by the originator at the time the Residential Mortgage Loans
were originated. The Company's Mortgage Assets presently consist solely of
Residential Mortgage Loans, and the Company intends to maintain 100% of its
portfolio in Mortgage Assets consisting of either Residential Mortgage Loans or
Mortgage-Backed Securities. The Company also may invest in whole loans secured
by a first mortgage or deed of trust on a commercial real estate property or a
multi-family property ("Commercial Mortgage Loans") or in other assets eligible
to be held by a REIT, but has no present intention to do so. 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 more than 30 days past
due in the payment of principal or interest at the time of acquisition; (ii) is
or was at any time during the preceding 12 months in nonaccrual status or
renegotiated due to the financial deterioration of the borrower; or (iii) has
been, more than once during the preceding 12 months, more than 30 days past due
in the payment of principal or interest. Loans that are in a "nonaccrual status"
are generally loans that are past due 90 days or more in principal or interest.
See "Business and Strategy--Description of Mortgage Assets."
ADVISORY AGREEMENT. The Company has entered into an advisory service
agreement with Webster Bank (the "Advisory Agreement") pursuant to which Webster
Bank administers the day-to-day operations of the Company. Webster Bank in its
role as advisor under the terms of the Advisory Agreement is hereinafter
referred to as the "Advisor." The Advisor is responsible for (i) monitoring the
credit quality of Mortgage Assets held by the Company, (ii) advising the Company
with respect to the acquisition, management, financing and disposition of the
Company's Mortgage Assets, and (iii) holding documents relating to the Mortgage
Assets as custodian on behalf of the Company. The Advisor may at any time
subcontract all or a portion of its obligations under the Advisory Agreement to
one or more of its
9
affiliates. The Advisor and its personnel have substantial experience in
mortgage finance and in the administration of Mortgage Loans.
The Advisory Agreement has an initial term of two years, and will be
renewed automatically for additional one-year periods unless notice of
nonrenewal is delivered by either party to the other party. The Advisory
Agreement may be terminated by the Company at any time upon 90 days' prior
written notice. Under the Advisory Agreement, the Company will pay the Advisor
an advisory fee of $150,000 per year. See "Management--The Advisor."
ADDITIONAL INVESTMENTS. The Company may from time to time purchase
additional Mortgage Assets out of net proceeds received in connection with the
Offering, the repayment or disposition of Mortgage Assets, the issuance of
additional shares of Preferred Stock or additional capital contributions with
respect to the Common Stock. The Company does not currently intend to issue any
additional shares of Preferred Stock. The Company anticipates that, prior to its
issuance of additional shares of Preferred Stock, it will take into
consideration Webster Bank's funding requirements and an assessment of other
available options for raising any necessary capital. See "Benefits to Webster
Bank."
MANAGEMENT. Currently, the Company's Board of Directors is composed of
three members and it has three officers. The Company has no other employees.
Each of the Company's directors and officers also is an officer of Webster Bank.
See "Management."
10
SELECTED FINANCIAL DATA
The selected financial data set forth below is based upon and should be
read in connection with the Company's audited financial statements and notes
thereto appearing elsewhere herein.
FINANCIAL CONDITION DATA:
At June 30, 1997
----------------
(In Thousands)
Assets:
Cash.................................................... 13,415
Total Mortgage Loans, Net............................... 613,519
Accrued Interest Receivable............................. 3,751
Prepaid Expenses and Other Assets....................... 107
---------
Total Assets........................................ $ 630,792
=========
Liabilities and Shareholders' Equity:
Total Liabilities....................................... $ 274
Shareholder's Equity:
Preferred Stock......................................... 2,000
Common Stock............................................ 1
Paid in Capital......................................... 615,021
Retained Earnings....................................... 13,496
---------
Total Shareholder's Equity............................ 630,518
---------
Total Liabilities and Shareholder's Equity.......... $ 630,792
=========
INCOME STATEMENT DATA:* For the Period
from March 17, 1997
(Date of Inception)
to June 30, 1997
----------------
(In Thousands)
Interest Income:
Net Interest Income..................................... $ 13,613
Provision for Loan Losses............................... -
--------
Net Interest Income After Provision
for Loan Losses................................... 13,613
Noninterest Expenses....................................... 59
--------
Income Before Taxes........................................ 13,554
Income Taxes............................................... -
--------
Net Income................................................. 13,554
Preferred Stock Dividends.................................. 58
--------
Net Income Available to Common Shareholder................. $ 13,496
========
- ----------
* No ratio of earnings to fixed charges is presented because the Company has
no fixed charges.
11
TAX STATUS OF THE COMPANY
The Company will elect to be treated as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997, and believes that its organization and proposed method of operation will
enable it to meet the requirements for qualification as a REIT. As a REIT, the
Company generally will not be subject to federal and Connecticut state income
tax on net income and capital gains that it distributes to the holders of its
Common Stock and Preferred Stock.
To maintain REIT status, an entity must meet a number of organizational
and operational requirements, including a requirement that it currently
distribute to stockholders at least 95% of its "REIT taxable income" (not
including capital gains and certain items of non-cash income). If the Company
fails to qualify as a REIT in any taxable year, it will be subject to federal
and Connecticut state income tax at regular corporate rates. Notwithstanding
qualification for taxation as a REIT, the Company may be subject to federal,
state and/or local tax. See "Risk Factors--Tax Risks" and "Federal Income Tax
Considerations."
12
RISK FACTORS
Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before purchasing Preferred Shares in the Offering. This Prospectus
contains forward-looking statements that involve risks and uncertainties. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED BELOW.
CONTROL BY WEBSTER BANK
The Company is a wholly-owned subsidiary of Webster Bank, and will
continue to be controlled by Webster Bank after the Offering. The Company's
Board of Directors consists entirely of Webster Bank employees, and Webster Bank
and its affiliates are involved in virtually every aspect of the Company's
existence. Webster Bank administers the day-to-day activities of the Company in
its role as Advisor under the Advisory Agreement, and acts as Servicer of the
Company's Mortgage Loans under the Servicing Agreement. In addition, all of the
officers of the Company are also officers of Webster Bank. As the holder of all
of the outstanding voting stock of the Company, Webster Bank generally will have
the right to elect all of the directors of the Company.
DEPENDENCE UPON WEBSTER BANK AS ADVISOR AND SERVICER
The Company is dependent on the diligence and skill of the officers and
employees of Webster Bank as its Advisor for the selection, structuring and
monitoring of the Company's Mortgage Assets. See "Management." In addition, the
Company will be dependent upon the expertise of Webster Bank as its Servicer for
the servicing of the Mortgage Loans. The Advisor may subcontract all or a
portion of its obligations under the Advisory Agreement to one or more
affiliates, and under certain conditions to non-affiliates, involved in the
business of managing Mortgage Assets. The Advisor may assign its rights or
obligations under the Advisory Agreement and the Servicer may assign its rights
and obligations under the Servicing Agreement to any affiliate of the Company.
In the event the Advisor or the Servicer subcontracts or assigns its rights or
obligations in such a manner, the Company will be dependent upon the
subcontractor or affiliate to provide services. See "Management--The Advisor"
and "Business and Strategy--Servicing."
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors of the Company has established the investment
policies and operating policies and strategies of the Company, certain of which
are described in this Prospectus. These policies may be amended or revised from
time to time at the discretion of the Board of Directors without a vote of the
Company's stockholders, including holders of the Preferred Shares. The ultimate
effect of any change in the policies and strategies of the Company on a holder
of Preferred Shares may be positive or negative. For example, although the
Company currently intends to maintain 100% of its portfolio in a combination of
Residential Mortgage Loans and Mortgage-Backed Securities, the Company may in
the future acquire other Mortgage Assets, such as Commercial Mortgage Loans,
which have a different and distinct risk profile. See "Business and
Strategy--Management Policies."
POTENTIAL LACK OF ACTIVE MARKET FOR PREFERRED SHARES
The AMPS will not be listed on any securities exchange. Application has
been made to list the Series B Preferred Shares on the Nasdaq Stock Market.
However, there can be no assurance that the Series B Preferred Shares will be
listed, or that an active, or any, trading market will develop or be maintained
for the Preferred Shares. Consequently, there can be no assurance as to the
liquidity of the trading markets for the Preferred Shares.
13
DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
Because the Company is a subsidiary of Webster Bank, federal regulatory
authorities will have the right to examine the Company and its activities. If
Webster Bank is deemed to be "undercapitalized" under "prompt corrective action"
initiatives of federal regulators, such regulatory authorities will have the
authority to, among other things, require Webster Bank or the Company to alter,
reduce or terminate its activities, restrict the transfer of assets by either
organization, restrict transactions between the two organizations, require
Webster Bank to divest or liquidate the Company, or require that Webster Bank be
sold. Payment of dividends on the Preferred Shares also could be subject to
limitations. In addition, Webster Bank could be subject to these prompt
corrective action restrictions if federal regulators determined that Webster
Bank was in an unsafe or unsound condition or engaging in an unsafe or unsound
practice. Under certain circumstances, certain of these restrictions could
result in the Company's failure to qualify as a REIT.
Webster Bank would become "undercapitalized" for purposes of the OTS
prompt corrective action regulations if it had a core capital (or leverage)
ratio of less than 4.00%, or 3.00% if Webster Bank is rated composite 1 under
the CAMEL rating system in its most recent examination, a Tier 1 risk-based
capital ratio of less than 4.00% or a total risk-based capital ratio of less
than 8.00%. At June 30, 1997, Webster Bank's core capital (or leverage) ratio
was 6.24%, its Tier 1 risk-based capital ratio was 12.98% and its total
risk-based capital ratio was 14.19%.
The OTS prompt corrective action regulations prohibit thrift
institutions such as Webster Bank from making "capital distributions" (defined
to include a transaction that the OTS or the FDIC determines, by order or
regulation, to be "in substance a distribution of capital") unless the
institution is at least "adequately capitalized" after the distribution. There
can be no assurance that either the OTS or the FDIC would not seek to restrict
the Company's payment of dividends on the Preferred Shares under this provision
if Webster Bank were to fail to maintain its status as "adequately capitalized."
Under OTS regulations, the ability of thrift institutions such as
Webster Bank to make "capital distributions" (defined to include payment of
dividends, stock repurchases and redemptions, cash-out mergers and other
distributions charged against the capital accounts of an institution) varies
depending primarily on the institution's earnings and regulatory capital levels.
While the Company believes that dividends on the Preferred Shares should not be
considered "capital distributions" under the OTS regulations, there can be no
assurances that the OTS would agree with this position. Under these OTS
regulations, institutions are divided into tiers. Tier 1 institutions are those
in compliance with their "fully phased-in" capital requirements and which have
not been notified by the OTS that they are "in need of more than normal
supervision." Tier 1 institutions may make capital distributions without
regulatory approval of up to the greater of (i) 100% of net income for the
calendar year to date, plus up to one-half of the institution's surplus capital
(i.e., the excess of capital over the fully phased-in requirement) at the
beginning of the calendar year in which the distribution is made or (ii) 75% of
net income for the most recent four quarters. Tier 1 institutions that make
capital distributions under the foregoing rules must continue to meet the
applicable capital requirements on a pro forma basis after giving effect to such
distributions. Tier 1 institutions may seek OTS approval to pay dividends beyond
these amounts.
The category of Tier 2 institutions, which are defined as institutions
that are in compliance with their current, but not their "fully phased-in"
capital requirements, is no longer relevant because all deductions from capital
requirements have been fully phased-in as of July 1, 1996. Tier 3 institutions
have capital levels below their current required minimum levels and may not make
any capital distributions without the prior written approval of the OTS. In
addition to the foregoing, Webster Bank is restricted from declaring or paying a
dividend on capital stock if the effect would cause its regulatory capital to be
reduced below the amount required for its liquidation accounts established
pursuant to requirements upon Webster Bank's and certain of its predecessors'
conversion from mutual to stock form.
As of June 30, 1997, Webster Bank had sufficient levels of capital to
be a Tier 1 institution. However, the OTS retains discretion under its capital
distribution regulations to treat an institution that is in need of more than
normal supervision (after written notice) as a Tier 3 institution. The OTS also
14
retains general discretion to prohibit any otherwise permissible capital
distribution on general safety and soundness grounds and must be given 30 days
advance notice of all capital distributions.
GEOGRAPHIC CONCENTRATION
Certain geographic regions of the United States may from time to time
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 present with respect to Mortgage
Loans generally. Substantially all of the residential properties underlying the
Mortgage Assets presently are located in Connecticut. These Mortgage Assets may
be subject to a greater risk of default than other comparable Mortgage Assets in
the event of adverse economic, political or business developments or natural
hazards that may affect such region and the ability of property owners in such
region to make payments of principal and interest on the underlying mortgages.
NO CREDIT ENHANCEMENT OR SPECIAL HAZARD INSURANCE
The Company generally does not intend to obtain credit enhancements
such as mortgagor bankruptcy insurance or to obtain special hazard insurance for
its Mortgage Loans, other than standard hazard insurance, which will in each
case only relate to individual Mortgage Loans. Accordingly, during the time it
holds Mortgage Loans for which third party insurance is not obtained, the
Company will be subject to risks of borrower 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 (or guarantor in the case of Commercial Mortgage Loans) 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 local and
other economic conditions affecting the values of the properties underlying the
Mortgage Assets and the ability of mortgagees to make payments of principal and
interest on their Mortgage Loans. There can be no assurance that a decline in
local or other economic conditions will not adversely affect Mortgage Assets
currently owned by the Company or acquired by the Company in the future. The
Company is required to maintain (i) a Required Asset Coverage designed to ensure
that the Company continues to own Eligible Assets with a Market Value in excess
of the liquidation preference on the outstanding Preferred Shares, and (ii) a
Required Dividend Coverage designed to ensure that the Company has sufficient
Liquid Assets to pay dividends accumulated on the Preferred Shares.
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 securing
a Mortgage Loan 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. In some states, an
action to obtain a deficiency judgment is not permitted following a non-judicial
sale of a mortgaged property. In Connecticut, where substantially all of the
properties currently securing the Company's Mortgage Loans are located,
foreclosures are judicial and an action to obtain a deficiency judgment is only
permitted following a judicial foreclosure of a mortgaged property. In the event
of a default by a mortgagor, 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
15
related Mortgage Loan. In addition, the Servicer of the Company's Mortgage Loans
will 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.
LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges and require certain disclosures to borrowers. In addition, most states
have other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the servicing and collection of the Mortgage Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Company to collect all or part of the principal of or interest on
the Mortgage Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the Company to damages and administrative
sanctions.
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 the underlying real
property which 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 which the
Company has acquired through foreclosure or otherwise, the Company may be
required to remove those substances and clean up the property. There can be no
assurance that in such a case 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 property owners, 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.
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 taxable year ending December 31, 1997. Although the Company believes that it
will be owned and organized and will operate in such a manner, and Hogan &
Hartson L.L.P. will render certain opinions, described under "Federal Income Tax
Considerations", regarding the Company's qualification as a REIT, no assurance
can be given that the Company will be able to operate in such a manner so as to
qualify as a REIT or to remain so qualified. Qualification as a REIT involves
the application of highly technical and complex Code provisions for which there
are only limited judicial or administrative interpretations. The determination
of various factual matters and circumstances, not entirely within the Company's
control and not addressed by the opinion of Hogan & Hartson L.L.P., may affect
the Company's ability to qualify as a REIT. Although the Company is not aware of
any proposal in Congress to amend the tax laws in a manner that would materially
and adversely affect the Company's ability to operate as a REIT, no assurance
can be given that new legislation or new regulations, administrative
interpretations or court decisions will not significantly change the tax laws in
the future with respect to qualification as a REIT or the federal income tax
consequences of such qualification.
The Company is relying on the opinion of Hogan & Hartson L.L.P.,
special counsel to the Company, regarding various issues affecting the Company's
ability to qualify, and retain qualification, as a REIT. Such legal opinions are
not binding on the Internal Revenue Service (the "IRS") or the courts.
16
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 federal taxable income and would be subject to federal and
Connecticut state income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. As a result, the amount
available for distribution to the Company's stockholders would be reduced for
the year or years involved. In addition, unless entitled to relief under certain
statutory provisions, the Company would also be disqualified from treatment as a
REIT for the four taxable years following the year during which qualification
was lost. A failure of the Company to qualify as a REIT would not by itself give
the Company the right to redeem the Preferred Shares, nor would it give the
holders of the Preferred Shares the right to have their shares redeemed. See
"Description of Preferred Shares--Series B Preferred Shares--Redemption" and
"Description of Preferred Shares--Auction Market 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
interest of the Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. The 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."
In the event that the Company has insufficient available cash on hand
or is otherwise precluded from making dividend distributions in amounts
sufficient to maintain its status as a REIT or to avoid imposition of an excise
tax, the Company may avail itself of consent dividend procedures. A consent
dividend is a hypothetical dividend, as opposed to an actual dividend, declared
by the Company and treated for U.S. federal tax purposes as though it had
actually been paid to stockholders who were the owners of shares on the last day
of the year and who executed the required consent form, and then recontributed
by those stockholders to the Company. The Company would use the consent dividend
procedures only with respect to its Common Stock.
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" (excluding capital gains
and certain items of non-cash 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. Under
certain circumstances, federal regulatory authorities may restrict the ability
of the Company, as a subsidiary of Webster Bank, to make distributions to its
stockholders. Such a restriction could result in the Company's failure to meet
REIT requirements with respect to stockholder distributions. See "--Dividend and
Other Regulatory Restrictions on Operations of the Company."
REDEMPTION UPON OCCURRENCE OF A TAX EVENT OR FAILURE TO MEET THE
REQUIRED ASSET COVERAGE. At any time following the occurrence of a Tax Event,
even if such Tax Event occurs prior to ________ __, 2002 with respect to the
Series B Preferred Shares, the Company will have the right to redeem the
Preferred Shares in whole but not in part, at a price equal to the liquidation
preference, plus accrued and unpaid dividends, if any, thereon, subject to the
prior approval of the OTS. The occurrence of a Tax Event will not, however, give
the holders of the Preferred Shares any right to have such shares redeemed. The
Company also may be required to redeem Preferred Shares to the extent it fails
to maintain the Required Asset Coverage. See "Description of Preferred
Shares--Series B Preferred Shares--Redemption" and "Description of Preferred
Shares--Auction Market Preferred Stock--Redemption."
RISK ASSOCIATED WITH LEVERAGE
Although the Company does not currently intend to incur any
indebtedness in connection with the acquisition and holding of Mortgage Assets,
the Company may do so at any time. To the extent the
17
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 and prepayment risk.
NO THIRD PARTY VALUATION OF THE MORTGAGE ASSETS
No third party valuations of the Mortgage Assets currently owned by the
Company were obtained for purposes of the Offering. In addition, although the
Company and Webster Bank intend that future acquisitions or dispositions of
Mortgage Assets be on a fair value basis, 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 Assets to, or purchasing the Mortgage Assets
from, the Company.
LIMITED OPERATING HISTORY OF THE COMPANY
As the Company was incorporated and began its operations in March 1997,
the operating history of the Company is limited.
THE COMPANY
Webster Preferred Capital Corporation is a Connecticut corporation
incorporated in March 1997. The Company was formed by Webster Bank to provide a
cost-effective means of raising funds, including equity capital, on a
consolidated basis for Webster Bank's parent, Webster. The Company will acquire,
hold and manage Mortgage Assets. In March 1997, Webster Bank contributed $617.0
million of Mortgage Assets, net as part of the formation of the Company. As of
June 30, 1997, all of the Mortgage Assets owned by the Company are Residential
Mortgage Loans. Although the Company may acquire and hold a variety of Mortgage
Assets, its present intention is to acquire only Residential Mortgage Loans and
Mortgage-Backed Securities. As of June 30, 1997, approximately 35.4% of the
Company's Mortgage Loans are fixed rate loans and 64.6% are adjustable rate
loans. Prior to completion of the Offering, Webster will contribute at least
$____ of Mortgage-Backed Securities to the Company, and during the first quarter
of 1998, Webster Bank anticipates contributing approximately $____ million of
additional Mortgage Assets or cash to the Company.
The Company is required to maintain (i) a Required Asset Coverage
designed to ensure that the Company continues to own Eligible Assets with a
Market Value in excess of the liquidation preference on the outstanding
Preferred Shares, and (ii) a Required Dividend Coverage designed to ensure that
the Company has sufficient Liquid Assets to pay dividends accumulated on the
Preferred Shares. Although the Company is expected to hold a majority of its
assets as Residential Mortgage Loans, such assets will not constitute Eligible
Assets. Eligible Assets include primarily Mortgage-Backed Securities, cash and
certain other marketable securities.
All of the Company's Common Stock is owned by Webster Bank. Webster
Bank has indicated to the Company that, for as long as any Preferred Shares are
outstanding, Webster Bank intends to maintain direct ownership of 100% of the
outstanding Common Stock of the Company. The Preferred Shares are not
exchangeable into preferred shares of Webster Bank.
The Company will elect to be treated as a REIT under the Code and will
generally not be subject to federal and Connecticut state income tax to the
extent that it distributes its earnings to its stockholders and maintains its
qualification as a REIT. Furthermore, the Company and Webster Bank will benefit
significantly from federal and state tax treatment of dividends paid by the
Company as a result of its qualification as a REIT. The dividends payable on the
Preferred Shares will be deductible for federal income tax purposes as a result
of the Company's qualification as a REIT. Also as a result of the Company's
qualification as a REIT, as well as its qualification under certain Connecticut
tax law
18
requirements, Webster Bank will be able to deduct from its income, dividends
received on the Common Stock for Connecticut corporation income tax purposes.
WEBSTER BANK
Webster Bank is the federal savings bank subsidiary of Webster, both of
which are headquartered in Waterbury, Connecticut. Deposits at Webster Bank are
FDIC insured. Webster Bank currently serves customers from 84 banking offices
located in New Haven, Fairfield, Litchfield, Hartford and Middlesex Counties in
Connecticut. Webster Bank's focus is on providing financial services to
individuals, families and businesses. It emphasizes four business lines consumer
banking, business banking, mortgage banking and trust and investment management
services. These lines are supported by centralized administration, marketing,
finance and operations. Webster Bank's goal is to provide banking services that
are fairly priced, reliable and convenient.
The Webster Bank consolidated financial information as of June 30, 1997
includes Derby Savings Bank ("Derby") and People's Savings Bank & Trust
("People's"), both of which were acquired by Webster Bank in 1997 in
transactions accounted for as pooling of interests. At June 30, 1997, Webster
Bank had total consolidated assets of $6.4 billion, total deposits of $4.4
billion, and shareholder's equity of $437.2 million or 6.9% of total assets. At
June 30, 1997, Webster Bank had total loans receivable of $3.8 billion, which
included $2.9 billion in residential mortgage loans, $279.0 million in
commercial real estate loans, $190.9 million in commercial and industrial loans
and $443.6 million in consumer loans (consisting primarily of home equity
loans). At June 30, 1997, nonaccrual loans and other real estate owned ("OREO")
were $51.1 million. At that date, Webster Bank's allowance for loan losses was
$50.3 million, or 126.9% of nonaccrual loans, and its total allowance for loan
and OREO losses was $51.1 million, or 94.9% of nonaccrual loans and OREO.
At June 30, 1997, Webster Bank had regulatory capital significantly in
excess of all applicable capital requirements as detailed below:
AT JUNE 30, 1997
-------------------------------------------------------------------------------------
TIER 1 TIER 1 TOTAL
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL RISK-BASED CAPITAL
----------- ----------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ --- ------ ---
(DOLLARS IN THOUSANDS)
Webster Bank Actual Regulatory Capital $ 390,883 6.18% $ 394,495 6.24% $ 394,495 12.98% $ 431,353 14.19%
Minimum Regulatory Requirement....... 94,830 1.50 189,769 3.00 121,594 4.00 243,189 8.00
--------- ---- --------- ---- --------- ----- --------- -----
Excess Over Requirement.............. $ 296,053 4.68% $ 204,726 3.24% $ 272,901 8.98% $ 188,164 6.19%
Since 1991, Webster Bank has experienced significant growth, primarily
as a result of acquisitions. In September 1991, Webster Bank acquired certain
assets and $247 million of deposit liabilities of Suffield Bank in an FDIC
assisted transaction. In 1992, Webster Bank acquired $1.3 billion of the assets,
all of the deposits and certain other liabilities of First Constitution Bank,
New Haven, Connecticut in an FDIC assisted transaction. In March 1994, Webster
completed a conversion/acquisition of Bristol Savings Bank and its $453 million
in deposits. Also in 1994, Webster Bank acquired Shoreline Bank and Trust
Company with approximately $51 million of assets. In November 1995, Webster Bank
acquired Shelton Savings Bank with approximately $298 million of assets,
including $224 million of loans and approximately $273 million of deposits. In
February 1996, Webster Bank acquired 20 branch banking offices from Shawmut Bank
Connecticut, N.A., assuming approximately $845 million in deposits and acquiring
approximately $586 million in loans. In 1997, Webster Bank acquired Derby with
approximately $1.2 billion of assets, and People's with approximately $479
million of assets and an additional $327 million of trust assets under
management. Webster Bank also acquired Sachem Trust National Association in 1997
with approximately $300 million of trust assets under management.
As a result of the Offering, Webster Bank will benefit from federal and
state tax treatment of dividends paid by the Company as a result of its
qualification as a REIT. The dividends payable on the Preferred Shares will be
deductible for federal and Connecticut state income tax purposes as a result of
19
the Company's qualification as a REIT. Also as a result of the Company's
qualification as a REIT, as well as its qualification under certain Connecticut
tax law requirements, Webster Bank will be able to deduct from its income the
dividends received on the Common Stock for Connecticut state income tax
purposes. Webster Bank also will be entitled to receive advisory and servicing
fees and dividends in respect of the Common Stock and will be entitled to retain
any ancillary fees, including, but not limited to, late payment charges,
prepayment fees, penalties and assumption fees collected in connection with the
Mortgage Loans serviced by it. In addition, Webster Bank, as Servicer, 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 serviced by the Servicer.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Preferred Shares
offered hereby are estimated to be $___ million ($___ million if the
Underwriters' over-allotment option with respect to the Series B Preferred
Shares is exercised in full). The Company will use the net proceeds received in
connection with the Offering to purchase additional Mortgage Assets. The Company
expects that it will purchase any such additional Mortgage Assets within two
months from the completion of the Offering, or, if applicable, exercise by the
Underwriters of their over-allotment option. In addition, in anticipation of the
Offering, the Company has been reinvesting its net income in additional Mortgage
Assets. Accordingly, approximately $40 million of the proceeds of the Offering
will be used to fund 1997 cash dividends of the Company's net income on the
currently outstanding capital stock of the Company. See "Business and Strategy."
Pending such expected acquisition of additional Mortgage Assets, the Company
will invest the net Offering proceeds not used to fund 1997 dividends in
short-term securities or money market investments.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 (the date of the most recent audited financial statements of the
Company) and as adjusted to reflect the consummation of the Offering.
JUNE 30, 1997
---------------------------------
ACTUAL AS ADJUSTED
---------------------------------
(In Thousands, Except Share Data)
Shareholders' Equity
Series A Auction Market Cumulative Preferred Stock, par value $1.00 per share;
none authorized, issued and outstanding, actual; and 2,600 shares
authorized, issued and outstanding, as adjusted............................. $ - $
Series B ___% Cumulative Preferred Stock, par value $1.00 per share; none
authorized, issued and outstanding, actual; and 1,150,000 shares authorized,
and 1,000,000 shares issued and outstanding, as adjusted.................... -
10% Cumulative Non-Convertible Preferred Stock; 2,000 shares issued and
outstanding at June 30, 1997; no shares authorized, issued and
outstanding, as adjusted.................................................... 2,000(1) -(1)
Common Stock, par value $0.01 per share; 1,000 shares authorized, and 100
shares issued and outstanding, actual; and 1,000 shares
authorized and ______ shares issued and outstanding, as adjusted............ 1(1) (1)
Additional Paid-in Capital.................................................... 615,021 (2)
Retained Earnings............................................................. 13,496
Total Shareholders' Equity................................................ 630,518(1)
------------ ---------
Total Capitalization............................................................. $ 630,518(1)
============ =========
20
- ---------------
(1) In contemplation of the Offering, the Company will redeem from Webster Bank
its currently outstanding 2,000 shares of preferred stock, in exchange for
100 additional shares of Common Stock.
(2) The Company was formed with an initial capitalization of $617.0 million in
Mortgage Assets, net. In addition, Webster Bank will contribute
approximately $____ million of Mortgage-Backed Securities to the Company
prior to completion of the Offering. The additional paid-in capital, as
adjusted, of $_____ million represents (i) the $617.0 million total capital
contribution made by Webster Bank in the form of Mortgage Assets to the
Company, (ii) the approximate $_____ million contribution of
Mortgage-Backed Securities to be made by Webster Bank prior to completion
of the Offering, and (iii) the $_____ million raised in the Offering, less
the aggregate $2 million par value of the Common Stock and Preferred
Shares, and the organizational and Offering expenses.
21
BUSINESS AND STRATEGY
GENERAL
The Company will acquire, hold and manage Mortgage Assets that will
generate net income for distribution to stockholders. In March 1997, Webster
Bank contributed $617.0 million of Mortgage Assets, net as part of the formation
of the Company. Prior to completion of the Offering, Webster will contribute at
least $____ of Mortgage-Backed Securities to the Company, and during the first
quarter of 1998, Webster Bank anticipates contributing approximately $____
million of additional Mortgage Assets or cash to the Company.
The Company is required to maintain (i) a Required Asset Coverage
designed to ensure that the Company continues to own Eligible Assets with a
Market Value in excess of the liquidation preference on the outstanding
Preferred Shares, and (ii) a Required Dividend Coverage designed to ensure that
the Company has sufficient Liquid Assets to pay dividends accumulated on the
Preferred Shares. Although the Company is expected to hold a majority of its
assets as Residential Mortgage Loans, such assets will not constitute Eligible
Assets. Eligible Assets include Mortgage-Backed Securities, cash and certain
Liquid Assets and other marketable securities. See "Required Asset Coverage."
In order to preserve its status as a REIT under the Code, substantially
all of the assets of the Company will consist of Mortgage Loans, Mortgage-Backed
Securities and other qualified REIT real estate assets of the type set forth in
Section 856(c)(6)(B) of the Code. See "Federal Income Tax Considerations."
DIVIDEND POLICY
The Company currently expects to pay an aggregate amount of dividends
with respect to its outstanding shares of capital stock equal to not less than
100% of the Company's "REIT taxable income" (excluding capital gains and certain
items of non-cash income). In order to remain qualified as a REIT, the Company
must distribute annually at least 95% of its "REIT taxable income" (excluding
capital gains and certain items of non-cash income) to stockholders. The Company
anticipates that none of the dividends on the Preferred Shares and none or no
material portion of the dividends on the Common Stock will constitute
non-taxable returns of capital.
The Company is required to maintain a Required Dividend Coverage
designed to ensure that the Company has sufficient Liquid Assets to pay
dividends accumulated on the Preferred Shares. See "Required Dividend Coverage."
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's distributable funds will consist
primarily of interest and principal payments on the Mortgage Assets held by it,
and the Company anticipates that a significant portion of such assets will bear
interest at adjustable rates. Accordingly, if there is a decline in interest
rates, the Company may experience a decrease in income available to be
distributed to its stockholders. However, the Company currently expects that
both its cash available for distribution and its "REIT taxable income" will
exceed the amount needed to pay dividends on the Preferred Shares, even in the
event of a significant decline in interest rate levels, because (i) the
Company's Mortgage Assets are interest bearing, (ii) the Preferred Shares are
not expected to exceed 15% of the Company's capitalization, and (iii) the
Company does not anticipate incurring any indebtedness. As indicated below under
"-- Description of Mortgage Assets," as of June 30, 1997, the weighted average
interest rate of the Company's Residential Mortgage Loans was approximately
7.68% per annum. At current interest rates and assuming that (i) the Mortgage
Assets presently held by the Company are held for the 12-month period following
consummation of the Offering, (ii) the net Offering proceeds and principal
repayments (net of dividends paid) are reinvested in additional Mortgage Assets
with characteristics similar to those of the presently held Mortgage Assets, and
(iii) interest rates remain constant during such 12-month period, the Company
anticipates generating interest income of approximately $___ million, after
payment of servicing and advisory fees, during such 12-month period.
22
Because the aggregate annual dividend payment on the Preferred Shares is
approximately $____ million, the Company anticipates, based on the foregoing,
that approximately $____ million would be available for payment of dividends on
the shares of Common Stock held by Webster Bank during such 12-month period.
Accordingly, the Company expects that it will, after taking into consideration
the dividends on the Preferred Shares, pay dividends to Webster Bank as the
holder of its Common Stock. Because the tax return of Webster Bank is not
consolidated with the Company, the dividends payable to Webster Bank as to any
year must be paid before the end of such year.
There are several limitations on the Company's ability to pay dividends
on the Common Stock (none of which should adversely affect the legal right of
the Company to pay dividends in respect of the Preferred Shares). If the Company
fails to declare full dividends on the Preferred Shares in any dividend
period, the Company may not make any dividends, other than consent dividends, or
other distributions with respect to the Common Stock for such dividend period.
The Connecticut Corporation Law provides that no dividend distribution may be
made if, after giving it effect: (1) the Company would not be able to pay its
debts as they become due in the usual course of business; or (2) the Company's
total assets would be less than the sum of its total liabilities plus, unless
the certificate of incorporation of the Company provides otherwise, the amount
that would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution. It is, however, possible that these limitations on the Company's
ability to pay dividends on the Common Stock and Preferred Stock could affect
the ability of the Company to qualify as a REIT for federal income tax purposes,
unless the Company avails itself of consent dividend procedures. See "Federal
Income Tax Considerations--Requirements for Qualification as a REIT."
Under certain circumstances, including any determination that Webster
Bank's relationship to the Company results in an unsafe and unsound banking
practice, federal regulatory authorities will have additional authority to
restrict the ability of the Company to make dividend payments to its
stockholders. The Company is required to maintain a Required Asset Coverage
designed to ensure that the Company continues to own Eligible Assets with a
Market Value in excess of the aggregate redemption price of the outstanding
Preferred Shares. Although the Company is expected to hold a majority of its
assets as Residential Mortgage Loans, such assets will not constitute Eligible
Assets. Eligible Assets include Mortgage-Backed Securities, cash and certain
other marketable securities. As of each Evaluation Date, the Company will value
the Eligible Assets to determine whether their Adjusted Value meets the Required
Asset Coverage as set forth under the heading "Required Asset Coverage." The
Company estimates that at the Date of Original Issue, based on the anticipated
composition of the Company's portfolio and current market valuations, the Market
Value of Eligible Assets will be approximately $____ million and the Adjusted
Value of Eligible Assets will be approximately $_____ million. Assuming issuance
of the Preferred Shares offered hereby, the aggregate liquidation preference
would be $75.0 million (or $76.5 million if the Underwriters' over-allotment
option is exercised). The Required Asset Coverage on that date is expected to be
approximately $____ million. The Market Value of the Company's Eligible Assets
will fluctuate with general changes in interest rates, and can be expected to
vary from time to time depending on market conditions. The Adjustment Factors
applicable to different types of Eligible Assets used to calculate Adjusted
Value vary because of differences in volatility of the market prices of such
assets. While there can be no assurance that the Market Value or Adjusted Value
of the Eligible Assets will be maintained, if the Required Asset Coverage is not
maintained or restored as required, the Company would be obligated to redeem
such number of Preferred Shares as would cause the Required Asset Coverage to be
restored. Any such redemption may be subject to regulatory approval. See
"Required Asset Coverage." In addition, payments of dividends to stockholders
may be subject to the OTS regulations on "capital distributions." See "Risk
Factors--Dividend and Other Regulatory Restrictions on Operations of the
Company."
23
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition
of additional Mortgage Assets as Mortgage Assets held by the Company are repaid.
The acquisition of such additional Mortgage Assets will be funded with the
proceeds of principal repayments on its current portfolio of Mortgage Assets.
The Company does not anticipate that it will have any other material capital
expenditures. The Company believes that cash generated from the payment of
interest and principal on its Mortgage Assets will provide sufficient funds to
meet its operating requirements and to pay dividends in accordance with the
requirements to be taxed as a REIT for the foreseeable future. To the extent
that the Company accumulates cash in order to meet its dividend requirements, it
may invest such cash in short term securities or money market investments.
GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY
RESIDENTIAL MORTGAGE LOANS. The Company may from time to time acquire
both conforming and nonconforming Residential Mortgage Loans. 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 Fannie Mae. Under current regulations, the maximum
principal balance allowed on conforming Residential Mortgage Loans ranges from
$207,000 ($310,500 for Residential Mortgage Loans secured by mortgaged
properties located in either Alaska or Hawaii) for one unit residential loans to
$397,800 ($596,700 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 under their
standard programs. The nonconforming Residential Mortgage Loans that the Company
purchases will be nonconforming generally because they have original principal
balances which exceed the limits for FHLMC or FNMA programs. 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 a single family (one to four unit) residential
property, including stock allocated to a dwelling unit in a residential
cooperative housing corporation. Residential real estate properties underlying
Residential Mortgage Loans consist of individual dwelling units, individual
cooperative apartment units, individual condominium units, two to four family
dwelling units, planned unit developments and townhouses.
MORTGAGE-BACKED SECURITIES. The Company may from time to time acquire
fixed-rate or adjustable-rate Mortgage-Backed Securities representing interests
in pools of Mortgage Loans. A portion of any of the Mortgage-Backed Securities
that the Company purchases may have been originated by Webster Bank by
exchanging pools of Mortgage Loans for the Mortgage-Backed Securities. The
Mortgage Loans underlying the Mortgage-Backed Securities will be secured by
single family residential properties located throughout the United States.
The Company intends to acquire only investment grade Mortgage-Backed
Securities issued or guaranteed by Fannie Mae, FHLMC and the Government National
Mortgage Association ("GNMA"). The Company does not intend to acquire any
interest-only, principal-only or high-risk Mortgage-Backed Securities. Further,
the Company does not intend to acquire any residual interests in real estate
mortgage conduits or any interests, other than as a creditor, in any taxable
mortgage pools.
OTHER REAL ESTATE ASSETS. Although the Company presently intends to
invest only in Residential Mortgage Loans and Mortgage-Backed Securities, the
Company may invest up to 5% of the total value of its portfolio in assets other
than Residential Mortgage Loans and Mortgage-Backed Securities eligible to be
held by REITs. In addition to Commercial Mortgage Loans, such assets could
include cash, cash equivalents and securities, including shares or interests in
other REITs.
24
MANAGEMENT POLICIES
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 without a vote of the Company's stockholders,
including holders of the Preferred Shares. See also "--Dividend Policy."
ASSET ACQUISITION AND DISPOSITION POLICIES. Subsequent to the Offering,
the Company anticipates that it will purchase additional Mortgage Assets on a
monthly basis. The Company intends to acquire all or substantially all of such
Mortgage Assets from Webster Bank and/or affiliates of Webster Bank, on terms
that are comparable to those that could be obtained by the Company if such
Mortgage Assets were purchased from unrelated third parties, out of proceeds
received in connection with the repayment or disposition of Mortgage Assets or
the issuance of additional shares of Preferred Stock or the contribution of
additional capital by Webster Bank. The Company may also from time to time
acquire Mortgage Assets from unrelated third parties. As of the date of this
Prospectus, the Company has not adopted any arrangements or procedures by which
it would purchase Mortgage Assets from unrelated third parties, and the Company
has not entered into any agreements with any third parties with respect to the
purchase of Mortgage Assets. The Company anticipates that it would purchase
Mortgage Assets from unrelated third parties only if neither Webster Bank nor
any affiliate of Webster Bank had an amount or type of Mortgage Asset sufficient
to meet the requirements of the Company. The Company currently anticipates that
the Mortgage Assets that it purchases will include Residential Mortgage Loans,
as described in "--Description of Mortgage Assets," and Mortgage-Backed
Securities, although if Webster Bank and/or any of its affiliates develop
additional Mortgage Asset products, the Company may purchase such additional
types of Mortgage Assets. In addition, the Company may also from time to time
acquire limited amounts of other assets eligible to be held by REITs. The
Company currently anticipates that it will not acquire the right to service any
Mortgage Loans it acquires in the future. The Company anticipates that any
servicing arrangement that it enters into in the future will contain fees and
other terms consistent with secondary market standards.
The Company currently intends to maintain 100% of its portfolio in a
combination of Residential Mortgage Loans and Mortgage-Backed Securities. As
indicated above, the Company may invest in other assets eligible to be held by
REITs. The Company primarily intends to purchase newly originated loans of
Webster Bank, or more seasoned loans at then current market rates. 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 more than 30 days past
due 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 in nonaccrual status
or renegotiated due to financial deterioration of the borrower; or (iii) has
been, more than once during the preceding 12 months, more than 30 days past due
in the payment of principal or interest. Loans that are in a "nonaccrual status"
are generally loans that are past due 90 days or more in principal or interest.
The Company currently intends that with respect to delinquent and
non-accrual loans, to aggressively seek collections on such loans consistent
with Webster Bank's policies in that regard.
CAPITAL AND LEVERAGE POLICIES. The Company presently does not
anticipate any additional funding requirements. 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 consideration of provisions of the Code requiring the
distribution by a REIT of a certain percentage of taxable income and taking into
account taxes that would be imposed on undistributed taxable income), or a
combination of these methods.
The Company will have no debt outstanding following completion of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of
25
the Company do not contain any limitation on the amount or percentage of debt,
funded or otherwise, the Company might incur.
The Company may also issue additional series of Preferred Stock.
However, the Company may not issue additional shares of Preferred Stock senior
to the Preferred Shares without the consent of persons holding at least 67% of
the aggregate liquidation value of Preferred Shares at that time. The Company
anticipates that, prior to its issuance of additional shares of Preferred Stock,
it will take into consideration Webster Bank's funding requirements and an
assessment of other available options for raising any necessary capital.
CREDIT RISK MANAGEMENT POLICIES. The Company intends that each Mortgage
Loan acquired from Webster Bank, an affiliate of Webster Bank or an unrelated
third party in the future will represent a first lien position and will be
originated in the ordinary course of the originator's real estate lending
activities based on the underwriting standards generally applied (at the time of
origination) for the originator's own account. See "--Description of Mortgage
Assets--Mortgage Loan Underwriting Standards." The Company also intends that all
Mortgage Loans held by the Company will be serviced pursuant to the Servicing
Agreement, which requires the Servicer to service the Company's Mortgage Loans
in a manner substantially the same as for similar work performed by the Servicer
for transactions on its own behalf. It also requires the Servicer to take all
reasonable steps necessary to comply with and to use its best efforts to cause
the Company to comply with any applicable federal and state statutes or
regulations or private mortgage insurance requirements while servicing all loans
pursuant to the Servicing Agreement.
RELATIONSHIP WITH WEBSTER BANK POLICIES. Because of the nature of the
Company's relationship with Webster Bank and its affiliates, it is the Company's
policy that the terms of any financial dealings with Webster Bank and its
affiliates will be consistent with those available from third parties in the
mortgage lending industry. It is the intention of the Company and Webster Bank
that any agreements and transactions between the Company, on the one hand, and
Webster Bank or its affiliates, on the other hand, including, without
limitation, the purchase of Mortgage Loans, are fair to all parties and are
consistent with market terms for such types of transactions. The Servicing
Agreement provides that foreclosures and dispositions of the Mortgage Loans are
to be performed with a view toward maximizing the recovery by the Company as
owner of the Mortgage Loans, and the Servicer shall service the Mortgage Loans
solely with a view toward the interests of the Company, and without regard to
the interests of Webster Bank or any of its 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 amended and restated
certificate of incorporation (the "Certificate of Incorporation") limiting any
officer, director, security holder or affiliate of the Company from having any
direct or indirect pecuniary interest in any Mortgage Asset to be acquired or
disposed of by the Company or in any transaction in which the Company has an
interest or from engaging in acquiring, holding and managing Mortgage Assets. As
described herein, it is expected that Webster Bank and its affiliates will have
direct interests in transactions with the Company (including without limitation
the sale of Mortgage Assets 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 Assets.
OTHER POLICIES. The Company intends to operate in a manner that will
not subject it to regulation under the Investment Company Act of 1940, as
amended. 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 Preferred
Shares in the open market or otherwise. The Company has no present intention of
causing the Company 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.
26
The Company intends to publish and distribute to stockholders, in
accordance with the rules of the Nasdaq Stock Market, annual reports containing
financial statements prepared in accordance with generally accepted accounting
principles and certified by the Company's independent public accountants. The
Company will maintain its status as a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), for as long as any of the
Preferred Shares are outstanding.
The Company currently intends to make investments and operate its
business at all times in such a manner as to be consistent with the requirements
of the Code to qualify as a REIT. However, future economic, market, legal, tax
or other considerations may cause the Board of Directors to determine that it is
in the best interests of the Company and its stockholders to revoke its REIT
status.
DESCRIPTION OF MORTGAGE ASSETS
Information with respect to the Company's Mortgage Assets is presented
as of June 30, 1997. The Company's portfolio of Mortgage Assets may or may not
have the characteristics described below at future dates, although the Company
currently intends to maintain 100% of its portfolio in a combination of
Residential Mortgage Loans and Mortgage-Backed Securities.
GENERAL. At June 30, 1997, the Residential Mortgage Loans owned by the
Company had an aggregate outstanding principal balance of $613.6 million. The
Company's Residential Mortgage Loans at June 30, 1997 were originated in the
ordinary course of the real estate lending activities of Webster Bank or
acquired by Webster Bank as a result of acquisitions. All of the Company's
Residential Mortgage Loans at June 30, 1997 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 following table sets forth the composition of the Company's loan
portfolio in dollar amounts and in percentages at June 30, 1997, and a
reconciliation of loans receivable, net.
JUNE 30, 1997
(In Thousands)
Residential Mortgage Loans.................... $ 613,627
Mortgage Loans Net Items:
Allowance for Loan Losses................... (1,544)
Unearned Premiums and Deferred
Loan Fees, Net............................ 1,436
-----------
Residential Mortgage Loans, Net............. $ 613,519
===========
All of the Company's Residential Mortgage Loans at June 30, 1997 were
originated between January 1979 and April 1997, and have an original term to
stated maturity of up to 30 years. The following table sets forth information
regarding the origination dates of the Company's Residential Mortgage Loans.
AGGREGATE PRINCIPAL BALANCE
YEAR IN WHICH RESIDENTIAL OF RESIDENTIAL MORTGAGE
MORTGAGE LOANS WERE ORIGINATED LOANS AT JUNE 30, 1997
------------------------------ -----------------------
(In Thousands)
1979-1984.......................... $ 1,881
1985-1989.......................... 54,840
1990-1994.......................... 284,996
1995............................... 93,738
1996............................... 121,049
1997............................... 57,123
-----------
$ 613,627
===========
27
At June 30, 1997, the weighted average Loan-to-Value Ratio of the
Residential Mortgage Loans was 65.3%. "Loan-to-Value Ratio" means the ratio
(expressed as a percentage) of the current principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the underlying
mortgaged property and (ii) if the Mortgage Loan was made to finance the
acquisition of property, the purchase price of the mortgaged property. The
mortgage notes with respect to all of the Residential Mortgage Loans at June 30,
1997 contain "due-on-sale" provisions, which restrict the assumption of the
Residential Mortgage Loan by a proposed transferee and accelerate the payment of
the outstanding principal balance of the Residential Mortgage Loan.
The following table sets forth the contractual maturity and
interest-rate sensitivity of the Company's Residential Mortgage Loans at June
30, 1997.
CONTRACTUAL MATURITY
------------------------------------------------------
ONE YEAR ONE TO OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
(In Thousands)
Residential Mortgage Loans:
Fixed Rate....................................... $ - $ 374 $ 216,653 $ 217,027
Adjustable Rate.................................. 185,521 198,643 12,436 396,600
---------- ---------- ------------ -----------
Total.......................................... $ 185,521 $ 199,017 $ 229,089 $ 613,627
========== ========== ============ ===========
At June 30, 1997, (i) $4.7 million of the Residential Mortgage Loans
were more than 30 days past due in the payment of principal or interest; (ii)
$633,000 were in nonaccrual status; and (iii) $6.7 million were more than once
during the preceding 12 months, more than 30 days past due in the payment of
principal or interest.
The Company has established allowances for loan losses in an amount
deemed prudent by management based in large part on the loss experience of
Webster Bank in determining the adequacy of loan loss allowances. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When the
Company determines a problem asset to be uncollectible, it either establishes a
specific allowance for expected losses or charges-off expected losses to the
allowance for loan losses. As a subsidiary of Webster Bank, the Company's
determination as to the amount of its valuation allowances is subject to review
by the OTS which can order the establishment of additional valuation allowances.
The following table sets forth certain information regarding the
Company's loans accounted for on a nonaccrual basis at June 30, 1997. The
Company has no real estate acquired through foreclosure.
JUNE 30, 1997
(In Thousands)
Residential Mortgage Loans Accounted for on a
Nonaccrual Basis............................................. $ 633
Real Estate Acquired Through Foreclosure........................ -
-------------
Total...................................................... $ 633
=============
Interest on nonaccrual loans that would have been recorded as
additional income for the six months ended June 30, 1997 had the loans been
current in accordance with their original terms approximated $16,205.
28
The following table sets forth information as to delinquent loans in
the Company's loans receivable portfolio before net items.
JUNE 30, 1997
------------------------
PERCENTAGE
PRINCIPAL OF LOANS
BALANCES RECEIVABLE
-------- ----------
(In Thousands)
Residential Mortgage Loans Past Due
30-89 Days and Still Accruing............. $4,027 .7%
The Company's allowance for loan losses at June 30, 1997 totaled $1.5
million. All of such allowances are attributable to Residential Mortgage Loans,
which are the only loans held by the Company at that date. In assessing the
specific risks inherent in the portfolio, management takes into consideration
the risk of loss on the Company's nonaccrual loans and watch list loans
including an analysis of the collateral for the loans. Other factors considered
are loss experience (including that of Webster Bank), loan concentrations, local
economic conditions and other factors. As of June 30, 1997, the Company has not
had any charge-offs, nor has it made any provisions for loan losses charged to
operations.
RESIDENTIAL MORTGAGE LOANS. The following table sets forth certain
information with respect to each type of Residential Mortgage Loan owned by the
Company at June 30, 1997:
Aggregate
Principal Weighted Average Weighted Average
Balance Loan-to- Months Remaining
Loan Type (In Thousands) Value Ratio to Maturity
- --------- -------------- ---------------- ----------------
15 Year Fixed Rate Residential Mortgage Loans.. $ 51,676 47.7% 143
20 Year Fixed Rate Residential Mortgage Loans.. 1,632 65.0 210
25 Year Fixed Rate Residential Mortgage Loans.. 835 71.8 277
30 Year Fixed Rate Residential Mortgage Loans.. 162,884 67.3 321
Adjustable Rate Residential Mortgage Loans..... 396,600 67.7 316
----------
Total....................................... $ 613,627
==========
As of June 30, 1997, $217.0 million or 35.4% of the Residential
Mortgage Loans bore interest at a fixed rate and $396.6 million or 64.6% bore
interest at adjustable rates. The interest rate on an "adjustable rate mortgage"
or an "ARM" is typically tied to an index (such as the interest rate on United
States Treasury Bills) and is adjustable periodically. ARMs are typically
subject to lifetime interest rate caps and/or periodic interest rate caps. As of
June 30, 1997, the interest rates of the Residential Mortgage Loans ranged from
4.75% per annum to 9.50% per annum and the weighted average interest rate was
7.68% per annum.
29
The following tables contain certain additional data with respect to
the interest rates of certain of the Residential Mortgage Loans owned by the
Company as of June 30, 1997:
CURRENT INTEREST RATE OF RESIDENTIAL MORTGAGE LOANS
Number of Aggregate Percentage
Residential Principal Balance by Aggregate
Current Interest Rate Mortgage Loans (In Thousands) Principal Balance
- --------------------- -------------- ----------------- -----------------
Fixed Rate Loans:
- -----------------
6.501%-7.000%............................... 221 $ 25,599 4.2%
7.001%-7.500%............................... 558 77,930 12.7
7.501%-8.000%............................... 667 109,585 17.9
8.001%-8.500%............................... 9 1,558 0.2
8.501%-9.000%............................... 9 1,183 0.2
9.001%-9.500%............................... 8 1,172 0.2
------ ----------- -------
Total Fixed Rate Loans.................... 1,472 217,027 35.4
------ ----------- -------
Adjustable Rate Loans:
- ----------------------
4.501%-5.000%............................... 2 204 0.1
5.001%-5.500%............................... 1 84 -
5.501%-6.000%............................... 12 4,554 0.7
6.001%-6.500%............................... 10 3,780 0.6
6.501%-7.000%............................... 211 46,942 7.7
7.001%-7.500%............................... 435 85,102 13.9
7.501%-8.000%............................... 804 129,900 21.1
8.001%-8.500%............................... 570 98,145 16.0
8.501%-9.000%............................... 138 26,538 4.3
9.001%-9.500%............................... 10 1,351 0.2
------ ----------- -------
Total Adjustable Rate Loans............... 2,193 396,600 64.6
------ ----------- -------
Total Residential Mortgage Loans............... 3,665 $ 613,627 100.0%
====== =========== =======
"Gross Margin," with respect to an ARM, means the applicable fixed
percentage which is added to the applicable index to calculate the current
interest rate paid by the borrower of such adjustable rate Residential Mortgage
Loan (without taking into account any interest rate caps or minimum interest
rates). As of June 30, 1997, the weighted average Gross Margin of the adjustable
rate Residential Mortgage Loans was approximately 2.78%. The following table
sets forth certain additional data with respect to the Gross Margin of the
adjustable rate Residential Mortgage Loans owned by the Company as of June 30,
1997:
GROSS MARGIN
Aggregate Percentage
Number of Principal Balance by Aggregate
Gross Margin Mortgage Loans (In Thousands) Principal Balance
- ------------ -------------- ----------------- -----------------
Less than 2.75%............................. 156 $ 19,474 4.9%
2.75%....................................... 1,462 294,326 74.2
Greater than 2.75%.......................... 575 82,800 20.9
------- ---------- -------
Total.................................... 2,193 $ 396,600 100.0%
======= ========== =======
The current portfolio of Residential Mortgage Loans includes loans
directly originated by Webster Bank, as well as loans acquired by Webster Bank
in connection with its merger and acquisition activity
30
over recent years. The interest rate of each type of ARM product owned by the
Company at June 30, 1997 adjusts at the times (each, a "Rate Adjustment Date")
and in the manner described below subject to lifetime interest rate caps, to
minimum interest rates and, in the case of most ARMs owned by the Company at
June 30, 1997, to maximum periodic adjustment increases or decreases, each as
specified in the mortgage note relating to the ARM. Information set forth below
regarding interest rate caps and minimum interest rates applies to the
Residential Mortgage Loans owned by the Company at June 30, 1997 only. Mortgage
Loans purchased by the Company after that date may be subject to different
interest rate caps and minimum interest rates.
Each ARM bears interest at its initial interest rate until its first
Rate Adjustment Date. Effective with each Rate Adjustment Date, the monthly
principal and interest payment on an adjustable rate Mortgage Loan will be
adjusted to an amount that will fully amortize the then-outstanding principal
balance of such Residential Mortgage Loan over its remaining term to stated
maturity and that will be sufficient to pay interest at the adjusted interest
rate. Certain of the types of Residential Mortgage Loan products that are ARMs
contain an option, which may be exercised by the mortgagor, to convert the ARM
into a fixed rate loan for the remainder of the mortgage term. If a Residential
Mortgage Loan that is an ARM is converted into a fixed rate loan, the interest
rate will be determined at the time of conversion as specified in the mortgage
note relating to such Mortgage Loan and will remain fixed at such rate until the
stated maturity of such Residential Mortgage Loan. Mortgage Loans owned by the
Company at June 30, 1997 generally allow the mortgagor to prepay at any time
some or all of the outstanding principal balance of the Mortgage Loan without a
fee or penalty.
Current ARM products offered by Webster Bank include six month,
one-year and three-year ARMs. Webster Bank also offers five-year and ten-year
fixed rate Residential Mortgage Loans with the ability to automatically convert
to a one-year ARM after five or ten years, respectively.
MORTGAGE LOAN UNDERWRITING STANDARDS. Webster Bank has represented to
the Company that all of the Mortgage Loans contributed by Webster Bank to the
Company in March 1997 were originated generally in accordance with the
underwriting policies customarily employed by the originator during the period
in which those Residential Mortgage Loans were originated.
In the Mortgage Loan approval process, Webster Bank assesses both the
borrower's ability to repay the Mortgage Loan and the adequacy of the proposed
security. Credit approval is vested with the board of directors of Webster Bank
and delegated to certain officers in accordance with the credit authorizations
approved by the board of directors of Webster Bank. Any significant Mortgage
Loan not conforming to Webster Bank's approved policies must be approved by the
executive vice president of mortgage banking or the chief executive officer of
Webster Bank. All Mortgage Loans of $3.0 million or more are presented to the
board of directors of Webster Bank for final approval.
The approval process for all types of Mortgage Loans includes on-site
appraisals of the properties securing such loans and a review of the applicant's
financial records and credit, payment and banking history, and tax returns.
Webster Bank generally lends up to 95% of the appraised value of single family
residential dwellings to be owner-occupied.
Webster Bank requires title insurance policies protecting the priority
of Webster Bank's liens for all Mortgage Loans and also requires fire and
casualty insurance for permanent Mortgage Loans. The borrower selects the
insurance carrier, subject to Webster Bank's approval. Generally, for any
Residential Mortgage Loan in an amount exceeding 80% of the appraised value of
the security property, Webster Bank currently requires mortgage insurance from
an independent mortgage insurance company.
Substantially all Mortgage Loans originated by Webster Bank contain a
"due-on-sale" clause providing that Webster Bank may declare a Mortgage Loan
immediately due and payable in the event, among other things, that the borrower
sells the property securing the loan without the consent of Webster Bank.
31
GEOGRAPHIC DISTRIBUTION. Approximately 92% of the residential real
estate properties underlying the Company's Residential Mortgage Loans as of June
30, 1997 were located in Connecticut. The remaining properties are located
primarily in Massachusetts, New York and Rhode Island. Consequently, these
Residential Mortgage Loans may be subject to a greater risk of default than
other comparable Residential Mortgage Loans in the event of adverse economic,
political or business developments in Connecticut that affect the ability of
residential property owners in any of these areas to make payments of principal
and interest on the underlying mortgages.
LOAN-TO-VALUE RATIOS; INSURANCE. Approximately 95% of the Company's
Residential Mortgage Loans as of June 30, 1997 having Loan-to-Value Ratios of
greater than 80%, are insured under primary mortgage guaranty insurance
policies. At the time of origination of the Residential 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
replacement value or the principal balance of such Residential Mortgage Loan,
whichever is less. If the residential real estate 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 its Residential Mortgage Loans.
SERVICING
The Mortgage Loans owned by the Company are serviced by Webster Bank
pursuant to the terms of the Servicing Agreement. Webster Bank in its role as
servicer under the terms of the Servicing Agreement is herein referred to as the
"Servicer." The Servicer will receive fees at an annual rate of (i) 8 basis
points for fixed rate loan servicing and collection work, (ii) 8 basis points
for variable rate loan servicing and collection work and (iii) 5 basis points
for all other services to be provided, in each case based on the daily
outstanding balances of all of the Company's loans for which the Servicer is
responsible.
The Servicing Agreement generally requires the Servicer to service the
Company's Mortgage Loans in a manner substantially the same as for similar work
performed by the Servicer for transactions on its own behalf. It also requires
the Servicer to use its best efforts to comply with any applicable federal and
state statutes or regulations or private mortgage insurance requirements while
servicing all loans pursuant to the Servicing Agreement. The Servicer 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 Servicer will
also provide accounting and reporting services required by the Company for such
Mortgage Loans. The Servicer may, in its discretion, arrange with a defaulting
borrower a schedule for the liquidation of delinquencies, provided that, in the
case of Residential Mortgage Loans, no primary mortgage guaranty insurance
coverage is adversely affected. The Servicer may also be directed by the
Company, at any time during the servicing process, to dispose of any Mortgage
Loan which is placed in a nonaccrual status, renegotiated due to the financial
deterioration of the borrower or which has been, more than once during the
preceding 12 months, more than 30 days past due in the payment of principal or
interest. The Servicer may from time to time assign all or a portion of its
rights and obligations under the Servicing Agreement to an affiliate of the
Company. The Servicer will not, in connection with the assignment of any of its
obligations under the Servicing Agreement, be discharged or relieved in any
respect from its obligation to the Company to perform its obligations under the
Servicing Agreement.
The Servicer will be required to pay all expenses related to the
performance of its duties under the Servicing Agreement. The Servicer will be
required to make advances of taxes and required insurance premiums that are not
collected from borrowers with respect to any Mortgage Loan serviced by it,
unless it determines that such advances are nonrecoverable from the mortgagor,
insurance proceeds or other sources with respect to such Mortgage Loan. If such
advances are made, the Servicer generally will be reimbursed prior to the
Company being reimbursed out of proceeds related to such Mortgage Loan. The
Servicer also will be entitled to reimbursement by the Company for expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans
serviced by it and in connection with the restoration of
32
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 Servicer's expenses in the sale, are less than the
outstanding principal balance of the related Mortgage Loan. The Servicer will be
responsible to the Company for any loss suffered as a result of the Servicer's
failure to make and pursue timely claims or as a result of actions taken or
omissions made by the Servicer which cause the policies to be cancelled by the
insurer. The Servicer 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 underlying a
Mortgage Loan by operation of law or otherwise in accordance with the terms of
the Servicing Agreement. Under the Servicing Agreement, the Servicer also
provides certain investment and fund management services to the Company.
In the event of a material breach of a party's obligations under the
Servicing Agreement, the non defaulting party may terminate the Servicing
Agreement ten days after written notice and a demand to the other party if such
breach has not been cured. The Company also has the right to terminate the
Servicing Agreement on 30 days' notice if the Servicer alters its reporting
practices in a manner that is not acceptable to the Company. In the event that
the Servicer is no longer an affiliate of the Company, the Servicing Agreement
will terminate.
The Company and the Servicer have agreed to indemnify the other party
against a breach of the representations, warranties and covenants in the
Servicing Agreement, subject to certain limitations.
The Servicer will be entitled to retain any late payment charges,
prepayment fees, penalties and assumption fees collected in connection with the
Mortgage Loans serviced by it. The Servicer 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
serviced by it. At the end of each calendar month, the Servicer remits amounts
due to the Company net of all fees and charges due to the Servicer.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicer 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 Servicer 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 Servicer as additional servicing compensation.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase additional
Mortgage Assets and that all or substantially all of these Mortgage Assets will
be purchased from Webster Bank and affiliates of Webster Bank. Accordingly, 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 a party to, nor is any of its property the subject
of, any material pending legal proceedings other than routine litigation
incidental to its business.
33
SELECTED FINANCIAL DATA
The selected financial data set forth below is based upon and should be
read in connection with the Company's audited financial statements and notes
thereto appearing elsewhere herein.
FINANCIAL CONDITION DATA:
At June 30, 1997
----------------
(In Thousands)
Assets:
Cash.................................................... 13,415
Total Mortgage Loans, Net............................... 613,519
Accrued Interest Receivable............................. 3,751
Prepaid Expenses and Other Assets....................... 107
---------
Total Assets........................................ $ 630,792
=========
Liabilities and Shareholders' Equity:
Total Liabilities....................................... $ 274
Shareholder's Equity:
Preferred Stock......................................... 2,000
Common Stock............................................ 1
Paid in Capital......................................... 615,021
Retained Earnings....................................... 13,496
---------
Total Shareholder's Equity............................ 630,518
---------
Total Liabilities and Shareholder's Equity.......... $ 630,792
=========
INCOME STATEMENT DATA: For the Period
from March 17, 1997
(Date of Inception)
to June 30, 1997
----------------
(In Thousands)
Interest Income:
Net Interest Income..................................... $ 13,613
Provision for Loan Losses............................... -
--------
Net Interest Income After Provision
for Loan Losses................................... 13,613
Noninterest Expenses....................................... 59
--------
Income Before Taxes........................................ 13,554
Income Taxes............................................... -
--------
Net Income................................................. 13,554
Preferred Stock Dividends.................................. 58
--------
Net Income Available to Common Shareholder................. $ 13,496
========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company is a wholly-owned subsidiary of Webster Bank and was
incorporated in March 1997 to provide a cost-effective means of raising funds,
including equity capital, on a consolidated basis for Webster. Total assets at
June 30, 1997 were $630.8 million of Mortgage Assets, net.
The Company will elect to be treated 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.
Furthermore, the Company and Webster Bank will benefit significantly from
federal and state tax treatment of dividends paid by the Company as a result of
its qualification as a REIT. The following discussion of the Company's financial
condition and results of operations should be read in conjunction with the
Company's financial statements and other financial data included elsewhere
herein.
ASSET QUALITY
GENERAL. The Company presently maintains asset quality by acquiring
Residential Mortgage Loans that have been conservatively underwritten,
aggressively managing nonaccrual assets and maintaining adequate reserve
coverage. At June 30, 1997, Residential Mortgage Loans comprised 100% of the
total loan portfolio.
NONACCRUAL ASSETS. The aggregate amount of nonaccrual assets was
$633,000 at June 30, 1997.
At June 30, 1997
----------------
(In Thousands)
Nonaccrual Assets:
Loans Accounted for on a Nonaccrual Basis:
Residential Fixed Rate Loans............................ $ 53
Residential Variable Rate Loans......................... 580
------
Total................................................. $ 633
======
At June 30, 1997, the allowance for loan losses was $1.5 million, or
243.9% of nonaccrual assets and .25% of total Mortgage Loans, net. Management
believes that the allowance for loan losses is adequate to cover expected losses
in the portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for the Company are net cash flows
from operating activities and investing activities. Net cash flows from
investing activities primarily include the purchase and maturity of Residential
Mortgage Loans. While scheduled loan amortization and short term investments are
predictable sources of funds, loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. One of the inherent risks
of investing in loans is the ability of such instruments to incur prepayments of
principal prior to maturity at prepayment rates different than those estimated
at the time of purchase. This generally occurs because of changes in market
interest rates. The market values of fixed rate loans are sensitive to
fluctuations in market interest rates, declining in value as interest rates
rise. If interest rates decrease, the market value of loans generally will tend
to increase with the level of prepayments also normally increasing.
ASSET/LIABILITY MANAGEMENT
The goal of the Company's asset/liability policy is to manage interest
rate risk so as to maximize net interest income over time in changing interest
rate environments while maintaining acceptable levels of risk. The Company must
provide for sufficient liquidity for daily operations. The Company prepares
34
estimates of the level of prepayments and the effect of such prepayments on the
level of future earnings due to reinvestment of funds at rates different than
those that currently exist. The Company is unable to predict future fluctuations
in interest rates and as such the market values of certain of the Company's
financial assets are sensitive to fluctuations in market interest rates. Changes
in interest rates can affect the value of its loans and other interest-earning
assets.
RESULTS OF OPERATIONS
From the March 17, 1997 date of inception of the Company to June 30,
1997, the Company reported net income of $13.5 million, or $134,960 per share.
Because the Company was formed in March 1997, there are no comparable results
from previous periods. Total interest income for the period amounted to $13.6
million, net of servicing fees. The average balance of total Mortgage Loans for
the period was $616.1 million, net, and the average yield was 7.68%. There were
no provisions for loan losses for the period. Noninterest expenses amounted to
$59,000. No income tax expense was recorded for the period.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data of the Company presented
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP"), which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services. In the
current interest rate environment, the maturity structure of the Company's
assets is critical to the maintenance of acceptable performance levels.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently consists of three members.
Directors are elected for a one-year term. The Company currently has three
officers. The Company has no other employees.
The persons who are current directors and executive officers of the
Company are as follows:
Name Age Position and Offices Held
- ---- --- -------------------------
John V. Brennan......................... 45 President and Director
Ross M. Strickland...................... 48 Director
Harriet Munrett Wolfe................... 44 Director
Gregory S. Madar........................ 35 Vice President and Secretary
Peter J. Swiatek........................ 38 Vice President and Treasurer
The following is a summary of the experience of the executive officers
and directors of the Company:
John V. Brennan is the President and a director of the Company. He is
also the Executive Vice President, Chief Financial Officer and Treasurer of
Webster and Webster Bank. Mr. Brennan, a certified public accountant, joined
Webster Bank in 1986 as Senior Vice President and Treasurer. He was elected
35
Chief Financial Officer in 1990 and Executive Vice President in 1991. Prior to
joining Webster Bank, he was a senior manager with the accounting firm of KPMG
Peat Marwick LLP.
Ross M. Strickland is a director of the Company. He is also the
Executive Vice President -- Mortgage Banking of Webster and Webster Bank,
positions he has held since his employment in 1991. Prior to joining Webster
Bank, he was Executive Vice President of Residential Lending with the former
Northeast Savings, F.A., Hartford, Connecticut, from 1988 to 1991. Prior to
joining Northeast Savings, he was National Sales Manager, Credit Resources
Group, for Shearson Lehman Brothers.
Harriet Munrett Wolfe is a director of the Company. She is also the
Senior Vice President, Counsel and Secretary of Webster and Webster Bank. Mrs.
Wolfe joined Webster and Webster Bank in March 1997 as Senior Vice President and
Counsel, and was appointed Secretary in June 1997. Prior to joining Webster and
Webster Bank, she was in private practice. From November 1990 to January 1996,
she was Vice President and Senior Counsel of Shawmut Bank Connecticut, N.A.,
Hartford, Connecticut. Prior to joining Shawmut, she was Associate Legal Counsel
and Assistant Secretary of the former Citytrust, Bridgeport, Connecticut.
Gregory S. Madar is the Vice President and Secretary of the Company. He
is also Vice President and Tax Manager of Webster Bank. Mr. Madar, a certified
public accountant, joined Webster Bank in 1995. Prior to joining Webster Bank,
he was Controller of Millane Nurseries, Inc. from 1993 to 1995. Prior to joining
Millane Nurseries, he was a tax manager with KPMG Peat Marwick LLP in Hartford.
He was associated with KPMG from 1987 to 1993.
Peter J. Swiatek is the Vice President and Treasurer of the Company. He
is also Senior Vice President and Controller of Webster Bank and Controller of
Webster Financial Corporation. Mr. Swiatek joined Webster in 1990 as Vice
President of Accounting. He was elected Controller in 1992 and Senior Vice
President in 1993. Prior to joining Webster Bank, Mr. Swiatek was the Controller
of the former The Bank of Hartford.
EMPLOYEES; COMPENSATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The Company currently has three officers, none of whom receive separate
compensation as employees of the Company. The Company has retained the Advisor
to perform certain functions pursuant to the Advisory Agreement described below
under "--The Advisor." Each officer of the Company currently is also an officer
of Webster Bank. The Company will maintain corporate records and audited
financial statements that are separate from those of Webster Bank and any of
Webster Bank's affiliates. It is not currently anticipated that the officers,
directors or employees of the Company will have any 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.
The Company does not intend to pay the directors of the Company fees
for their services as directors. Although no direct compensation will be paid by
the Company, under the Advisory Agreement, the Company will reimburse Webster
Bank for its proportionate share of the salaries of such persons.
AUDIT COMMITTEE
The entire Board of Directors serves as the Company's audit committee,
which reviews the engagement of the Company's independent accountants and the
functions performed by the independent accountants pursuant to the terms of the
accountants' engagement. The audit committee will also review the adequacy of
the Company's internal accounting controls.
36
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation eliminates, to the fullest
extent permitted by the Connecticut Business Corporation Act (the "Connecticut
Corporation Law"), the personal liability of a director to the Company and its
stockholders for monetary damages for breach of such director's duty. The
Company's Certificate of Incorporation and by-laws (the "By-Laws") require the
Company to indemnify, to the fullest extent permitted by applicable law,
including the Connecticut Corporation Law, any director or officer of the
Company. The By-Laws 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, and empower the Company to purchase and maintain insurance
to protect any director or officer against any liability asserted against him or
her, or incurred by him or her, arising out of his or her status as such.
THE ADVISOR
In connection with the formation of the Company and the consummation of
the Offering as described herein, the Company has entered into the Advisory
Agreement with Webster Bank to administer the day-to-day operations of the
Company. Webster Bank in its role as advisor under the terms of the Advisory
Agreement is herein referred to as the "Advisor." The Advisor is responsible for
(i) monitoring the credit quality of the Mortgage Assets held by the Company,
(ii) advising the Company with respect to the acquisition, management, financing
and disposition of the Company's Mortgage Assets, and (iii) maintaining custody
of the documents related to the Company's Mortgage Assets. The Advisor may at
any 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, subcontract all or a portion of its obligations under
the Advisory Agreement to unrelated third parties. The Advisor may assign its
rights or obligations under the Advisory Agreement to any affiliate of the
Company. 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 June 30, 1997, the Advisor and its affiliates owned
approximately $2.9 billion of Residential Mortgage Loans. In their Residential
Mortgage Loan business, the Advisor and its affiliates originate and purchase
Residential Mortgage Loans and then sell such loans to investors, primarily in
the secondary market, while generally retaining the rights to service such
loans. The Advisor and its affiliates also purchase servicing rights on
Residential Mortgage Loans. At June 30, 1997, in addition to loans serviced for
its own portfolio, the Advisor and its affiliates serviced Residential Mortgage
Loans having an aggregate principal balance of approximately $1.2 billion.
The Advisory Agreement has an initial term of two years, and will be
renewed automatically for additional one-year periods unless notice of
nonrenewal is delivered by either party to the other party. The Advisory
Agreement may be terminated by the Company at any time upon 90 days' prior
written notice. The Advisor will be entitled to receive an advisory fee equal to
$150,000 per year with respect to the advisory services provided by it to the
Company.
BENEFITS TO WEBSTER BANK
Webster Bank expects to realize the following benefits in connection
with the Offering and other transactions constituting the formation of the
Company:
o Webster Bank will benefit from federal and state tax treatment of
dividends paid by the Company as a result of its qualification as a
REIT. The dividends payable on the Preferred Shares will be deductible
for federal and Connecticut state income tax purposes as a result of
the Company's qualification as a REIT. Also as a result of the
Company's qualification as a REIT, as well as its qualification under
certain Connecticut tax law requirements (including that capital
contributions
37
from unrelated parties, as of the end of the relevant tax period,
exceed 5% of the Company's total real estate assets), Webster Bank will
be able to deduct from its income, dividends received on the Common
Stock for Connecticut corporation income tax purposes.
o Webster Bank is entitled to receive advisory and servicing fees and
dividends in respect of the Common Stock. For the first 12 months
following completion of the Offering, these fees and dividends are
anticipated to be as follows:
Advisory Fees.......................................... $150,000
Servicing Fees......................................... 800,000(1)
Common Stock Dividends................................. (2)
----------
$
==========
- ----------
(1) Assumes that for the first 12 months following completion of the
Offering, the Company holds Residential Mortgage Loans with an
average outstanding principal balance of $1.0 billion. See
"Business and Strategy--Servicing" for a description of the basis
upon which the servicing fees will be calculated.
(2) The amount of dividends to be paid in respect of the Common Stock
is expected to be equal to the excess of the Company's "REIT
taxable income" (excluding capital gains and certain items of
non-cash income) over the amount of dividends paid in respect of
Preferred Stock. Assuming that the dividend rate on the AMPS
remains constant at ___%, the aggregate annual dividend amount of
the Preferred Shares will be approximately $_____ million.
Assuming that (i) prior to completion of the Offering, Webster
contributes at least $______ of Mortgage-Backed Securities to the
Company, (ii) the net proceeds of the Offering and principal
repayments (net of dividends paid) are reinvested in additional
Mortgage Assets with characteristics similar to those held at June
30, 1997, (iii) during the first quarter of 1998 Webster Bank
contributes approximately $____ million of additional Mortgage
Assets to the Company, and (iv) interest rates remain constant
during such 12-month period, the Company anticipates that the
Company will generate "REIT taxable income" (excluding capital
gains and certain items of non-cash income) of approximately $____
million, after payment of servicing and advisory fees, during such
12-month period.
o Webster Bank also is entitled to retain any ancillary fees, including,
but not limited to, late payment charges, prepayment fees, penalties
and assumption fees collected in connection with the Mortgage Loans
serviced by it. In addition, Webster Bank, as Servicer, 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 serviced by the Servicer.
REQUIRED ASSET COVERAGE
The Required Asset Coverage, determined pursuant to the procedures set
forth below, must be maintained as of each Evaluation Date. The term "Evaluation
Date" means (a) the Date of Original Issue and (b) the third Business Day
immediately preceding each Auction Date thereafter. The term "Cure Date" means
the second Business Day after each Evaluation Date.
On each Evaluation Date, the Company shall determine (i) the Market
Value of Eligible Assets owned by the Company on that date and the Adjusted
Value thereof, using the Adjustment Factors set forth below, (ii) the aggregate
Adjusted Value of all such Eligible Assets, and (iii) whether the Required Asset
Coverage and the Required Dividend Coverage exist. If the Required Asset
Coverage or the Required Dividend Coverage does not exist on an Evaluation Date,
then the Company shall make the above mentioned determinations on the related
Cure Date.
38
The "Required Asset Coverage" on any Evaluation Date or Cure Date, as
the case may be, shall be deemed to exist if the aggregate Adjusted Value of all
Eligible Assets of the Company as of the opening of business on such date equals
or exceeds the Required Asset Coverage on such date. The Required Asset Coverage
on any such date means an aggregate amount equal to the sum of (i) the number of
shares of AMPS outstanding on such Evaluation Date multiplied by $25,000.00 and
the number of shares of Series B Preferred Stock outstanding on such Evaluation
Date multiplied by $10.00, (ii) an amount equal to all accumulated and unpaid
dividends on Preferred Shares on such Evaluation Date, (iii) to the extent not
duplicative of clause (ii), an amount equal to the dividends projected to accrue
on Preferred Shares outstanding on such Evaluation Date until the next scheduled
Dividend Payment Date for such Preferred Shares, at the Applicable Dividend Rate
in effect on such Evaluation Date for the AMPS and at __% for the Series B
Preferred Shares, (iv) an amount equal to the dividends projected to accumulate
on each Preferred Share outstanding on such Evaluation Date from and after the
scheduled Dividend Payment Date specified in clause (iii) until the ____ day
after such Evaluation Date specified in clause (iii) above, at an assumed
applicable dividend rate equal to ____ times the Applicable Dividend Rate for
AMPS determined in the most recent Auction for a 28-day Dividend Period, (v)
except to the extent already included under the foregoing provisions, the sum of
all accrued liabilities that would appear on the face of a balance sheet of the
Company as of such Evaluation Date in accordance with GAAP, including, without
limitation, operating expenses of the Company and securities sold under an
obligation to repurchase, and (vi) projected expenses for the next succeeding
three-month period.
For the purpose of calculation of Required Asset Coverage, no Preferred
Shares shall be deemed outstanding if prior to or concurrently with the
determination of Required Asset Coverage the requisite notice of redemption
shall have been mailed and the requisite Liquid Assets for redemption of such
shares shall have been irrevocably deposited with the Custodian for the purpose
of such redemption. Eligible Assets of the Company are determined on an accrual
basis in accordance with customary practice under which Eligible Assets sold but
not yet delivered are not reflected as Eligible Assets in the calculation and
Eligible Assets purchased and not yet received are so reflected as Eligible
Assets in the calculation. The Liquid Assets deposited with the Custodian with
irrevocable instructions and authority to pay the redemption price for shares of
AMPS subject to redemption will not be included as Eligible Assets in the
calculation of Required Asset Coverage. See "Description of Preferred
Shares--Auction Market Preferred Stock--Redemption."
The calculations of the Market Value and the Adjusted Value of the
Eligible Assets and the Required Asset Coverage and Dividend Coverage as of each
Evaluation Date and related Cure Date, if any, shall be set forth in a
certificate of Required Asset Coverage (a "Required Asset Coverage
Certificate"). The Company shall deliver a Required Asset Coverage Certificate
to the Custodian and each of S&P and Fitch (the "Rating Agencies") on the Date
of Original Issue, on each Auction Date and by the close of business two
Business Days after each other Evaluation Date, or, if necessary, by the close
of business on any related Cure Date. In each case, such Required Asset Coverage
Certificate must be signed by the President, the Treasurer or the Secretary of
the Company. If the Required Asset Coverage is not maintained as of any
Evaluation Date and is not restored by the next Cure Date, then the Company will
have an obligation to redeem Preferred Shares as described under "Description of
Preferred Shares--Series B Preferred Shares--Redemption" and "Description of
Preferred Shares--Auction Market Preferred Stock--Redemption."
The acquisition of additional Eligible Assets by the Company to restore
the Required Asset Coverage may be made by capital contributions from Webster
Bank, to the extent permitted by applicable law. Webster Bank may, but has no
obligation to, make capital contributions to the Company. Such contributions may
be subject to regulatory restrictions.
Funds received by the Company from its investments, including
repayments of principal and repayments of mortgages underlying the Eligible
Assets, will be used for its general corporate purposes, particularly to pay the
Company's operating expenses and obligations, to pay dividends on the Common
Stock and Preferred Stock and to maintain the Required Asset Coverage through
reinvestment in Mortgage Assets.
39
The determination of the aggregate Adjusted Value of the Eligible
Assets involves two separate calculations, which were established after
consultation with S&P and Fitch. The first calculation (Calculation I)
determines the market value (the "Market Value") of the Eligible Assets owned by
the Company. The second calculation (Calculation II) takes the Market Value of
each Eligible Asset owned by the Company and applies a specific Adjustment
Factor to such value for each category of Eligible Assets to determine the
Adjusted Value of such Eligible Assets.
Calculation I: The "Market Value" of the Eligible Assets is computed as
follows:
(a) Cash, demand and time deposits, and certificates of
deposit shall be valued at 100% of face value.
(b) The aggregate principal amount of the mortgage loans
evidenced by Mortgage-Backed Securities having a remaining term to
maturity greater than 90 days shall be multiplied by the lower of the
bid prices, as of the close of business in New York City on the last
Business Day prior to such Evaluation Date, for the same kind of
certificate or, if not available, some other security having, as nearly
as practicable, comparable interest rates and maturities, as quoted by
any nationally recognized securities pricing service.
(c) Each Short-Term Money Market Instrument (except for
those described in (a) above) or any U.S. Treasury Securities having a
remaining term to maturity less than or equal to 90 days, shall be
valued by multiplying the face amount thereof by the lower of the bid
prices therefor obtained by the Company as of the close of business in
New York City on the last Business Day prior to the applicable
Evaluation Date as quoted by any nationally recognized securities
pricing service.
Calculation II: The "Adjusted Value" of each Eligible Asset, as of any
time, shall be the lesser of (i) the Market Value thereof as of such time,
divided by the applicable Adjustment Factor and (ii) 100% of the principal
balance of such Eligible Asset. The table which follows presents the Adjustment
Factors for specific types of Eligible Assets.
ADJUSTMENT
ELIGIBLE ASSET FACTOR
-------------- ----------
Cash, Demand Deposits and Next Business Day Repurchase Agreements................
Mortgage-Backed Securities.......................................................
U.S. Treasury Securities.........................................................
Short-Term Money Market Instruments (Other than Demand Deposits and Next
Business Day Repurchase Agreements)...........................................
The total of such Market Values, as adjusted, is the aggregate Adjusted
Value of the Eligible Assets.
The calculation of the Adjusted Value of the Eligible Assets may be
made on bases other than those set forth above if S&P and Fitch have advised the
Company in writing that the revised calculation of Adjusted Value would not
adversely affect their respective then-current ratings of the shares of AMPS.
If the Market Value on any Cure Date is being determined, the Market
Value of any Eligible Assets owned by the Company both on such Cure Date and on
the related Evaluation Date shall for such purpose have the Market Value
therefor as calculated on such related Evaluation Date.
The Company shall maintain records of price quotations used to
determine Market Value for at least three years from the date of such
determination.
40
The calculation of Required Asset Coverage is designed to ensure that
the Company shall continue to own Eligible Assets that have a Market Value which
is substantially in excess of the redemption price of the outstanding Preferred
Shares. The Market Value of the Eligible Assets will fluctuate with general
changes in interest rates and possibly other factors. The Adjustment Factors
applicable to the different types of Eligible Assets vary because of the
differences in volatility of the market prices of such assets. On the Date of
Original Issue, the Market Value of the Company's Eligible Assets is expected to
exceed the redemption price of the outstanding Preferred Shares by approximately
$_____ million.
REQUIRED DIVIDEND COVERAGE
The Company is required to maintain a Required Dividend Coverage
designed to ensure that the Company has sufficient Liquid Assets to pay
dividends accumulated on the Preferred Shares. On each Evaluation Date and
Dividend Payment Date, the Company is required to deposit or have on deposit
with the Custodian and thereafter to maintain on deposit until the Business Day
prior to the next ensuing related Dividend Payment Date, sufficient Liquid
Assets to pay the dividends which will accumulate on the then outstanding
Preferred Shares from and after such Date of Original Issue, most recent
Dividend Payment Date or such Dividend Payment Date, as the case may be, until
the next scheduled Dividend Payment Date for each outstanding Preferred Share at
the Applicable Dividend Rate for each share of AMPS outstanding and at ___% per
annum for each Series B Preferred Share outstanding. The source of funds for the
Company to pay dividends will be its cash or funds received from interest and
principal payments on its Mortgage Assets. Liquid Assets include cash, demand
deposits, Short-Term Money Market Instruments and Next Business Day Repurchase
Agreements.
DESCRIPTION OF PREFERRED SHARES
The following summary sets forth the material terms and provisions of
the AMPS and the Series B Preferred Shares, and is qualified in its entirety by
reference to the terms and provisions of the Company's Certificate of
Incorporation, which has been filed with SEC as an exhibit to the Registration
Statement (as defined below) of which this Prospectus forms a part. See
"Description of Capital Stock."
GENERAL
The AMPS and Series B Preferred Shares constitute the two authorized
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 Company to issue the Preferred Shares offered
hereby, subject to limitations prescribed by Connecticut law and the Company's
Certificate of Incorporation.
When issued, the Preferred Shares will be validly issued, fully paid
and nonassessable. The holders of the 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 Preferred Shares will not be subject to any
sinking fund or other obligation of the Company for their repurchase or
retirement.
RANKING
The AMPS and the Series B Preferred Shares are of equal rank with
respect to dividend rights and rights upon liquidation. The Preferred Shares
rank senior to the Company's Common Stock with respect to dividend rights and
rights upon liquidation. Additional shares of Preferred Stock ranking
41
senior to the Preferred Shares may not be issued without the approval of persons
holding at least 67% of the aggregate liquidation value of the Preferred Shares.
REQUIRED ASSET COVERAGE
The Company is required to maintain a Required Asset Coverage designed
to ensure that the Company continues to own Eligible Assets with a Market Value
in excess of the aggregate redemption price of the outstanding Preferred Shares.
Although the Company is expected to hold a majority of its assets as Residential
Mortgage Loans, such assets will not constitute Eligible Assets. Eligible Assets
include primarily Mortgage-Backed Securities, cash and certain Liquid Assets and
other marketable securities. As of each Evaluation Date, the Company will value
the Eligible Assets to determine whether their Adjusted Value meets the Required
Asset Coverage as set forth under the heading "Required Asset Coverage." The
Company estimates that at the Date of Original Issue, based on the anticipated
composition of the Company's portfolio and current market valuations, the Market
Value of Eligible Assets will be approximately $____ million and the Adjusted
Value of Eligible Assets will be approximately $_____ million. Assuming issuance
of the Preferred Shares offered hereby, the aggregate liquidation preference
would be $75.0 million (or $76.5 million if the Underwriters' over-allotment
option is exercised). The Required Asset Coverage on that date is expected to be
approximately $____ million. Accordingly, on the Date of Original Issue, the
Market Value of the Company's Eligible Assets is expected to exceed the
redemption price of the outstanding Preferred Shares by approximately $_____
million. The Market Value of the Company's Eligible Assets will fluctuate with
general changes in interest rates, and can be expected to vary from time to time
depending on market conditions. The Adjustment Factors applicable to different
types of Eligible Assets used to calculate Adjusted Value vary because of
differences in volatility of the market prices of such assets. While there can
be no assurance that the Market Value or Adjusted Value of the Company's
Eligible Assets will be maintained at such levels, if the Required Asset
Coverage is not maintained or restored as required, the Company would be
obligated, subject to regulatory approval, to redeem such number of Preferred
Shares as would cause the Required Asset Coverage to be restored. See "Required
Asset Coverage."
The Company's ability to maintain the Required Asset Coverage could be
impeded by restrictions that federal regulators could place on the activities
and operations of Webster Bank or the Company under certain circumstances. In
addition, any redemption of Preferred Shares could be subject to the approval of
federal regulators.
REQUIRED DIVIDEND COVERAGE
The Company is required to maintain a Required Dividend Coverage
designed to ensure that the Company has sufficient Liquid Assets to pay
dividends accumulated on the Preferred Shares. On each Evaluation Date and
Dividend Payment Date, the Company is required to deposit or have on deposit
with the Custodian and thereafter to maintain on deposit until the Business Day
prior to the next ensuing related Dividend Payment Date, sufficient Liquid
Assets to pay the dividends which will accumulate on the then outstanding
Preferred Shares from and after such Date of Original Issue, the most recent
Dividend Payment Date or such Dividend Payment Date, as the case may be, until
the next scheduled Dividend Payment Date for each outstanding Preferred Share at
the Applicable Dividend Rate for each share of AMPS outstanding and at ____% per
annum for each Series B Preferred Share outstanding. The source of funds for the
Company to pay dividends will be its cash or funds received from interest and
principal payments on its Mortgage Assets. Liquid Assets include cash, demand
deposits, Short-Term Money Market Instruments and Next Business Day Repurchase
Agreements.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the Preferred Shares at the time
outstanding will be entitled to receive out of
42
assets of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Common Stock or any other class of
stock ranking junior to the Preferred Shares upon liquidation, liquidating
distributions in the amount of $25,000.00 per share of AMPS and $10.00 per
Series B Preferred Share, plus all accrued and unpaid dividends, if any, thereon
to the date of liquidation.
After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of 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 Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Preferred Shares in
the distribution of assets upon any liquidation, dissolution or winding up of
the affairs of the Company, then the holders of the Preferred Shares and such
other classes or series of capital 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 liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Preferred Shares will not be entitled to vote. In the
event the holders of Preferred Shares are entitled to vote as indicated below,
each Preferred Share will be entitled to vote proportionately based upon the
liquidation preference associated with such Preferred Share.
If at the time of any annual meeting of the Company's stockholders for
the election of directors the Company has failed to pay or declare and set aside
for payment a dividend during any of the dividend periods on the Series B
Preferred Shares and any other series of Preferred Stock of the Company other
than the AMPS, the number of directors then constituting the Board of Directors
of the Company will be increased by two (if not already increased by two due to
a default in preference dividends), and the holders of the Preferred Shares 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 until the later of (i) the full term for which he or she shall have
been elected or (ii) the payment of all accrued and unpaid dividends on the
Preferred Stock.
The affirmative vote or consent of persons holding at least 67% of the
aggregate liquidation value of the Preferred Stock of the Company, including the
Preferred Shares, will be required (a) to issue additional shares of Preferred
Stock senior to the Preferred Shares, (b) to create any series of stock which
shall, as to dividends or distribution of assets, rank prior to 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 (c) alter or change the provisions
of the Company's Certificate 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 persons holding at least 67% of the aggregate
liquidation value of all series of Preferred Stock adversely affected thereby.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series B
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer."
43
RATINGS
The AMPS will be rated _______ by S&P and _______ by Fitch. The Series
B Preferred Shares will be rated _______ by S&P and _______ by Fitch. 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.
LISTING ON NASDAQ STOCK MARKET
Prior to this Offering, there has been no market for the Preferred
Shares. The AMPS will not be listed on any exchange. Application has been made
to list the Series B Preferred Shares on the Nasdaq Stock Market. However, there
can be no assurance that an active, or any, trading market will develop or be
maintained for the Preferred Shares.
SERIES B PREFERRED SHARES
The transfer agent, registrar and dividend disbursement agent for the
Series B Preferred Shares will be The Bank of New York. The registrar for Series
B Preferred Shares will send notices to stockholders of any meetings at which
holders of the Preferred Stock have the right to elect directors of the Company.
DIVIDENDS. Holders of Series B Preferred Shares shall 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, cash dividends at the rate
of _____% per annum of the liquidation preference (equivalent to $______ per
share per annum). Dividends on the Series B Preferred Shares shall be payable
quarterly in arrears on the fifteenth day of January, April, July and October in
each year (as to the Series B Preferred Shares, each such date being a "Dividend
Payment Date"), at such annual rates, commencing on January 15, 1998. Dividends
in each quarterly period will accrue from the first day of such period, whether
or not declared or paid for the prior quarterly period. Each declared dividend
shall be payable to holders of record as they appear at the close of business on
the stock register of the Company on such record dates, not exceeding 45 days
preceding the payment dates thereof, as shall be fixed by the Board of Directors
of the Company.
The right of holders of Series B Preferred Shares to receive dividends
is cumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series B Preferred Shares for a quarterly dividend period, then
holders of the Series B Preferred Shares will have a prior right to receive a
dividend for that period, and the Company will have an obligation to pay a
dividend for that period.
When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the Series B Preferred Shares and the shares of
any other series of capital stock ranking on a parity as to dividends with the
Series B Preferred Shares, dividends may be declared upon the Series B Preferred
Shares and any other such parity shares, but only if such dividends are declared
pro rata so that the amount of dividends declared per share on the Series B
Preferred Shares and such other shares shall in all cases bear to each other the
same ratio that the amount of accrued but unpaid dividends on the Series B
Preferred Shares and such other parity shares bear to each other. If no dividend
is declared on the Preferred Shares for a quarterly period, the payment of
dividends on the Common Stock will be prohibited for that period.
For a discussion of the tax treatment of distributions to stockholders,
see "Federal Income Tax Considerations--Taxation of Taxable U.S. Stockholders
Generally" and "--Taxation of Non-U.S. Stockholders of the Company," and for a
discussion of certain potential regulatory limitations on the Company's ability
to pay dividends, see "Risk Factors--Dividend and Other Regulatory Restrictions
on Operations of the Company."
REDEMPTION. The Series B Preferred Shares will not be redeemable prior
to ______ __, 2002 (except upon the occurrence of a Tax Event or upon a default
in the Required Asset Coverage). On or after such date, the Series B 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 $10.00, plus the accrued and unpaid dividends
to the date of redemption, if any, thereon.
Any such redemption must comply with the prompt corrective action and
capital distribution regulations of the OTS, which may prohibit a redemption and
may require the OTS' prior written approval. Unless full dividends on the Series
B Preferred Shares have been or contemporaneously are
44
declared and paid or declared and a sum sufficient for the payment thereof has
been set apart for payment for the then-current dividend period, no Series B
Preferred Shares shall be redeemed unless all outstanding Series B Preferred
Shares are redeemed and the Company shall not purchase or otherwise acquire any
Series B Preferred Shares; provided, however, that the Company may purchase or
acquire Preferred Shares pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Series B Preferred Shares.
The Company will also have the right at any time, upon the occurrence
of a Tax Event and with the prior written approval of the OTS, to redeem the
Series B Preferred Shares, in whole (but not in part) at a redemption price of
$______ per share, plus the accrued and unpaid dividends to the date of
redemption, if any, thereon. "Tax Event" means the receipt by the Company of an
opinion of a nationally recognized law firm experienced in such matters to the
effect that, as a result of (i) any amendment to, clarification of, or change
(including any announced prospective change) in, the laws or treaties (or any
regulations thereunder) of the United States or 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 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 Preferred Shares,
there is a substantial 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, (b) the
Company is, or will be, subject to more than a de minimis amount of other taxes,
duties or other governmental charges or (c) dividends received or to be received
by Webster Bank from the Company are not, or will not be, fully deductible by
Webster Bank for Connecticut corporation income tax purposes.
Upon a default in the Required Asset Coverage, the Company will have to
either restore such Coverage or redeem enough Preferred Shares to restore such
Coverage. Any such redemptions could be subject to the prior approval of the
OTS.
AUCTION MARKET PREFERRED STOCK
GENERAL. The following is a brief description of the terms of the AMPS.
This description, and the information set forth under "--Auction Procedures for
AMPS" below, do not purport to be complete and are subject to and qualified in
their entirety by reference to the Company's Certificate of Incorporation
establishing the terms of the AMPS, the Auction Agent Agreement and the
Broker-Dealer Agreements. A copy of the Certificate of Incorporation may be
obtained upon request from the Auction Agent.
The Company's Certificate of Incorporation designates one series of
Preferred Stock, comprising 2,600 shares designated as "Series A Auction Market
Preferred Stock". The Certificate of Incorporation provides that holders of AMPS
rank prior to the holders of Common Stock in their entitlement to dividends and
upon liquidation of the Company. The Company also has the right to designate
additional
45
authorized shares of Preferred Stock as additional series of AMPS ("Additional
AMPS") or otherwise. As of the date of this Prospectus, no shares of AMPS are
outstanding and, accordingly, there has not been a market for AMPS. In the
absence of a successful Auction, there is no assurance that a secondary market
for the AMPS will develop or, in the event such a market for the AMPS does
develop, that shares of AMPS will trade at or close to a price of $25,000.00.
See "--Auction Procedures for AMPS--Orders by Existing Holders and Potential
Holders."
In addition, as of the date of this Prospectus, 100 shares of Common
Stock are outstanding and all of such shares are owned directly by Webster Bank.
Immediately prior to the Date of Initial Issue of the AMPS, a further _____
shares of Common Stock will also be issued and outstanding and owned directly by
Webster Bank upon Webster Bank's contribution to the Company of additional
Mortgage Assets and cash.
Applicable Dividend Rates on the shares of AMPS will be determined in
Auctions which will be conducted generally every fourth Wednesday following the
initial Auction. The initial Auction is expected to occur on ________, 199___
for the AMPS.
When issued and sold, the shares of AMPS will have a liquidation
preference of $25,000.00 per share, plus an amount equal to accumulated and
unpaid dividends, and will be fully paid and nonassessable. See "--Rights Upon
Liquidation." The shares of AMPS are subject to redemption in the event of a Tax
Event or upon default in the Required Asset Coverage. See "Description of
Preferred Shares -- Auction Market Preferred Stock -- Redemption."
Except in an Auction, the Company may purchase or otherwise acquire
shares of AMPS at any price, whether higher or lower than the applicable
redemption price, so long as the Company is current in the payment of dividends
on the AMPS. Any shares of AMPS redeemed, purchased or otherwise acquired by the
Company may not be resold or reissued and must be retired. Such shares will
revert to the status of authorized but unissued shares of Preferred Stock
undesignated as to class.
AMPS represent a perpetual equity interest in the Company and, unlike
indebtedness of the Company, do not give rise to a claim for payment of a
principal amount at a particular date. As such, AMPS effectively rank behind all
indebtedness and other non-equity claims on the Company with respect to assets
available to satisfy claims on the Company.
The Auction Agent will serve as transfer agent and registrar for the
AMPS.
DIVIDENDS. The holders of shares of AMPS shall be entitled to receive,
when, as and if declared by the Board of Directors of the Company out of funds
legally available therefor, cumulative cash dividends at the Applicable Dividend
Rate per annum, determined as set forth below under "--Determination of Dividend
Rate," payable on the respective dates set forth below.
Dividends on the shares of AMPS will be payable in arrears and will
accumulate (whether or not earned or declared) from the date on which the
Company originally issues the AMPS (the "Date of Original Issue"). Each day on
which dividends on shares of AMPS would be payable, but for adjustments set
forth below, is referred to herein as a "Normal Dividend Payment Date."
(a) (i) If the Securities Depository shall as of a Normal
Dividend Payment Date make available to its members and participants the amounts
due as dividends on shares of AMPS in next-day funds on the dates on which such
dividends are payable and (ii) a Normal Dividend Payment Date is not a Business
Day, or the day next succeeding such Normal Dividend Payment Date is not a
Business Day, then dividends shall be payable on the first Business Day
following such Normal Dividend Payment Date that is next succeeded by a Business
Day; or
(b) (i) If the Securities Depository shall as of a Normal
Dividend Payment Date make available to its members and participants the amounts
due as dividends on shares of AMPS in immediately available funds on the dates
on which such dividends are payable (and the Securities
46
Depository shall have so advised the Auction Agent) and (ii) a Normal Dividend
Payment Date is not a Business Day, then dividends shall be payable on the first
Business Day following such Normal Dividend Payment Date.
As to the AMPS, each date on which dividends on the shares of AMPS
shall be payable as determined as set forth above is referred to herein as a
"Dividend Payment Date." Although any particular Dividend Payment Date may not
occur on the originally scheduled Normal Dividend Payment Date because of the
foregoing adjustments, each succeeding Dividend Payment Date shall be, subject
to such adjustments, the date determined as set forth below in the second
succeeding paragraph as if each preceding Dividend Payment Date had occurred on
the respective originally scheduled Normal Dividend Payment Date.
The initial Dividend Rate is ___% and the initial Dividend Payment Date
for AMPS is _______________, 199_.
After the initial Dividend Period, each subsequent Dividend Period will
(except for the adjustments described above) be 28 days in length (each such
28-day period, together with the period commencing on the Date of Original Issue
and ending on the day preceding the initial Dividend Payment Date, will be
referred to herein as a "Dividend Period"). After the initial Dividend Period,
each successive Dividend Period will commence on the last Dividend Payment Date
for the preceding Dividend Period and will end on the day preceding the next
Dividend Payment Date.
Prior to each Dividend Payment Date, the Company is required to deposit
with the Auction Agent sufficient funds for the payment of declared dividends.
Each dividend shall be payable to the holder or holders of record of
the AMPS as of the opening of business on the Business Day immediately preceding
the applicable Dividend Payment Date. So long as the shares of AMPS are held of
record by the nominee of the Securities Depository, dividends will be paid to
the nominee of the Securities Depository on each Dividend Payment Date. See
"Auction Procedures for AMPS--Restrictions and Transfers ." The Securities
Depository will credit the accounts of the Agent Members of Existing Holders in
accordance with the Securities Depository's normal procedures, which now provide
for payments in same-day funds settled through wire transfer of such funds to
Agent Members who, in turn, based on their current practice are expected to
distribute to the persons for whom they are acting as agents in same-day funds.
The Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments to Existing Holders in accordance with the instructions
of such Existing Holders. Dividends in arrears for any past Dividend Period may
be declared and paid at any time, on a regular Dividend Payment Date or
otherwise, to the holders of record. Any dividend payment made on shares of AMPS
shall first be credited against the dividends accumulated with respect to the
earliest Dividend Period for which dividends have not been paid.
Holders of shares of AMPS shall not be entitled to any dividends,
whether payable in cash, property or stock, in excess of full cumulative
dividends. No interest, or sum or money in lieu of interest, shall be payable in
respect of any dividend payment or payments on the shares of AMPS which may be
in arrears, other than any applicable Late Charge.
So long as any shares of AMPS are outstanding, the Company may not
(except as set forth below or elsewhere in this Prospectus) (i) declare, pay or
set aside for payment any dividend or other distribution (other than dividends
or distributions paid in shares of, or options, warrants or rights to subscribe
for or purchase shares of, Common Stock or any other stock or securities ranking
junior to the AMPS as to dividends and upon liquidation) in respect of its
Common Stock or any other stock of the Company ranking junior to or on a parity
with the shares of AMPS as to dividends or upon liquidation, or (ii) redeem,
purchase or otherwise acquire for any consideration (or pursuant to any sinking
fund therefor) any shares of Common Stock or any such junior shares or parity
shares (and other than pursuant to a conversion or exchange into junior shares
or securities) unless full cumulative dividends on all outstanding shares of the
AMPS (whether or not earned or declared) shall have been declared for all
Dividend Periods terminating on or prior to the date of payment in respect of
such dividend, distribution, redemption, purchase or acquisition.
47
When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the shares of the AMPS and the shares of any
other series of capital stock of the Company ranking on a parity as to dividends
with the AMPS (including the Series B Preferred Shares), dividends may be
declared upon shares of the AMPS and any other such parity shares, but only if
such dividends are declared pro rata so that the amount of dividends declared
per share on the AMPS and such other shares shall in all cases bear to each
other the same ratio that the amount of accrued but unpaid dividends per share
on the shares of the AMPS and such other parity shares bear to each other.
The amount of dividends per share of the AMPS payable for each Dividend
Period shall be computed by multiplying the Applicable Rate for each Dividend
Period by a fraction, the numerator of which shall be the number of days in the
Dividend Period (calculated by counting the first day thereof but excluding the
last day thereof) such share was outstanding and the denominator of which shall
be 360 and multiplying the amount so obtained by $25,000.00.
Determination of Dividend Rate. The dividend rate for the AMPS during
the period from and after the Date of Original Issue to the initial Dividend
Payment Date will be the rate per annum calculated as set forth above, and the
dividend rate for each subsequent Dividend Period will, except as provided
below, be at a rate per annum (the "Applicable Rate") that results from the next
preceding Auction. See "--Auction Procedures for AMPS--Determination of
Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate."
In the event shares of AMPS are duly called for redemption, the
Applicable Rate until the Redemption Date shall be the Applicable Rate in effect
on the date the Notice of Redemption is given.
In the event of the failure by the Company to pay to the Auction Agent
by 1:30 p.m., New York City time, (i) on the Business Day next preceding any
Dividend Payment Date the full amount of any dividend (whether or not earned or
declared) to be paid on such Dividend Payment Date on any share or (ii) the
Business Day next preceding any Redemption Date, the full Redemption Price to be
paid on such Redemption Date after a Notice of Redemption has been given, and if
the Company has ordered its bank in a timely manner to make payment and the
Auction Agent is unable to confirm receipt of funds by the time referred to
above and such funds are not received within three Business Days thereafter,
then until such time as the full amount due, as described below, shall have been
paid to the Auction Agent, (a) Auctions will be discontinued, (b) the dividend
rate established in the immediately preceding Auction shall be disregarded and
(c) the Applicable Rate for each succeeding Dividend Period, commencing on the
last Dividend Payment Date shall be equal to the Default Rate. With respect to
any such failure, the "Default Rate" will be the lesser of (i) 20% and (ii) 300%
of the applicable Benchmark Rate determined as of the Business Day next
preceding the date on which such Default occured. The foregoing shall continue
until there shall occur a Dividend Payment Date at least one Business Day prior
to which the full amount of any dividends (whether or not earned or declared)
payable on each Dividend Payment Date prior to and including such Dividend
Payment Date then due shall have been paid to the Auction Agent, and thereupon,
commencing with such Dividend Payment Date, Auctions for the AMPS shall resume
on the terms stated herein.
Any failure referred to in the immediately preceding paragraph with
respect to the AMPS shall be deemed to be cured if as of 1:30 p.m., New York
City time, on the third Business Day next succeeding any such failure, the
Company shall have paid to the Auction Agent (A) in the case of a failure to
timely pay dividends, the full amount of the dividends (whether or not earned or
declared) to be paid for the Dividend Period with respect to which such failure
occurred, plus a late charge in an amount equal to the product of (i) the lesser
of (a) __% and (b) ___% of the applicable Benchmark Rate on the date of
occurrence of such failure, (ii) a fraction, the numerator of which shall be the
number of days during which such failure exists and is not cured in accordance
with this sentence (including the day such failure occurs and excluding the day
such failure is cured) and the denominator of which shall be 360, and (iii) the
full amount of such dividends, or (B) in the case of a failure to pay the
Redemption Price, the full amount of the aggregate Redemption Price for the
shares that have been called for redemption, plus a late charge in an amount
equal to the product of (i) the lesser of (a) __% and (b) __% of the applicable
Benchmark Rate on the Business Day on which the Company was required to pay the
aggregate Redemption Price to the Auction Agent, (ii) a fraction, the numerator
of which shall be the number of days (not to exceed 6 days) during which such
failure exists and is not cured in accordance with this sentence (including the
day such failure occurs and excluding the day such failure is cured) and the
denominator of which shall be 360, and (iii) the aggregate liquidation
preference of the shares so called for redemption. If the Company shall have
cured such failure by making timely payment to the Auction Agent, the Auction
Agent will give written notice of such cure to each Existing Holder of shares of
AMPS at the address contained in the records of the Auction Agent to each
Broker-Dealer as promptly as practicable after such cure is effected.
If no dividend is declared on the Preferred Shares for a period, the
payment of dividends on the Common Stock will be prohibited for that period.
48
REDEMPTION. The AMPS may be redeemed for cash at the option of the
Company, in whole or in part, on any Dividend Payment Date (except during the
initial Dividend Period) at a Redemption Price of $25,000.00 per share, plus the
quarterly accrued and unpaid dividend, if any, thereon. Upon a default in the
Required Asset Coverage, the Company will have to either restore such Coverage
or redeem enough Preferred Shares to restore such Coverage. Any such redemptions
could be subject to the prior approval of the OTS. See "Description of Preferred
Shares -- Auction Market Preferred Stock -- Redemption."
AUCTION PROCEDURES FOR AMPS
GENERAL. Holders of AMPS will be entitled to receive cumulative cash
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor, on each Dividend Payment Date then ending at the
rate per share equal to the Applicable Rate per annum for each such Dividend
Period.
The Company's Certificate of Incorporation provides that the Applicable
Rate per annum for AMPS for each Dividend Period after the Initial Dividend
Period shall be equal to the rate per annum that the Auction Agent advises
results on the Business Day preceding the first day of such Dividend Period from
implementation of auction procedures (the "Auction Procedures") set forth in
such Certificate of Incorporation, in which persons determine to hold or offer
to purchase or sell shares of AMPS. The Auction Procedures are attached as
Appendix B to this Prospectus.
As described under "--Broker-Dealers" below, the Broker-Dealer
Agreements between the Broker-Dealers and the Auction Agent provide that a
Broker-Dealer may submit Orders and purchase AMPS as a principal, in Auctions or
otherwise. Because all Orders by holders of shares of AMPS must be submitted
through a Broker-Dealer, if a Broker-Dealer submits an Order as principal in an
Auction, it may have knowledge of Orders placed through it in that auction and
therefore have an advantage over other bidders; such Broker-Dealer, however,
would normally not have knowledge of Orders submitted by other Broker-Dealers in
that Auction.
The ability of an investor to dispose of shares of AMPS may be largely
dependent on the success of the Auction for the AMPS. If there are insufficient
clearing bids ("Clearing Bids") in an Auction with respect to the AMPS, then
investors that have submitted Sell Orders will not be able to sell in the
Auction any shares of AMPS subject to such submitted Sell Orders, except to the
extent there are Submitted Bids at rates less than or equal to the Maximum
Applicable Rate. There is no assurance that any particular Auction will be
successful and neither the Company nor any Broker-Dealer is obligated to take
any action to ensure that an Auction will be successful. In the absence of a
successful Auction, there is no assurance that a secondary market for the AMPS
will develop or that in the event such a market does develop, that shares of
AMPS will trade at or close to a price per share of $1,000.00. In addition, the
Auctions require the active participation of one or more Broker-Dealers. While
in connection with the AMPS, the Auction Agent is expected to enter into
agreements with certain firms to act as Broker-Dealers and has entered into an
agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated as a
Broker-Dealer (collectively, the "Broker-Dealer Agreements"), to the extent
Broker-Dealers resign or cease actively participating in the Auctions, the
liquidity of the market and the efficient functioning of the Auctions could be
reduced.
AUCTION AGENT AGREEMENT. The Company will enter into an auction agent
agreement (the "Auction Agent Agreement") with The Bank of New York (together
with any successor bank or trust company or other entity entering into a similar
agreement with the Company, the "Auction Agent") which will provide, among other
things, that the Auction Agent will follow the Auction Procedures for the
purposes of determining the Applicable Dividend Rate. Each periodic
implementation of such procedures is hereinafter referred to as an "Auction."
The Company will pay the Auction Agent compensation for its services under the
Auction Agent Agreement.
The Auction Agent will act as agent for the Company in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agent Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent has been negligent in ascertaining the pertinent
facts. Pursuant to the Auction Agent Agreement, the Company will be required to
indemnify the Auction Agent for certain losses and liabilities incurred by the
Auction Agent without negligence or bad faith on its part in connection with the
performance of its duties under such agreement.
49
The Company may terminate the Auction Agent Agreement at any time by so
notifying the Auction Agent. The Auction Agent may terminate the Auction Agent
Agreement upon 90 days' prior notice to the Company. No such termination by the
Company or resignation by the Auction Agent shall be effective until (i) the
Company has entered into an agreement or agreements with a successor auction
agent containing substantially the same terms and conditions as the Auction
Agent Agreement and (ii) such successor auction agent has entered into
agreements with the Broker-Dealers containing substantially the same terms and
conditions as the Broker-Dealer Agreements. Upon receiving a resignation notice
from the Auction Agent, the Company will use its best efforts to enter into an
agreement or agreements with a successor auction agent containing substantially
the same terms and conditions as the Auction Agent Agreement.
In addition to serving as the Auction Agent in connection with the
Auction Procedures, the Auction Agent will be the transfer agent, registrar,
dividend disbursing agent and redemption agent for the AMPS. The Auction Agent,
however, will serve merely as the agent of the Company, acting in accordance
with the Company's instructions, and will not be responsible for any evaluation
or verification of the various matters required to be certified to it.
BROKER-DEALER AGREEMENTS. The Auctions require the participation of one
or more Broker-Dealers. The Auction Agent will enter into an agreement with
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Lead Broker-Dealer")
and may enter into similar agreements (collectively, the "Broker-Dealer
Agreements") with one or more other broker-dealers (collectively, with Merrill
Lynch, Pierce, Fenner & Smith Incorporated, the "Broker-Dealers") selected by
the Company which provide for the participation of such Broker-Dealers in
Auctions.
A Broker-Dealer Agreement will be terminated by the Auction Agent at
the direction of the Company or may be terminated (a) by a Broker-Dealer with
the consent of the Company (which may not be unreasonably withheld or delayed)
upon five days prior written notice to the Auction Agent, or (b) by the Auction
Agent, upon five days prior written notice to the Broker-Dealer, as long as such
termination by the Auction Agent does not relate to Merrill Lynch, Pierce,
Fenner & Smith Incorporated. Notice of termination of a Broker-Dealer Agreement
taking effect within 10 days prior to an Auction Date will be deemed to be
effective on the second Business Day following such Auction Date. The Company
shall not unreasonably withhold or delay its consent to terminations, provided
that the Company need not consent to terminations resulting in fewer than two
Broker-Dealer Agreements in effect with respect to the AMPS at any time.
Notwithstanding any of the above, all Broker-Dealer Agreements will terminate
upon the termination of the Auction Agent Agreement.
Holders and prospective purchasers of shares of AMPS must submit orders
through the Broker-Dealers in order to participate in the Auctions.
Broker-Dealers may communicate among themselves in order to encourage bidding
and to determine the level of interest in the market. In addition,
Broker-Dealers may submit orders and purchase shares of AMPS as principal,
either in Auctions or otherwise. See "--Broker-Dealers" below.
RESTRICTIONS ON TRANSFER; BOOK ENTRY. Holders of shares of AMPS may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid or
a Sell Order placed in an Auction to or through a Broker-Dealer; provided that
in the case of all transfers other than pursuant to Auctions, the Company or a
Broker-Dealer or Agent Member shall advise the Auction Agent of such transfer.
All of the outstanding shares of AMPS will be represented by a single
certificate registered in the name of the Securities Depository or its nominee,
and a holder will not be entitled to receive any certificate representing any
shares of AMPS which such holder acquires. In addition, the ownership of the
shares of AMPS as to which the holder is the Existing Holder will be maintained
in book-entry form by the Securities Depository, for the account of its Agent
Member, which in turn will maintain such records of the holder's beneficial
ownership.
50
As used herein, "Existing Holder" of any shares of AMPS means a person
who is listed as the beneficial owner of such shares of AMPS in the records of
the Auction Agent. The Auction Agent may rely upon, as evidence of the
identities of the Existing Holders, a list of the initial Existing Holders of
the shares of AMPS provided by the Broker-Dealers, the results of Auctions and
notices from the Broker-Dealer of any Existing Holder with respect to such
Existing Holder's transfer of shares of AMPS to another person. The Auction
Agent will be required to register a transfer of beneficial ownership of shares
of AMPS from an Existing Holder to another person only if (i) such transfer is
pursuant to an Auction or (ii) the Auction Agent has been notified in writing
(A) by such Existing Holder, the agent member of the Securities Depository of
such Existing Holder or the Broker-Dealer of such Existing Holder (the "Agent
Member") of such transfer or (B) by the Broker-Dealer of any person that
purchased or sold such shares of AMPS in an Auction of the failure of such
shares of
51
AMPS to be transferred as a result of the Auction. Any such notice shall be
effective for an Auction only if received by the Auction Agent by 3:00 p.m., New
York City time, on the Business Day preceding the related Auction Date.
SECURITIES DEPOSITORY. The Depository Trust Company will act as
Securities Depository for the Agent Members with respect to shares of AMPS. A
single certificate for all of the shares of AMPS will be registered in the name
of Cede & Co. ("Cede"), as nominee of the Securities Depository. Each such
certificate will bear a legend to the effect that such certificate is issued
subject to the provisions restricting transfers of shares of AMPS contained in
the Certificate of Incorporation. The Company will issue stop-transfer
instructions to the Auction Agent, as transfer agent for the AMPS. Cede will be
the initial holder of record of all shares of AMPS, and Existing Holders of the
shares of AMPS will not receive certificates representing their ownership
interest in such shares. The Securities Depository will maintain lists of its
participants and will maintain the positions (ownership interests) held by each
Agent Member in the AMPS, whether as an Existing Holder for its own account or
as nominee for another Existing Holder. Payments and communications made by the
Company to holders of the AMPS will be duly made by making payments to, and
communicating with, the Securities Depository, whose nominee is the record
holder of all shares of the AMPS and, except as specifically provided herein,
the Company will have no further responsibility, obligation or liability with
respect to such payment or communication.
AUCTION DATES. The following is a brief summary of the procedures to be
used in conducting Auctions. This summary is qualified by reference to the
Auction Procedures set forth in Appendix B hereto. After the initial Dividend
Period, an Auction to determine the Applicable Rate of AMPS for a given Dividend
Period will be held on the Business Day next preceding the first day of such
Dividend Period (the date of each Auction being referred to herein as an
"Auction Date"). "Business Day" means a day on which the New York Stock Exchange
is open for trading and which is not a day on which banking institutions in New
York City are authorized or required by law or executive order to close.
Generally, Auctions for the offered AMPS will be conducted every fourth
Wednesday. A new Dividend Period will commence on the first Business Day
following the applicable Auction Date (also a Dividend Payment Date). The
Auction Date and the first day of the related Dividend Period (both of which
must be Business Days) need not be consecutive calendar days. For example, in
most cases, if the Wednesday that normally would be an Auction Date is not a
Business Day, then such Auction Date will be the preceding Tuesday and the first
day of the related Dividend Period will continue to be the following Thursday.
ORDERS FOR AMPS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline on each Auction Date:
(a) Each Existing Holder may submit to a Broker-Dealer by
telephone or otherwise a:
(i) "Hold Order" indicating the number of outstanding shares,
if any, of AMPS that such Existing Holder desires to continue to hold without
regard to the Applicable Rate for the next succeeding Dividend Period;
(ii) "Bid" indicating the number of outstanding shares, if
any, of AMPS that such Existing Holder offers to sell if the Applicable Rate for
the next succeeding Dividend Period is less than the rate specified in such Bid;
and/or
(iii) "Sell Order" indicating the number of outstanding
shares, if any, of AMPS that such Existing Holder offers to sell without regard
to the Applicable Rate for the next succeeding Dividend Period.
(b) Broker-Dealers will contact prospective purchasers of
shares of AMPS (each such prospective purchaser is hereinafter referred to as a
"Potential Holder" and the term Potential Holder
52
includes an Existing Holder with respect to an offer by such Existing Holder to
purchase additional shares) by telephone to determine whether such Potential
Holders desire to submit Bids in which such Potential Holders will indicate the
number of shares of AMPS which they offer to purchase, provided that the
Applicable Rate for the next succeeding Dividend Period shall not be less than
the rates per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is
hereinafter referred to as an "Order" and, collectively, as "Orders." An
Existing Holder or a Potential Holder placing an Order is hereinafter referred
to as a "Bidder" and, collectively, as "Bidders."
An Existing Holder may submit different types of Orders in an Auction
with respect to shares of AMPS then held by such Existing Holder, including Bids
to acquire additional shares of AMPS. For information concerning the priority
given to different types of Orders placed by an Existing Holder, see
"--Submission of Orders by Broker-Dealers to Auction Agent" below.
A Bid for shares by an Existing Holder with a rate higher than the
Maximum Applicable Rate will be treated as a Sell Order, and a Bid by a
Potential Holder with a rate higher than such Maximum Applicable Rate will not
be considered. See "--Determination of Sufficient Clearing Bids, Winning Bid
Rate and Applicable Rate" and "--Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocations of Shares" below.
A Sell Order submitted by an Existing Holder shall constitute an
irrevocable offer to sell the shares of AMPS subject thereto and a Bid submitted
by an Existing Holder shall constitute an irrevocable offer to sell the shares
of AMPS subject thereto if the rate specified in such Bid is higher than the
Applicable Rate determined in the Auction. A Bid submitted by a Potential Holder
shall constitute an irrevocable offer to purchase the number of shares of AMPS
subject thereto if the rate specified in the Bid is less than or equal to the
Applicable Rate determined in accordance with the Auction Procedures. The number
of shares purchased or sold may be subject to proration procedures. See
"--Acceptance or Rejection of Submitted Bids and Sell Orders and Allocations of
Shares" below. Each purchase or sale shall be made for settlement on the
Business Day next succeeding the Auction Date at a price per share equal to
$25,000.00. See "--Notification of Results; Settlement" below.
If an Order or Orders covering all of the outstanding shares of AMPS
held by an Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Existing Holder or otherwise, the Auction Agent shall deem a Hold Order to have
been submitted on behalf of such Existing Holder covering the number of
outstanding shares of AMPS held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
For the purposes of an Auction, shares of AMPS for which the Company
shall have given Notice of Redemption, as set forth under "Description of
Preferred Shares--Auction Market Preferred Stock--Redemption," shall not be
considered as outstanding and shall not be included in such Auction. Pursuant to
the Certificate of Incorporation, the Company is required to retire any shares
of AMPS it may acquire.
The ability of an investor to dispose of shares of AMPS may be largely
dependent on the success of the Auction. If there are insufficient Clearing Bids
in an Auction, then investors that have submitted Sell Orders will not be able
to sell in the Auction any shares of AMPS subject to such submitted Sell Offers
except to the extent there are Submitted Bids by Potential Holders at rates less
than or equal to the Maximum Applicable Rate. There is no assurance that any
particular Auction will be successful and neither the issuer nor any
Broker-Dealer is obligated to take any action to ensure that an Auction will be
successful. In the absence of successful Auctions, there is no assurance that a
secondary market for the AMPS will develop or that in the event such a market
does develop, that shares of AMPS will trade at or close to a price per share of
$25,000.00. In addition, the Auctions require the active participation of one or
more Broker-Dealers. While the Auction Agent expects to enter into agreements
with certain firms to act as Broker-Dealers and has entered into an agreement
with Merrill Lynch, Pierce, Fenner & Smith Incorporated as a Broker-Dealer, to
53
the extent Broker-Dealers resign or cease actively participating in the
Auctions, the liquidity of the market and the efficient functioning of the
Auctions could be reduced.
SUBMISSIONS OF ORDERS FOR AMPS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:00 p.m., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next higher one-thousandth (.001) of 1%.
If one or more Orders covering in the aggregate more than the number of
outstanding shares of AMPS held by any Existing Holder are submitted to the
Auction Agent, such Orders shall be considered valid in the following order of
priority:
(i) any Hold Order submitted on behalf of such Existing Holder
shall be considered valid up to and including the number of outstanding shares
held by such Existing Holder, provided that if more than one Hold Order is
submitted on behalf of such Existing Holder and the number of shares of AMPS
subject to such Hold Order exceeds the number of outstanding shares held by such
Existing Holder, the number of shares of AMPS subject to such Hold Orders shall
be reduced pro rata so that such Hold Orders shall cover the number of
outstanding shares held by such Existing Holder;
(ii)(A) any Bid submitted on behalf of such Existing Holder
shall be considered valid up to and including the excess of the number of
outstanding shares held by such Existing Holder over the number of shares
subject to any Hold Order referred to in clause (i) above, and (B) subject to
subclause (A), if more than one Bid with the same rate is submitted on behalf of
such Existing Holder and the number of outstanding shares subject to such Bids
is greater than such excess, the number of shares of AMPS subject to such Bids
shall be reduced pro rata so that such Bids shall cover the number of shares
equal to such excess, and (C) subject to subclause (A), if two or more Bids with
different rates are submitted on behalf of such Existing Holder, such Bids shall
be considered valid in the ascending order of their respective rates up to and
including the amount of such excess and in any such event the number, if any, of
such outstanding shares subject to Bids not valid under this clause (ii) shall
be treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order shall be considered valid up to and
including the excess of the number of outstanding shares held by such Existing
Holder over the sum of the shares subject to Hold Orders referred to in clause
(i) and valid Bids by such Existing Holder referred to in clause (ii) above,
provided that if more than one Sell Order is submitted on behalf of any Existing
Holder and the number of outstanding shares subject to such Sell Orders is
greater than such excess, the number of shares of AMPS subject to such Sell
Order shall be reduced pro rata so that such Sell Orders shall cover the number
of shares equal to such excess.
If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate and number of shares of
AMPS specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE. Not earlier than the Submission Deadline, the Auction Agent
will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer being hereinafter referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding shares of AMPS over the number of outstanding shares
subject to Submitted Hold Orders (such excess, the "Available Auction
Preferred") and whether Sufficient Clearing Bids have been made in the Auction.
"Sufficient Clearing Bids" will have been made if the number of outstanding
shares that are the subject of Submitted Bids by Potential Holders (including
Existing Holders who have submitted Bid Orders to purchase additional shares)
with rates not higher
54
than the Maximum Applicable Rate equals or exceeds the number of outstanding
shares that are the subject of Submitted Sell Orders (including the number of
outstanding shares subject to Submitted Bids by Existing Holders specifying
rates higher than the Maximum Applicable Rate) unless such excess or such
equality exists because the number of shares subject to such Submitted Sell
Orders and Submitted Bids are each zero because all of the outstanding shares
are the subject of Submitted Hold Orders.
If Sufficient Clearing Bids have been made in an Auction, the Auction
Agent will determine the lowest rate specified in the Submitted Bids of Existing
Holders and Potential Holders (the "Winning Bid Rate") which will cause the
number of shares subject to Submitted Bids specifying a rate less than or equal
to the Winning Bid Rate to be not less than the number of shares of Available
Auction Preferred in such Auction. If Sufficient Clearing Bids have been made,
the Winning Bid Rate will be the Applicable Rate for the Dividend Period next
succeeding such Auction for all shares then outstanding.
If Sufficient Clearing Bids have not been made in an Auction other than
because all of the outstanding shares of AMPS are the subject of Submitted Hold
Orders, then the Applicable Rate for such next succeeding Dividend Period will
be the Maximum Applicable Rate on the Auction Date. If Sufficient Clearing Bids
have not been made, Existing Holders that have submitted Sell Orders will not be
able to sell in the Auction any shares subject to such Submitted Sell Orders,
except to the extent there are Submitted Bids by Potential Holders at rates less
than or equal to the Maximum Applicable Rate. See "--Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocations of Shares" below.
If all of the outstanding shares are subject to Submitted Hold Orders,
the Applicable Rate for the next Dividend Period for all such shares will be
equal to the All Hold Rate in effect on the date of the applicable Auction.
As used herein with respect to shares of AMPS, "Maximum Applicable
Rate" means a per annum rate equal to the lesser of (i) the Rate Multiple
multiplied by the applicable Benchmark Rate in effect on the related Auction
Date and (ii) 20%.
The "Rate Multiple," when used with respect to shares of AMPS on an
Auction Date, means the percentage, determined as set forth below, based on the
prevailing rating of the AMPS in effect at the close of business on the Business
Day preceding such Auction Date:
Rate
Prevailing Rating Multiple
----------------- --------
AA- or Above 150%
A- to A+ 200%
BBB- to BBB + 250%
BB- to BB+ 275%
Below BB- 300%
The Maximum Applicable Rate cannot in any event exceed 20% per annum.
In the event that the AMPS is not rated by S&P or Fitch, the Rate Multiple will
be 300%.
Notwithstanding the foregoing, with respect to any Auction Date, the
Company may, by telephonic and written notice to the Auction Agent delivered by
10:00 a.m. on such Auction Date, increase (but not thereafter decrease) the
percentage Rate Multiple for AMPS to be in effect on or after such Auction Date.
For purposes of the Rate Multiple definition, the "prevailing rating"
of the AMPS shall be (i) AA- or Above, if the AMPS has a rating AA- or better by
S&P or the equivalent of such rating by such agency or a substitute rating
agency or substitute rating agencies selected as provided below, (ii) A- to A+,
if the AMPS has a rating of A- to A+ by S&P or the equivalent of such rating by
such agency or a substitute rating agency or substitute rating agencies selected
as provided below, (iii) BBB- to BBB+, if the AMPS
55
has a rating of BBB- to BBB + by S&P or the equivalent of such rating by such
agency or a substitute rating agency or substitute rating agencies selected as
provided below, (iv) BB- to BB+, if the AMPS has a rating of BB- to BB+ by S&P
or the equivalent of such rating by such agency or a substitute rating agency or
substitute rating agencies selected as provided below, and (v) Below BB- if the
AMPS has a rating of Below BB- by S&P or the equivalent of such rating by such
agency as a substitute rating agency or substitute rating agencies selected as
provided below. The Company shall take all reasonable action necessary to enable
S&P to provide and maintain a rating for the AMPS. If S&P shall not make any
such rating available, the Company shall select a nationally recognized
statistical rating organization (as that term is used in the rules and
regulations of the SEC under the Exchange Act) or two nationally recognized
statistical rating organizations to act as substitute rating agency or
substitute rating agencies, as the case may be. Even if S&P makes a rating
available for the AMPS, at any time the Company may select one or more other
nationally recognized statistical rating organizations to provide additional
ratings for the AMPS. In the event that two or more Rating Agencies make ratings
available on AMPS at the request of the Company, and any such rating by a Rating
Agency is lower than the equivalent of such rating by the other Rating Agency or
Rating Agencies, the "prevailing rating" shall be based on the lower rating made
available by such Rating Agencies.
"Benchmark Rate" means the One-Month LIBOR.
"One-Month LIBOR" means, with respect to a Dividend Period relating to
a Dividend Payment Date (in the following order of priority):
(i) the rate (expressed as a percentage per annum) for deposits
in U.S. dollars in the London interbank market having a one-month
maturity commencing on the second London Business Day following the
related Determination Date that appears on Telerate Page 3750 as of
11:00 a.m. (London time) on such Determination Date;
(ii) if such rate does not appear on Telerate Page 3750 as of
11:00 a.m. (London time) on the related Determination Date, the
Company will request the principal London offices of four leading
banks in the London interbank market to provide such banks' offered
quotations (expressed as percentages per annum) as of 11:00 a.m.
(London time) on such Determination Date to prime banks in the London
interbank market for deposits in U.S. dollars having a one-month
maturity commencing on the second London Business Day following such
Determination Date. If at least two quotations are provided, LIBOR
will be the arithmetic mean (if necessary, rounded to the nearest one
hundred-thousandth of a percentage point, with five one millionths of
a percentage point rounded upwards (e.g., 9.876545% (or .09876545)
would be rounded to 9.87655% (or .0987655)), of such quotations;
(iii) if fewer than two such quotations are provided as requested
in clause (ii) above, the Company shall request three major banks in
the City of New York to provide such banks' offered quotations
(expressed as percentages per annum) as of 11:00 a.m. (New York time)
on such Determination Date to leading European banks for loans in U.S.
dollars having a one-month maturity commencing on the second London
Business Day following such Determination Date. If at least two such
quotations are provided, LIBOR will be the arithmetic mean (e.g.,
9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655))of
such quotations; and
(iv) if fewer than two such quotations are provided as requested
in clause (iii) above, One-Month LIBOR will be One-Month LIBOR
determined with respect to the Dividend Period immediately preceding
such current Dividend Period.
If the rate for deposits in U.S. dollars having a one-month maturity
that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time)
on the related Determination Date is superseded on Telerate Page 3750 by a
corrected rate before 12:00 noon (London time) on such Determination Date,
the corrected rate as so substituted on the applicable page will be the
applicable One-Month LIBOR for such Determination Date.
Absent manifest error, the Company's determination of One-Month LIBOR
and its calculation of the Applicable Dividend Rate for each Dividend
Period will be final and binding.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATIONS OF SHARES. Based on the determinations made under
"--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" above and subject to the discretion of the Auction Agent to round as
described below, Submitted Bids and Submitted Sell Orders shall be accepted or
rejected in the order of priority set forth in the Auction Procedures with the
result that Existing Holders and Potential Holders of AMPS shall sell, continue
to hold and/or purchase shares of AMPS as set forth below. Existing Holders that
submitted or were deemed to have submitted Hold Orders shall continue to hold
the shares of AMPS subject to such Hold Orders.
If Sufficient Clearing Bids have been made, Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order of
priority and all other Submitted Bids shall be rejected:
(a) each Existing Holder that placed a Submitted Bid
specifying a rate higher than the Winning Bid Rate, or a Submitted Sell Order,
will sell the outstanding shares of AMPS subject to such Submitted Bid or
Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid
specifying a rate lower than the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid
specifying a rate lower than the Winning Bid Rate will purchase the number of
shares of AMPS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid
specifying a rate equal to the Winning Bid Rate shall continue to hold the
outstanding shares of AMPS subject to such Submitted Bid, unless the number of
outstanding shares of AMPS subject to all such Submitted Bids is greater than
the excess of the Available Auction Preferred over the number of shares of AMPS
accounted for in clauses (b) and (c) above, in which event such Existing Holder
with such a Submitted Bid shall sell a number of
56
outstanding shares of AMPS determined on a pro rata basis based on the number of
outstanding shares subject to all such Submitted Bids by such Existing Holders;
and
(e) each Potential Holder that placed a Submitted Bid
specifying a rate equal to the Winning Bid Rate shall purchase any Available
Auction Preferred not accounted for in clause (b), (c) or (d) above on a pro
rata basis based on the number of outstanding shares subject to all such
Submitted Bids by such Potential Holders.
If Sufficient Clearing Bids have not been made, Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order or
priority and all other Submitted Bids shall be rejected:
(a) each Existing Holder that placed a Submitted Bid
specifying a rate equal to or lower than the Maximum Applicable Rate shall
continue to hold the outstanding shares subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid
specifying a rate equal to or lower than the Maximum Applicable Rate shall
purchase the number of shares subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid
specifying a rate higher than the Maximum Applicable Rate, or a Submitted Sell
Order, shall sell a number of outstanding shares determined on a pro rata basis
based on the number of outstanding shares subject to all such Submitted Bids and
Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share (or, if fractional
shares have been authorized, a fraction of a share in a fractional denomination
not authorized), the Auction Agent shall, in such manner as, in its sole
discretion, it shall determine, (i) round up or down the number of shares being
sold or purchased on such Auction Date so that the number of shares sold or
purchased by each Existing Holder or Potential Holder shall be whole shares (or
authorized fractional shares) of AMPS and (ii) allocate such whole shares (or
authorized fractional shares) of AMPS for purchase among Potential Holders even
if such allocation results in one or more of such Potential Holders not
purchasing shares of AMPS.
NOTIFICATION OF RESULTS; SETTLEMENT. The Auction Agent will advise each
Broker-Dealer that submitted a Bid or Sell Order on behalf of a Bidder whether
such Bid or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next succeeding Dividend Period by telephone at
approximately 3:00 p.m., New York City time, on each Auction Date. Each
Broker-Dealer that submitted a Bid or Sell Order on behalf of a Bidder will then
advise such Bidder whether such Bid or Sell order was accepted or rejected, will
confirm purchases and sales with each Bidder purchasing or selling shares of
AMPS as a result of the Auction and will advise each Bidder purchasing or
selling shares of AMPS to give instructions to its Agent Member of the
Securities Depository to pay the purchase price against delivery of such shares
by book entry or to deliver such shares by book entry against payment therefor
as appropriate. If an Existing Holder selling shares of AMPS as a result of an
Auction fails to instruct its Agent Member to deliver such shares, the
Broker-Dealer that submitted the Bid or Sell Order of such Existing Holder shall
instruct such Agent Member to deliver such shares by book entry on behalf of
such Existing Holder against payment therefor. Each Broker-Dealer that submitted
a Hold Order on behalf of an Existing Holder will also advise such Existing
Holder of the Applicable Rate for the next Dividend Period. The Auction Agent
will record each transfer of beneficial ownership of shares of AMPS on the
registry of Existing Holders to be maintained by the Auction Agent.
The Auction Agent will also send an administrative message through the
Securities Depository advising the Agent Member of each Bidder purchasing shares
of the amount ($25,000.00 for each share of AMPS purchased) that it will be
required to pay against registration of transfer of shares of AMPS to be
purchased. The Auction Agent will also advise the Agent Member of each Existing
Holder selling shares
57
of the number of shares as to which it will be required to authorize
registration of transfer against payment therefor.
Pursuant to the Auction Agent Agreement, based on the results of each
Auction, the Auction Agent shall determine the aggregate number of shares of
AMPS to be purchased and the aggregate number of shares of AMPS to be sold by
Potential Holders and Existing Holders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders, and, with respect to each Broker-Dealer, to the
extent that such aggregate number of shares to be purchased and such aggregate
number of shares to be sold differ, determine to which other Broker-Dealer or
Broker-Dealers such Broker-Dealer shall deliver, or from which Broker-Dealer or
Broker-Dealers such Broker-Dealer shall receive, as the case may be, shares of
AMPS. Pursuant to the Broker-Dealer Agreements, each Broker-Dealer shall, in
such manner and at such time or times as in its sole discretion it may
determine, allocate purchases and sales of shares of AMPS among the Potential
Holders, if any, and Existing Holders, if any, on whose behalf such
Broker-Dealer submitted Bids or Sell Orders and any Broker-Dealer or
Broker-Dealers identified to it by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited as
necessary to effect the purchase and sale of shares of AMPS as determined in the
Auction. Purchasers will make payment to the Securities Depository through their
Agent Members in same-day funds; the Securities Depository will make payment to
Agent Members in accordance with its normal procedures, which now provide for
wire transfer of same-day funds. Agent Members currently distribute such funds
to the persons for whom they are acting as agents in same-day funds.
The settlement procedures for Auctions for the AMPS are attached hereto
as Appendix A.
BROKER-DEALERS. The Auction Agent after each Auction will pay, from
funds provided by the Company, to each Broker-Dealer a fee equal to ____% of the
purchase price of shares of AMPS placed by such Broker-Dealer at such Auction,
multiplied by the number of days in the Dividend Period to which such Auction
relates and divided by 360. For purposes of the preceding sentence, shares of
AMPS will be deemed placed by a Broker-Dealer if such shares were (i) the
subject of Hold Orders deemed to have been submitted by Existing Holders of
shares of AMPS that were acquired by such Existing Holders through such
Broker-Dealer, (ii) the subject of valid Hold Orders placed by the
Broker-Dealer, (iii) the subject of either of the following Orders submitted by
such Broker-Dealer: (A) a Submitted Bid of an Existing Holder that was rejected
so that such Existing Holder continues to hold such shares as a result of the
Auction or (B) a Submitted Bid of a Potential Holder that was accepted so that
such Potential Holder purchases such shares as a result of the Auction and (iv)
with regard to an Auction in which there were not Sufficient Clearing Bids, a
Submitted Sell Order of an Existing Holder that was rejected.
The Broker-Dealer Agreements provide that if any Existing Holder on
whose behalf a Broker-Dealer submitted a Bid or Sell Order that is accepted or
rejected fails to instruct its Agent Member to deliver shares by book entry
against payment therefor, such Broker-Dealer shall instruct such Agent Member to
deliver such shares by book entry on behalf of such Existing Holder against
payment therefor. The delivery of funds by a Broker-Dealer for the purchase of
shares of AMPS by a Potential Holder on behalf of whom such Broker-Dealer
submitted an Order shall not relieve such Potential Holder of any liability to
such Broker-Dealer for payment for such shares. Each Broker-Dealer Agreement
provides that neither the Company nor the Auction Agent shall have any
responsibility or liability with respect to the failure of a Potential Holder,
Existing Holder or their respective Agent Members to deliver shares of AMPS or
to pay for shares of AMPS purchased or sold pursuant to an Auction or otherwise.
As long as Cede, or any other nominee for a Securities Depository or any
Securities Depository, continues to hold the shares of AMPS, no share
certificates will need to be delivered by any Existing Holder to reflect any
transfer of shares effected by an Auction.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit
Orders in Auctions for its own account, unless the Company
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notifies all Broker-Dealers that they may no longer do so, in which case
Broker-Dealers may continue to submit only Hold Orders and Sell Orders for their
own accounts. If a Broker-Dealer submits an Order for its own account in any
Auction, it may have knowledge of Orders placed through it in that Auction and
therefore have an advantage over other Bidders; such Broker-Dealer, however,
would not have knowledge of Orders submitted by other Broker-Dealers in that
Auction. In the Broker-Dealer Agreements, each Broker-Dealer agrees to handle
customer orders in accordance with its respective duties under applicable
securities laws and rules.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
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 Connecticut Corporation Law and the Certificate of
Incorporation and By-Laws of the Company.
COMMON STOCK
GENERAL. The Company is authorized to issue 1,000 shares of Common
Stock. There are currently 100 issued and outstanding shares of Common Stock,
all of which are owned by Webster Bank.
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, if the Company fails to declare and pay full
dividends on the Preferred Shares in any dividend period, the Company may not
make any dividends or other distributions with respect to the Common Stock for
such dividend period. In order to remain qualified as a REIT, the Company must
distribute annually at least 95% of its annual "REIT taxable income" (not
including capital gains and certain items of non-cash income) to stockholders.
See "Federal Income Tax Considerations."
VOTING RIGHTS. Subject to the rights, if any, of the holders of any
series of Preferred Stock, all voting rights are vested in the Common Stock. The
holders of Common Stock are entitled to one vote per share. All of the issued
and outstanding shares of Common Stock currently are held by Webster 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
The Company is currently authorized to issue _____ shares of Preferred
Stock, (i) 2,600 of which are designated Series A Auction Market Cumulative
Preferred Stock, par value $1.00 per share, (ii)1,150,000 of which are
designated Series B ____% Cumulative Preferred Stock, par value $1.00 per share,
and (iii) _____ of which are designated excess stock, par value $1.00 per share
(the "Excess Stock").
Subject to limitations prescribed by Connecticut law and the Company's
Certificate of Incorporation, the Board of Directors or, if then constituted, a
duly authorized committee thereof, is authorized 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 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.
59
Either the Certificate of Incorporation or a certificate of amendment
relating to each series of Preferred Stock will set forth the preferences and
other terms of such series, including without limitation the following: (1) the
title and stated value, if any, of such series; (2) the number of shares of such
series offered and the liquidation preference per share of such series; (3) the
dividend rate(s), period(s), and/or payment date(s) or method(s) of calculation
thereof applicable to such series; (4) whether such series of Preferred Stock is
cumulative or not and, if cumulative, the date from which dividends on such
series shall accumulate; (5) the provision for a sinking fund, if any, for such
series; (6) the provision for redemption, if applicable, of such series; (7) the
relative ranking and preferences of such series as to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of the Company; (8)
any limitations on issuance of any series of Preferred Stock ranking senior to
or on a parity with such series of Preferred Stock as to dividend rights and
rights upon liquidation, dissolution or winding up of the affairs of the
Company; (9) any other specific terms, preferences, rights, limitations or
restrictions of such series; and (10) any voting rights of such series.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Certificate of Incorporation contains certain
restrictions on the number of shares of Preferred Stock that individual
stockholders may directly or beneficially own. For the Company to qualify as a
REIT under the Code, no more than 50% of the value of its outstanding shares of
capital stock may be owned, directly or indirectly, by five or fewer individuals
(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 capital stock of the
Company must also 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 Certificate of Incorporation of the
Company contains restrictions on the acquisition and ownership of Preferred
Stock intended to ensure compliance with the One Hundred Persons Test. Such
provisions include a restriction that if any transfer of shares of capital stock
of the Company would cause the Company to be owned by fewer than 100 persons,
such transfer shall be null and void and the intended transferee will acquire no
rights to the stock.
Subject to certain exceptions specified in the Company's Certificate of
Incorporation, no natural person or entity is permitted to own more than $50,000
of the aggregate liquidation value (the "Ownership Limit") of the Series B
Preferred Shares.
The Certificate of Incorporation provides that shares of Preferred
Stock owned, or deemed to be owned, by, or transferred to a stockholder in
excess of the Ownership Limit, or which would cause the Company to fail to
qualify as a REIT (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 or ownership 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 Series B Preferred Shares will
bear a legend referring to the restrictions described above.
60
The Company's Certificate of Incorporation requires that any person who
beneficially owns 0.5% (or such lower percentage as may be required by the Code
or the Treasury Regulations) of the outstanding shares of any 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 Ownership Limit.
SUPER-MAJORITY DIRECTOR APPROVAL
The Certificate of Incorporation requires approval by two-thirds of the
Company's Board of Directors in order for the Company to file a voluntary
petition of bankruptcy.
BUSINESS COMBINATIONS
The Connecticut Corporation Law establishes special requirements with
respect to "business combinations" between a Connecticut corporation or any
majority-owned subsidiary of a Connecticut corporation and any person (other
than the corporation or any of its subsidiaries) who beneficially owns, directly
or indirectly, 10% or more of the voting power of the outstanding shares of
voting stock of the corporation; any person who is an affiliate of the
corporation and at any time within the two years immediately prior to the date
in question beneficially owned 10% of more of the voting power of the then
outstanding shares of voting stock; or generally an affiliate or associate of an
interested shareholder (an "Interested Shareholder"), subject to certain
exemptions. "Business combinations" generally include (i) any merger,
consolidation or statutory share exchange; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets (other than in the
usual and regular course of business) that has an aggregate book value of ten
percent or more of the total market value of the corporation's outstanding
shares or its net worth; (iii) certain issuances or transfers of equity
securities that have an aggregate market value of five percent or more of the
total market value of the corporation's outstanding shares; (iv) the adoption of
a plan of liquidation or dissolution that is proposed by an Interested
Shareholder; and (v) any reclassification of securities or any merger,
consolidation or share exchange of the corporation with any of its subsidiaries
which has the effect of increasing by 5% or more of the total number of
outstanding shares the proportionate amount of any class of equity securities
owned by an Interested Shareholder. In general, an Interested Shareholder may
not engage in a "business combination" with the corporation unless the business
combination is approved by the affirmative vote of (i) the board of directors of
the corporation and (ii) (a) the holders of 80% of the voting power of the
outstanding shares of voting stock of the corporation and (b) the holders of
two-thirds of the voting power of the outstanding shares other than voting stock
held by the Interested Shareholder with whom the business combination is to be
effected, unless, among other things, the consideration received by the
corporation's common stockholders and other stockholders meets certain price
requirements and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for his shares. Further, a
corporation may not engage in a business combination with an Interested
Shareholder for a period of five years after the Interested Shareholder's stock
acquisition date unless the business combination or purchase of stock is
approved prior to the stock acquisition date by the board of directors of the
corporation and by a majority of the nonemployee directors of which there shall
be at least two. These provisions of the Connecticut Corporation Law do not
apply to business combinations that are excepted under the Connecticut
Corporation Law. The Certificate of Incorporation exempts from the Connecticut
Corporation Law any business combination with Webster Bank or Webster, and any
and all other entities whether currently existing or formed in the future
affiliated with either of the foregoing.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the federal income tax
considerations regarding the Offering. The following description is for general
information only, is not exhaustive of all possible tax considerations, and is
not intended to be (and should not be construed as) tax advice. For example,
this summary does not give a detailed discussion of any state, local or foreign
tax considerations. In addition,
61
the discussion is intended to address only those federal income tax
considerations that are generally applicable to all stockholders of the Company.
It does not discuss all aspects of federal income taxation that might be
relevant to a specific stockholder in light of its particular investment or tax
circumstances. The description does not purport to deal with all aspects of
taxation that may be relevant to stockholders subject to special treatment under
the federal income tax laws, including, without limitation, insurance companies,
financial institutions, broker-dealers, tax-exempt organizations (except to the
extent discussed under the heading "--Taxation of Tax-Exempt Stockholders of the
Company") or foreign corporations and persons who are not citizens or residents
of the United States (except to the extent discussed under the heading
"--Taxation of Non-U.S. Stockholders of the Company").
The information in this section is based on the Code, current,
temporary and proposed income tax regulations promulgated under the Code (the
"Treasury Regulations"), the legislative history of the Code, current
administrative interpretations and practices of the IRS (including its practices
and policies as endorsed in private letter rulings, which are not binding on the
IRS except with respect to a taxpayer that receives such a ruling), and court
decisions, all as of the date hereof. As discussed below, the Taxpayer Relief
Act of 1997 (the "1997 Act") contains certain changes to the REIT qualification
requirements and the taxation of REITs that may be material to a holder of
Preferred Shares, but which will become effective only for the Company's taxable
years commencing on or after January 1, 1998. No assurance can be given that
future legislation, Treasury Regulations, administrative interpretations and
practices and court decisions will not significantly change the current law or
adversely affect existing interpretations of current law. Any such change could
apply retroactively to transactions preceding the date of the change. The
Company has not requested, and does not plan to request, any rulings from the
IRS concerning the tax treatment of the Company. Thus, no assurance can be
provided that the statements set forth herein (which do not bind the IRS or the
courts) will not be challenged by the IRS or will be sustained by a court if so
challenged.
EACH PROSPECTIVE PURCHASER OF PREFERRED SHARES IS URGED TO CONSULT WITH
ITS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE
OWNERSHIP AND DISPOSITION OF THE SHARES OF AN ENTITY ELECTING TO BE TAXED AS A
REIT IN LIGHT OF ITS SPECIFIC TAX AND INVESTMENT SITUATIONS AND THE SPECIFIC
FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS APPLICABLE TO IT.
TAXATION OF THE COMPANY
The Company will elect to be treated as a REIT under Sections 856
through 860 of the Code commencing with its taxable year ending December 31,
1997. The Company believes that it is organized, has operated, and will continue
to operate in such a manner as to qualify for taxation as a REIT under the Code.
The Company intends to continue to operate in such a manner, but no assurance
can be given that it will continue to operate in such a manner so as to qualify
or remain qualified.
Sections 856 through 860 of the Code and the corresponding Treasury
Regulations are highly technical and complex. The following sets forth the
material aspects of the rules that govern the federal income tax treatment of a
REIT and its stockholders. This summary is qualified in its entirety by the
applicable Code provisions, rules and Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
Hogan & Hartson L.L.P. has acted as tax counsel to the Company in
connection with the Offering. In the opinion of Hogan & Hartson L.L.P.,
commencing with the Company's taxable year ending December 31, 1997, the Company
was organized in conformity with the requirements for qualification as a REIT,
and its proposed method of operation and its actual method of operation since
formation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code. It must be emphasized that this opinion is conditioned
upon certain representations made by the Company as to factual matters relating
to the organization and operation of the Company and its Mortgage Assets. In
addition, this opinion is based upon the factual representations of the Company
concerning its business and properties as set forth in this Prospectus and
assumes that the actions described in this Prospectus
62
are completed in a timely fashion. Moreover, such qualification and taxation as
a REIT depends upon the Company's ability to meet on an ongoing basis (through
actual annual operating results, distribution levels and diversity of share
ownership) the various qualification tests imposed under the Code discussed
below, the results of which will not be reviewed by Hogan & Hartson L.L.P.
Accordingly, no assurance can be given that the actual results of the Company's
operations for any particular taxable year will satisfy such requirements.
Further, the anticipated income tax treatment described in this Prospectus may
be changed, perhaps retroactively, by legislative, administrative or judicial
action at any time. See "-- Failure of the Company to Qualify as a REIT."
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on its net income that is
distributed currently to stockholders. This treatment substantially eliminates
the "double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows:
o The Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net
capital gains.
o Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference.
o If the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for
sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income.
o 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 foreclosure property or sales to which Section
1033 of the Code applies), such income will be subject to a 100%
tax.
o If the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (each as discussed below), but has
nonetheless maintained its qualification as a REIT because certain
other requirements have been met, it will be subject to a 100% tax
on an amount equal to (a) the gross income attributable to the
greater of the amount by which the Company fails the 75% or 95%
test multiplied by (b) a fraction intended to reflect the
Company's profitability.
o 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.
REQUIREMENTS FOR QUALIFICATION AS A REIT
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 Sections 856 through 859 of the Code, (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) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) and (vii) that meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at
63
least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than twelve 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 conditions (v) and (vi), pension funds and
certain other tax-exempt entities are treated as individuals, subject to a
"look-through" exception in the case of condition (vi). In the opinion of Hogan
& Hartson L.L.P., the Company does not constitute a financial institution within
the meaning of condition (iv).
The Company believes that it will have issued sufficient shares with
sufficient diversity of ownership in the Offering to allow it to satisfy
conditions (v) and (vi). In addition, the Company's Certificate of Incorporation
provides for restrictions regarding the transfer and ownership 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 ownership
and transfer restrictions are described in "Description of Capital Stock of the
Company -- Restrictions on Ownership and Transfer." These restrictions, however,
may not ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above. If the Company fails to satisfy such
share ownership requirements, the Company's status as a REIT will terminate. See
"-- Failure of the Company to Qualify as a REIT."
Treasury Regulations require that the Company each year demand from
certain record owners of its shares certain information in order to assist the
Company in ascertaining that the share ownership requirements described above
are satisfied. Pursuant to the 1997 Act, for the Company's taxable years
commencing on or after January 1, 1998, if the Company were to fail to comply
with these Treasury Regulation requirements for any year, it would be subject to
a $25,000.00 penalty. If the Company's failure to comply was due to intentional
disregard of the requirements, the penalty is increased to $50,000. However, if
the Company's failure to comply was due to reasonable cause and not willful
neglect, no penalty would be imposed. If the Company complies with the
regulatory rules on ascertaining its actual owners but does not know, or would
not have known by exercising reasonable diligence, whether it failed to meet the
requirement that it not be closely held, the Company will be treated as having
met the requirement. These rules enacted as part of the 1997 Act are a change to
the prior law, under which a REIT would be disqualified if it failed to comply
with these Treasury Regulations.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company will have a calendar taxable
year.
In order to qualify as a REIT, the Company cannot have at the end of
any taxable year any undistributed "earnings and profits" that are attributable
to a "C corporation" taxable year. The Company was a newly formed entity that
will make a REIT election for its first taxable year. Hence, the Company itself
has no undistributed "C corporation earnings and profits."
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements.
o 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 (including "rents from
real property" and, in certain circumstances, interest) or from
certain types of temporary investments.
o 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, dividends,
interest, including certain hedging instruments, and gain from the
sale or disposition of stock or securities, including certain
hedging instruments (or from any combination of the foregoing).
o Third, for the 1997 taxable year, the Company must derive less
than 30% of its gross income from the sale or other disposition of
(i) real property held for less than four years
64
(other than foreclosure property and involuntary conversions),
(ii) stock or securities held for less than one year, and (iii)
property in a prohibited transaction. Pursuant to the 1997 Act,
the Company will not have to meet this test for its taxable years
commencing on or after January 1, 1998.
For interest 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 gross income so long as the determination of those amounts does not
depend on the income or profits of any 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 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 three 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).
Pursuant to the 1997 Act, for taxable years commencing on or after January 1,
1998, this grace period will be extended to the close of the third year
following the year of foreclosure. In the event the special foreclosure property
rules 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.
The Company anticipates that all the interest on its Mortgage Assets
will satisfy the 75% and 95% gross income tests.
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 generally will be 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 federal income
tax return, and any incorrect information on the schedule was not due to fraud
with 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. For example, if the Company fails to satisfy the gross income tests
because non-qualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving the Company, the
Company will not qualify as a REIT. As discussed above under "--Taxation of the
Company," even if these relief provisions apply, a tax would be imposed with
respect to the excess net income.
Asset Tests. The Company, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets.
o First, at least 75% of the value of the Company's total assets
must be represented by real estate assets including (i) its
allocable share of real estate assets held by partnerships in
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which the Company owns an interest and (ii) stock or debt
instruments held for not more than one year 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.
o Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class.
o Third, of the investments included in the 25% asset class, 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 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 for failure 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 (including, for example, as a
result of an additional capital contribution of proceeds of an offering of
shares by the Company such as this Offering), 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 other
actions within 30 days after the close of any quarter as may be required to cure
any noncompliance. If the Company fails to cure noncompliance with the asset
tests within such time period, the Company would cease to qualify as a REIT.
Annual Distribution Requirements. The Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (a) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and the Company's net
capital gain) and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) 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
date after such declaration.
To the extent that the Company does not distribute all of its net
capital gain or distributes 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 gain corporate tax rates. The Company, however, may
designate some or all of its retained net capital gain, so that, although the
designated amount will not be treated as distributed for purposes of this tax, a
stockholder would include its proportionate share of such amount in income, as
long-term capital gain, and would be treated as having paid its proportionate
share of the tax paid by the Company with respect to such amount. The
stockholder's basis in its shares would be increased by the amount the
stockholder included in income and decreased by the amount of the tax the
stockholder is treated as having paid. The Company would make an appropriate
adjustment to its earnings and profits. For a more detailed description of the
tax consequences to a stockholder of such a designation, see "--Taxation of
Taxable U.S. Stockholders of the Company Generally." The Company intends to make
timely distributions sufficient to satisfy these annual distribution
requirements.
The Company anticipates that it will generally have sufficient cash or
liquid assets to enable it to satisfy the distribution requirements described
above. See "Business and Strategy--Dividend Policy." It is possible, however,
that the Company, from time to time, may not have sufficient cash or other
liquid assets to meet these distribution requirements 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
arriving at taxable income of the Company. If such timing differences occur, in
order to meet the distribution requirements, the Company may find it necessary
to arrange for short-term, or possibly long-term, borrowings or to pay dividends
in the form of taxable stock dividends.
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
66
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.
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 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 may avail itself of consent dividend procedures set out in
Section 565 of the Code and the related Treasury Regulations to satisfy the 95%
distribution requirement or to avoid imposition of an excise tax. A consent
dividend is a hypothetical dividend that is treated for U.S. federal tax
purposes as though it actually had been paid in cash on the last day of the
year. To avail itself of the consent dividend procedures, the Company would have
to obtain consent on Form 972 from the stockholders who were actual owners of
shares on the last day of the year. The amount of hypothetical dividend would be
treated as though it actually had been paid to the consenting stockholder and
then recontributed by the stockholder to the Company. The Company would avail
itself of consent dividend procedures only with respect to the Common Stock. The
consent dividend procedures are practical in this case because all of the Common
Stock is expected to be held by a single holder.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable
year, and if the relief provisions 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. As a result, the Company's failure to qualify as a REIT
would significantly reduce the cash available for distribution by the Company to
its stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income, to the extent
of the Company's current and accumulated earnings and profits, 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 also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS OF THE COMPANY GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of Preferred
Shares who (for United States federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) is an estate the income of which is subject
to United States federal income taxation regardless of its source, or (iv) is a
trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
Distributions Generally. As long as the Company qualifies as a REIT,
distributions made by the Company out of its current or accumulated earnings and
profits (and not designated as capital gain dividends) will constitute dividends
taxable to its taxable U.S. Stockholders as ordinary income. Such distributions
will not be eligible for the dividends received deduction in the case of such
U.S. Stockholders that are corporations. U.S. Stockholders that are corporations
may be required to treat up to 20% of certain capital gain dividends as ordinary
income.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to taxable U.S. Stockholders
as gains from the sale or exchange of a capital asset held for more than one
year (to the extent that they do not exceed the Company's actual net capital
gain for the taxable year) without regard to the period for which a U.S.
Stockholder has held his shares in the
67
Company. It is not clear whether, for a U.S. Stockholder who is an individual or
an estate or trust, such amounts will be taxable at the rate applicable to
mid-term capital gains (i.e., gains from the sale of capital assets held for
more than one year but not more than 18 months) or at the rate applicable to
long-term capital gains (i.e., gains from the sale of capital assets held for
more than 18 months). This uncertainty may be clarified by future legislation or
regulations.
Generally, for an individual or an estate or trust, the maximum tax
rate applicable to mid-term capital gains is 28% and the maximum tax rate
applicable to long-term capital gains is 20%. However, for such taxpayers (i)
mid-term capital gains resulting from sales of depreciable real property are
taxed at the rate applicable to ordinary income to the extent that prior
depreciation deductions with respect to the property were claimed in excess of
the depreciation that would have been allowed if computed on a straight-line
basis; and (ii) long-term capital gains resulting from sales of depreciable real
property are taxed at a maximum rate of 25% to the extent of the depreciation
deductions taken with respect to such property. The IRS has authority to issue
regulations pursuant to which the capital gain dividends received by a taxable
U.S. Stockholder that is an individual or an estate or trust could be subject to
these special rates.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Stockholder, reducing the adjusted basis which such U.S.
Stockholder has in its shares for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a U.S.
Stockholder's adjusted basis in its shares taxable as capital gains (provided
that the shares have been held as a capital asset). Dividends declared by the
Company in October, November, or December of any year and 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 on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any net operating losses or capital losses of the
Company.
Capital Gain Distributions. Distributions made by the Company that are
properly designated by the Company as capital gain dividends will be taxable to
taxable U.S. Stockholders as long-term capital gains (to the extent that they do
not exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which a U.S. Stockholder has held his Preferred Shares.
U.S. Stockholders that are corporations may, however, be required to treat up to
20% of certain capital gain dividends as ordinary income.
Certain Dispositions of Shares. Upon any sale or other disposition of
Preferred Shares, a U.S. Stockholder will recognize gain or loss for federal
income tax purposes in an amount equal to the difference between (i) the amount
of cash and the fair market value of any property received on such sale or other
disposition and (ii) the holder's adjusted basis in such Preferred Shares for
tax purposes. Such gain or loss will be capital gain or loss if the Preferred
Shares have been held by the U.S. Stockholder as a capital asset.
In the case of a U.S. Stockholder who is an individual or an estate or
trust, such gain or loss will be mid-term capital gain or loss if such shares
have been held for more than one year but not more than 18 months and long-term
capital gain or loss if such shares have been held for more than 18 months. In
the case of a U.S. Stockholder that is a corporation, such gain or loss will be
long-term capital gain or loss if such shares have been held for more than one
year. In general, any loss recognized by a U.S. Stockholder upon the sale or
other disposition of shares in the Company that have been held for six months or
less (after applying certain holding period rules) will be treated as a
long-term capital loss, to the extent of distributions received by such U.S.
Stockholder from the Company which were required to be treated as long-term
capital gains.
Pursuant to the 1997 Act, for the Company's taxable years commencing on
or after January 1, 1998, the Company may designate its net capital gain so that
with respect to retained net capital gains, a U.S. Stockholder would include its
proportionate share of such gain in income, as long-term capital gain,
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and would be treated as having paid its proportionate share of the tax paid by
the Company with respect to the gain. The U.S. Stockholder's basis in its shares
would be increased by its share of such gain and decreased by its share of such
tax. With respect to such long-term capital gain of a U.S. Stockholder that is
an individual or an estate or trust, the IRS, as described above in this
section, has authority to issue regulations that could apply the special tax
rate applicable generally to the portion of the long-term capital gains of an
individual or an estate or trust attributable to deductions for depreciation
taken with respect to depreciable real property.
BACKUP WITHHOLDING FOR COMPANY DISTRIBUTIONS
The Company will report to its U.S. Stockholders and the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Stockholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any stockholders who fail to certify
their non-foreign status to the Company. See "-- Taxation of Non-U.S.
Stockholders of the Company."
TAXATION OF TAX-EXEMPT STOCKHOLDERS OF THE COMPANY
The IRS has ruled that amounts distributed as dividends by a qualified
REIT do not constitute unrelated business taxable income ("UBTI") when received
by a tax-exempt entity. Based on that ruling, provided that a tax-exempt
stockholder (except certain tax-exempt stockholders described below) has not
held its Preferred Shares as "debt financed property" within the meaning of the
Code and such Preferred Shares are not otherwise used in a trade or business,
the dividend income from the Company will not be UBTI to a tax-exempt
stockholder. Similarly, income from the sale of Preferred Shares will not
constitute UBTI unless such tax-exempt stockholder has held such Preferred
Shares as "debt financed property" within the meaning of the Code or has used
the Preferred Shares in a trade or business.
For tax-exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective stockholders should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by
a "pension held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a)
of the Code, and (iii) holds more than 10% (by value) of the interests in the
REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts." A REIT is a "pension held REIT" if
(i) it would not have qualified as a REIT but for the fact that Section
856(h)(3) of the Code provides that stock owned by qualified trusts shall be
treated for purposes of the "not closely held" requirement as owned by the
beneficiaries of the trust (rather than by the trust itself), and (ii) either
(a) at least one such qualified trust holds more than 25% (by value) of the
interests in the REIT, or (b) one or more such qualified trusts, each of which
owns more than 10% (by value) of the interests in the REIT, hold in the
aggregate more than 50% (by value) of the interests in the REIT. The percentage
of any REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI
earned by the REIT (treating the REIT as if it were a qualified trust and
therefore subject to tax on UBTI) to (ii) the total gross income of the REIT. A
de minimis exception applies where the percentage is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of REIT
distributions as
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UBTI will not apply if the REIT is able to satisfy the "not closely held"
requirement without relying upon the "look-through" exception with respect to
qualified trusts.
Based on the anticipated ownership of shares immediately following the
Offering, and as a result of certain limitations on transfer and ownership of
shares contained in the Certificate of Incorporation, the Company does not
expect to be classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS OF THE COMPANY
The rules governing United States federal income taxation of the
ownership and disposition of Preferred Shares by persons that, for purposes of
such taxation, are not U.S. Stockholders (collectively, "Non-U.S. Stockholders")
are complex, and no attempt is made herein to provide more than a brief summary
of such rules. Accordingly, the discussion does not address all aspects of
United States federal income tax and does not address state, local or foreign
tax consequences that may be relevant to a Non-U.S. Stockholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that the Company qualifies for taxation
as a REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income tax
laws with regard to an investment in Preferred Shares, including any reporting
requirements.
Distributions by the Company. Distributions by the Company to a
Non-U.S. Stockholder that are neither attributable to gain from sales or
exchanges by the Company of United States real property interests nor designated
by the Company as capital gains dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Company. Such distributions ordinarily will be
subject to withholding of United States federal income tax on a gross basis
(that is, without allowance of deductions) at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty, unless the dividends are
treated as effectively connected with the conduct by the Non-U.S. Stockholder of
a United States trade or business. Dividends that are effectively connected with
such a trade or business will be subject to tax on a net basis (that is, after
allowance of deductions) at graduated rates, in the same manner as domestic
stockholders are taxed with respect to such dividends, and are generally not
subject to withholding. Any such dividends received by a Non-U.S. Stockholder
that is a corporation may also be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury Regulations, dividends paid to an address
in a country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above.
Distributions in excess of current or accumulated earnings and profits
of the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's Preferred Shares, but
rather will reduce the adjusted basis of such Preferred Shares. To the extent
that such distributions exceed the adjusted basis of a Non-U.S. Stockholder's
Preferred Shares, they will give rise to gain from the sale or exchange of its
Preferred Shares, the tax treatment of which is described below. As a result of
a legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate) will
be subject to withholding at a rate of 10%. However, the Non-U.S. Stockholder
may seek a refund of such amounts from the IRS if it subsequently determined
that such distribution was, in fact, in excess of current or accumulated
earnings and profits of the Company, and the amount withheld exceeded the
Non-U.S. Stockholder's United States tax liability, if any, with respect to the
distribution.
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Distributions to a Non-U.S. Stockholder that are designated by the
Company at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) investment in the Preferred Shares is effectively connected with the
Non-U.S. Stockholder's United States trade or business, in which case the
Non-U.S. Stockholder will be subject to the same treatment as domestic
stockholders with respect to such gain (except that a stockholder that is a
foreign corporation may also be subject to the 30% branch profits tax, as
discussed above), or (ii) the Non-U.S. Stockholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains.
Under the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA") distributions to a Non-U.S. Stockholder that are attributable
to gain from sales or exchanges by the Company of United States real property
interests will cause the Non-U.S. Stockholder to be treated as recognizing such
gain as income effectively connected with a United States trade or business.
Non-U.S. Stockholders would thus generally be taxed at the same rates applicable
to domestic stockholders (subject to a special alternative minimum tax in the
case of nonresident alien individuals). Also, such gain may be subject to a 30%
branch profits tax in the hands of a Non-U.S. Stockholder that is a corporation,
as discussed above. The Company is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Stockholder's
United States federal income tax liability.
Sale of Preferred Shares. Gain recognized by a Non-U.S. Stockholder
upon the sale or exchange of Preferred Shares generally will not be subject to
United States taxation unless such shares constitute a "United States real
property interest" within the meaning of FIRPTA. The Preferred Shares will not
constitute a "United States real property interest" so long as 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 stock is held directly or indirectly by Non-U.S. Stockholders. The Company
believes that at the closing of the Offering it will be a "domestically
controlled REIT," and therefore that the sale of Preferred Shares will not be
subject to taxation under FIRPTA. However, no assurance can be given that the
Company will continue to be a "domestically controlled REIT." Notwithstanding
the foregoing, gain from the sale or exchange of Preferred Shares not otherwise
subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States. In such case, the nonresident alien individual will be subject to
a 30% United States withholding tax on the amount of such individual's gain.
Even if the Company does not qualify as or ceases to be a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Stockholder of Preferred Shares would not be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest" if
(i) the Preferred Shares are "regularly traded" (as defined by applicable
Treasury Regulations) on an established securities market (e.g., with respect to
the Series B Preferred Shares, the Nasdaq Stock Market) and (ii) such Non-U.S.
Stockholder owned 5% or less of the value of the Company's stock throughout the
five year period ending on the date of the sale or exchange. If gain on the sale
or exchange of Preferred Shares were subject to taxation under FIRPTA, the
Non-U.S. Stockholder would be subject to regular United States federal income
tax with respect to such gain in the same manner as a U.S. Stockholder (subject
to any applicable alternative minimum tax, a special alternative minimum tax in
the case of nonresident alien individuals and the possible application of the
30% branch profits tax in the case of foreign corporations), and the purchaser
of the Preferred Shares would be required to withhold and remit to the IRS 10%
of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding
tax (which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Stockholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company
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of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Preferred Shares by or through a foreign office of a
foreign broker. Information reporting (but not backup withholding) will apply,
however, to a payment of the proceeds of a sale of Preferred Shares by a foreign
office of a broker that (a) is a United States person, (b) derives 50% or more
of its gross income for certain periods from the conduct of a trade or business
in the United States or (c) is a "controlled foreign corporation" (generally, a
foreign corporation controlled by United States stockholders) for United States
tax purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Stockholder and certain other conditions are met, or the
stockholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of Preferred Shares is
subject to both backup withholding and information reporting unless the
stockholder certifies under penalty of perjury that the stockholder is a
Non-U.S. Stockholder, or otherwise establishes an exemption. A Non-U.S.
Stockholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS.
Regulations recently issued by the IRS, which will be effective for payments
made after December 31, 1998, make certain modifications to the certification
procedures applicable to Non-U.S. Stockholders. Prospective investors should
consult their tax advisors regarding the certification requirements for Non-U.S.
Stockholders.
OTHER TAX CONSEQUENCES FOR THE COMPANY AND ITS STOCKHOLDERS
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
Considerations discussed above. Consequently, prospective stockholders should
consult their own 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 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 Preferred Shares is in
accordance with the documents and instruments governing such Plan; (b) whether
the ownership of 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
account under Section 408 of the Code (an "IRA") considering the purchase of
Preferred Shares should consider whether the ownership of 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 PREFERRED SHARES SHOULD CONSULT WITH AND
RELY UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN LIGHT OF THEIR OWN
PARTICULAR CIRCUMSTANCES.
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PLAN ASSET REGULATION
Under Department of Labor ("DOL") 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. ss. 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 of 1933, as amended (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 SEC) after the end
of the fiscal year of the issuer during which the offering of such securities to
the public occurred. The 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 B 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 Series B Preferred Shares, 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 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 B Preferred Shares to be
"freely transferable."
A Plan should not acquire or hold the 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 B 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 B 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 B 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 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.
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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 or her
beneficiary, the IRA would lose its tax-exempt status. The other penalties for
prohibited transactions would not apply.
Thus, the acquisition of the Preferred Shares by a Plan could result in
a prohibited transaction if an Underwriter, the Company, Webster Bank 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 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 (an 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 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 Preferred Shares if the Company is "predominantly held" by
qualified trusts. See "Federal Income Tax Considerations--Taxation of Tax-Exempt
Stockholders of the Company."
INFORMATION REGARDING WEBSTER AND WEBSTER BANK
Webster is the savings and loan holding company of Webster Bank, and as
such, its primary business is the business of Webster Bank. Webster is subject
to the informational requirements of the Exchange Act, and the rules and
regulations thereunder, and in accordance therewith files reports, proxy
statements and other information with the SEC. Such reports, proxy statements
and other information can be obtained at prescribed rates from the Public
Reference Section of the SEC, 450 Fifth Street, N.W.,
74
Washington, D.C. 20549. In addition, such reports, proxy statements and other
information filed by Webster may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the SEC's Web site is (http://www.sec.gov).
Webster's common stock is traded on the Nasdaq Stock Market. Reports, proxy
statements and other information concerning Webster can be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement (the "Underwriting Agreement") between the Company, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Keefe, Bruyette &
Woods, Inc. (the "Underwriters"), the Company has agreed to sell to the
Underwriters, and each of the Underwriters has severally agreed to purchase, the
number of Preferred Shares set forth opposite its name below.
Number of Number of Series B
Underwriter Shares of AMPS Preferred Shares
----------- -------------- ------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
Keefe, Bruyette & Woods, Inc..................................
----------- -----------------
Total..........................................
=========== =================
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the Preferred Shares
being sold pursuant to the Underwriting Agreement if any are purchased. Under
certain circumstances, the purchase commitments of nondefaulting Underwriters
may be increased.
The Underwriters have advised the Company that they propose initially
to offer the AMPS directly to the public at the public offering price set forth
on the cover page of this Prospectus, and to certain dealers at such price less
a concession not in excess of $____ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $___ per share to
certain other dealers. After the initial public offering of the AMPS, the public
offering price, concession and discount may be changed.
The Underwriters have advised the Company that they propose initially
to offer the Series B Preferred Shares directly to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $____ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $___ per share to certain other dealers. After the initial public offering of
the Series B Preferred Shares, the public offering price, concession and
discount may be changed.
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
150,000 additional Series B Preferred Shares, solely to cover over-allotments,
if any, at the public offering price set forth on the cover page of this
Prospectus, less the underwriting discount set forth in the Underwriting
Agreement. If the Underwriters exercise this option, each Underwriter will have
a firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof which the number of Series B Preferred Shares to be
purchased by it shown in the foregoing table bears to the 1,000,000 Series B
Preferred Shares initially offered hereby.
75
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments the Underwriters may be required to
make in respect thereof.
The Company has agreed that for a period of 90 days from the date of this
Prospectus it will not, without the prior written consent of Merrill Lynch,
directly or indirectly, offer, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of any Preferred Shares or securities of the
Company which are substantially similar to or convertible into or exchangeable
for Preferred Shares.
Application has been made to list the Series B Preferred Shares on the
Nasdaq Stock Market. Prior to the Offering, there has been no public market for
the Series B Preferred Shares. The Underwriters have advised the Company that
they intend to make a market in the Series B Preferred Shares prior to the
commencement of trading on the Nasdaq Stock Market. The Underwriters will have
no obligation to make a market in the Series B Preferred Shares, however, and
may cease market making activities, if commenced, at any time.
In connection with the Offering, the rules of the SEC permit the
Underwriters to engage in certain transactions that stabilize the price of the
Preferred Shares. Such transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Preferred Shares.
If the Underwriters create a short position in the Series B Preferred
Shares in connection with the Offering (i.e., if they sell more Series B
Preferred Shares than are set forth on the cover page of this Prospectus), the
Underwriters may reduce that short position by purchasing Series B Preferred
Shares in the open market. The Underwriters may also elect to reduce any short
position by exercising all or a part of the over-allotment option described
herein.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase shares of Series B
Preferred Shares in the open market to reduce the Underwriters' short position
or to stabilize the price of the Series B Preferred Shares, they may reclaim the
amount of the selling concession from the selling group members who sold those
shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a syndicate short position could cause the price of the security to be
higher than it might be in the absence of such purchases. The imposition of a
penalty bid might also have an effect on the price of a security to the extent
that it were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Preferred Shares.
In addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Certain of the Underwriters or their affiliates have provided from time
to time, and expect to provide in the future, investment banking services to
affiliates of the Company, for which such Underwriters or their affiliates have
received or will receive customary fees and commissions.
76
EXPERTS
The financial statements of Webster Preferred Capital Corporation as of
June 30, 1997 and for the period March 17, 1997 (date of inception) to June 30,
1997, included in this Prospectus, have been so included in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing in this Prospectus and given upon the authority of said firm as
experts in accounting and auditing.
RATINGS
The AMPS will be rated ___ by S&P and ___ by Fitch and the Series B
Preferred Shares will be rated ___ by S&P and ___ by Fitch. 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 Preferred Shares, and,
accordingly, there can be no assurance that the respective ratings assigned to
the Preferred Shares upon initial issuance will not be lowered or withdrawn by
the assigning rating organization at any time thereafter.
LEGAL MATTERS
The validity of the Preferred Shares offered hereby will be passed upon
for the Company by Hogan & Hartson L.L.P., Washington, D.C. Certain tax matters
described under "Federal Income Tax Considerations" will be passed upon for the
Company by Hogan & Hartson L.L.P., Washington, D.C. Certain legal matters in
connection with this Offering will be passed upon for the Underwriters by Brown
& Wood LLP, New York, New York.
AVAILABLE INFORMATION
The Company has filed with the SEC a Registration Statement (of which
this Prospectus forms a part) on Form S-11 (the "Registration Statement") under
the Securities Act, with respect to the Preferred Shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the SEC. 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 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 SEC can be inspected at and copies can be obtained
at the public reference facilities maintained by the Securities and Exchange
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the SEC: 7 World Trade
Center, Suite 1300, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Securities
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's Web site is
http://www.sec.gov.
The Certificate of Incorporation establishing the rights, preferences
and limitations of the Preferred Shares provides that the Company shall maintain
its status as a reporting company under the Exchange Act, for as long as any of
the Preferred Shares are outstanding and pursuant thereto will furnish
stockholders with annual reports containing audited financial statements.
77
GLOSSARY
"Additional AMPS" means additional series of AMPS designated by the
Company.
"Adjusted Value" means, with respect to an Eligible Asset, as of any
time, the lesser of (i) the Market Value thereof as of such time, divided by the
applicable Adjustment Factor and (ii) 100% of the principal balance of such
Eligible Asset. The calculation of the Adjusted Value may be made on bases other
than those set forth in "Required Asset Coverage" if S&P and Fitch have advised
the Company in writing that the revised calculation of Adjusted Value would not
adversely affect their respective then current ratings of the shares of the
AMPS.
"Adjustment Factors" for specific types of Eligible Assets are set
forth in "Required Asset Coverage."
"Advisor" means Webster Bank in its role as advisor under the Advisory
Agreement.
"Advisory Service Agreement" means the advisory service agreement, made
as of October __, 1997, between Webster Bank and the Company.
"Agent Member" means the agent member of the Securities Depository of
an Existing Holder.
"All Hold Rate" means 90% of the applicable Benchmark Rate.
"AMPS" means the shares of Series A Auction Market Cumulative Preferred
Stock of the Company offered hereby.
"Applicable Dividend Rate" means the dividend rate for the AMPS during
the period from and after the Date of Original Issue to the initial Dividend
Payment Date calculated in the manner set forth in "Description of Preferred
Shares -- Auction Market Preferred Stock -- Dividends." The dividend rate for
each subsequent Dividend Period will be the rate that results from the next
preceding Auction, except as provided in "Description of Preferred Shares --
Auction Market Preferred Stock -- Dividends."
"ARM" or "adjustable rate mortgage" means a Mortgage Loan with an
interest rate that is typically tied to an index (such as the interest rate on
United States Treasury Bills) and is adjustable periodically. ARMs are typically
subject to lifetime interest rate caps and/or periodic interest rate caps.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agent" means The Bank of New York together with any successor
bank or trust company or other entity entering into an agreement similar to the
Auction Agent Agreement with the Company.
"Auction Agent Agreement" means the auction agent agreement to be
entered into between the Company and the Auction Agent.
"Auction Date" means an auction to determine the Applicable Dividend
Rate of the AMPS for a given Dividend Period that is held on the Business Day
next preceding the first day of such Dividend Period.
"Auction Procedures" means the auction procedures attached to this
Prospectus as Appendix B.
"Available Auction Preferred" means the excess of the number of
outstanding shares of AMPS over the number of outstanding shares subject to
Submitted Hold Orders.
"Benchmark Rate" means the One-Month LIBOR.
"Bid" means an Order that indicates the number of outstanding shares,
if any, of AMPS that an Existing Holder offers to sell if the Applicable
Dividend Rate for the next succeeding Dividend Period is less than the rate
specified in such Bid.
78
"Bidder" means an Existing Holder or a Potential Holder that places an
Order.
"Board of Directors" means the board of directors of the Company.
"Broker-Dealer" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and one or more broker-dealers selected by the Company who enter
into Broker-Dealer Agreements with the Auction Agent.
"Broker-Dealer Agreements" means agreements entered into between the
Auction Agent and a Broker-Dealer.
"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a day on which banking institutions in New York
City are authorized or required by law or executive order to close.
"By-Laws" means the By-Laws of the Company.
"Cede" means Cede & Co., as nominee of the Securities Depository.
"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company.
"Clearing Bids" means clearing bids in an Auction.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loan" means a whole loan secured by a first
mortgage or deed of trust on a commercial real estate property or a multi-family
property.
"Common Stock" means the common stock, par value $0.01 per share, of
the Company.
"Company" means Webster Preferred Capital Corporation, a Connecticut
corporation.
"Connecticut Corporation Law" means the Connecticut Business
Corporation Act as in effect from time to time or any successor statute thereto.
"Cure Date" means the second Business Day after each Evaluation Date.
"Custodian" means The Bank of New York.
"Date of Original Issue" means the date on which the Company originally
issues the AMPS.
"Default" means any failure by the Company to pay the Auction Agent by
1:30 p.m., New York City time, on the Business Day next preceding the Dividend
Payment Date or the Redemption Date, the full amount of any dividend on any
shares of AMPS or the Redemption Price of any shares of AMPS called for
redemption.
"Default Rate" means the rate per annum equal to the lesser of (i) 20%
and (ii) 300% of the Benchmark Rate determined as of the Business Day next
preceding the date on which such Default occurred.
"Derby" means Derby Savings Bank.
"Dividend Payment Date" means with respect to the AMPS, each date on
which dividends on shares of AMPS shall be payable as determined in "Description
of Preferred Shares -- Auction Market Preferred Stock -- Dividends," and with
respect to the Series B Preferred Shares, the fifteenth day of January, April,
July and October in each year, commencing on January 15, 1998.
79
"Dividend Period" means with respect to the AMPS, for the initial
Dividend Period, the period commencing on the Date of Original Issue and ending
on the day preceding the Initial Dividend Payment Date, and for after the
initial Dividend Period, each successive Dividend Period commences on the Last
Dividend Payment Date for the preceding Dividend Period and will end on the day
preceding the next Dividend Payment Date.
"DOL" means the United States Department of Labor.
"Eligible Assets" means cash, demand deposits, next Business Day
repurchase agreements, Mortgage-Backed Securities, U.S. Treasury Securities and
Short-Term Money Market Instruments.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Evaluation Date" means (a) the Date of Original Issue and (b) the
third business day immediately preceding each Auction Date.
"Excess Shares" means the shares of Preferred Stock owned, or deemed to
be owned, by, or transferred to a stockholder in excess of the Ownership Limit,
or which would otherwise cause the Company to fail to qualify as a REIT.
"Excess Stock" means the shares of Preferred Stock, par value $1.00, of
the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Holder" means with respect to the AMPS a person who is listed
as the beneficial owner of such shares of AMPS in the records of the Auction
Agent.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980,
as amended.
"Fitch" means Fitch Investor Service, Inc.
"Five or Fewer Test" means the Code requirement that no more than 50%
of the value of the Company's 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.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"Gross Margin" means, with respect to a Residential Mortgage Loan that
is an ARM, the applicable fixed percentage which is added to the applicable
index to calculate the current interest rate paid by the borrower of the
adjustable rate Residential Mortgage Loan (without taking into account any
interest rate caps or minimum interest rates). Gross Margin is inapplicable to
fixed rate Residential Mortgage Loans.
"Hold Order" means an Order by an Existing Holder that indicates the
number of outstanding shares, if any, of AMPS such the Existing Holder desires
to continue to hold without regard to the Applicable Rate for the next
succeeding Dividend Period.
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"Interested Shareholder" generally means any person (other than the
corporation or any of its subsidiaries) who beneficially owns, directly or
indirectly, 10% or more of the voting power of the outstanding shares of voting
stock of a corporation; any person who is an affiliate of the corporation and at
any time within the two years immediately prior to the date in question
beneficially owned 10% or more of the voting power of the then outstanding
shares of voting stock; or generally an affiliate or associate of an interested
shareholder.
"IRA" means an individual retirement account under Section 408 of the
Code.
"IRS" means the Internal Revenue Service.
"Lead Broker-Dealer" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
"Liquid Assets" means cash, demand deposits, Short-Term Money Market
Instruments and Next Business Day Repurchase Agreements.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the
ratio (expressed as a percentage) of the current principal amount of such
Mortgage Loan to the lesser of (i) the appraised value at origination of the
underlying mortgaged property and (ii) if the Mortgage Loan was made to finance
the acquisition of property, the purchase price of the mortgaged property.
"Market Value" means the market value of the Eligible Assets owned by
the Company computed as described in "Required Asset Coverage."
"Maximum Applicable Rate" means a per annum rate equal to the lesser of
(i) the Rate Multiple multiplied by the Benchmark Rate in effect on the related
Auction Date and (ii) 20%. The Maximum Applicable Rate cannot in any event
exceed 20% per annum.
"Mortgage Assets" means real estate mortgage assets, including but not
limited to Residential Mortgage Loans, Mortgage-Backed Securities and Commercial
Mortgage Loans.
"Mortgage-Backed Securities" means securities rated at least AA by at
least one nationally recognized independent rating organization at the time of
purchase by the Company, or representing interests in or obligations backed by
pools of Mortgage Loans issued or guaranteed by Fannie Mae, FHLMC and GNMA.
"Mortgage Loans" means whole loans secured by single family (one to
four units) residential real estate properties or by commercial real estate
properties.
"Nasdaq Stock Market" means the Nasdaq Stock Market's National Market
Tier.
"1997 Act" means the Taxpayer Relief Act of 1997.
"National Association of Securities Dealers" means the National
Association of Securities Dealers, Inc.
"Next Business Day Repurchase Agreements" means agreements with
institutions that have outstanding commercial paper rated at least A-1+ by S&P
or F-1+ by Fitch pursuant to which the Company will purchase securities that are
Eligible Assets at a specified price and agree to sell such securities to the
seller on the next Business Day.
"Non-U.S. Stockholders" means holders of Preferred Shares that, for
purposes of United States federal income taxation, are not U.S. Stockholders.
81
"Normal Dividend Payment Date" means each day on which dividends on
shares of AMPS would be payable, but for the adjustments set forth in
"Description of Preferred Shares -- Auction Market Preferred Stock --
Dividends."
"Notice of Redemption" means with respect to the AMPS the notice mailed
by the Company to each record holder of shares of AMPS and to the Auction Agent
not less than 15 nor more than 25 days prior to the applicable Redemption Date.
"Offering" means the offering of AMPS and Series B Preferred Shares
pursuant to this Prospectus.
"One Hundred Persons Test" means the Code requirement 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.
"One-Month LIBOR" means, with respect to a Dividend Period relating to
a Dividend Payment Date (in the following order of priority):
(i) the rate (expressed as a percentage per annum) for deposits
in U.S. dollars in the London interbank market having a one-month
maturity commencing on the second London Business Day following the
related Determination Date that appears on Telerate Page 3750 as of
11:00 a.m. (London time) on such Determination Date;
(ii) if such rate does not appear on Telerate Page 3750 as of
11:00 a.m. (London time) on the related Determination Date, the
Company will request the principal London offices of four leading
banks in the London interbank market to provide such banks' offered
quotations (expressed as percentages per annum) as of 11:00 a.m.
(London time) on such Determination Date to prime banks in the London
interbank market for deposits in U.S. dollars having a one-month
maturity commencing on the second London Business Day following such
Determination Date. If at least two quotations are provided, LIBOR
will be the arithmetic mean (if necessary, rounded to the nearest one
hundred-thousandth of a percentage point, with five one millionths of
a percentage point rounded upwards (e.g. 9.876545% or .09876545)
would be rounded to 9.87655% (or .0987655)), of such quotations;
(iii) if fewer than two such quotations are provided as requested
in clause (ii) above, the Company shall request three major banks in
the City of New York to provide such banks' offered quotations
(expressed as percentages per annum) as of 11:00 a.m. (New York time)
on such Determination Date to leading European banks for loans in U.S.
dollars having a one-month maturity commencing on the second London
Business Day following such Determination Date. If at least two such
quotations are provided, LIBOR will be the arithmetic mean (e.g.,
9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655))
of such quotations; and
(iv) if fewer than two such quotations are provided as requested
in clause (iii) above, One-Month LIBOR will be One-Month LIBOR
determined with respect to the Dividend Period immediately preceding
such current Dividend Period.
If the rate for deposits in U.S. dollars having a one-month maturity
that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time)
on the related Determination Date is superseded on Telerate Page 3750 by a
corrected rate before 12:00 noon (London time) on such Determination Date,
the corrected rate as so substituted on the applicable page will be the
applicable One-Month LIBOR for such Determination Date.
Absent manifest error, the Company's determination of One-Month LIBOR and
its calculation of the Applicable Dividend Rate for each Dividend Period will be
final and binding.
"Order" means the communication to a Broker-Dealer of a Hold Order, a
Bid or a Sell Order.
"OREO" means other real estate owned.
"OTS" means the Office of Thrift Supervision.
"Ownership Limit" means the provision in the Company's Certificate of
Incorporation limiting any natural person or entity from owning more than
$50,000 of the aggregate liquidation value of the Series B Preferred Shares.
"People's" means People's Savings Bank & Trust.
"Plan" means 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 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.
"Plan Asset Regulation" means the DOL regulations governing what
constitutes the assets of a Plan or IRA for purposes of ERISA and the related
prohibited transaction provisions of the Code, 29 C.F.R. Sec. 2510.3-101.
"Plan Assets" means the assets of a Plan or IRA for purposes of ERISA.
"Potential Holder" means prospective purchasers of shares of AMPS,
including an Existing Holder with respect to an offer by such Existing Holder to
purchase additional shares.
"Preferred Shares" means the AMPS and the Series B Preferred Shares
offered hereby.
"Preferred Stock" means the preferred stock, par value $1.00 per share,
of the Company.
"Prospectus" means this prospectus, as the same may be amended or
supplemented.
"PTCE" means a Prohibited Transaction Class Exemption.
82
"Rate Adjustment Date" means, with respect to any ARM, a date on which
the interest rate on such ARM adjusts.
"Rate Multiple" means with respect to shares of AMPS on an Auction
Date, the percentage, determined as set forth in "Description of Preferred
Shares -- Auction Market Preferred Stock -- Submission of Orders by
Broker-Dealers to Auction Agent -- Determination of Sufficient Clearing Bids,
Winning Bids and Applicable Rate," based on the prevailing rating of the AMPS in
effect at the close of business on the Business Day preceding such Auction Date.
"Rating Agencies" means S&P and Fitch.
"Redemption Date" means with respect to the AMPS the date specified in
the applicable Notice of Redemption.
"Redemption Price" means with respect to the AMPS the price per share
specified in the applicable Notice of Redemption.
"Registration Statement" means the registration statement filed by the
Company with the SEC on Form S-11 under the Securities Act with respect to the
Preferred Shares.
"REIT" means a real estate investment trust as defined pursuant to
Section 856 of the Code, or any successor provisions thereof.
"REIT taxable income" shall have the meaning set forth in "Federal
Income Tax Considerations--Requirements for Qualifications as a REIT--Annual
Distribution Requirements."
"Required Asset Coverage Certificate" means a certificate of Required
Asset Coverage signed by the President, the Treasurer or the Secretary of the
Company.
"Required Asset Coverage" means on any Evaluation Date or Cure Date, as
the case may be, an aggregate amount equal to the sum of (i) the number of
shares of AMPS outstanding on such Evaluation Date multiplied by $25,000.00 and
the number of shares of Series B Preferred Stock outstanding on such Evaluation
Date multiplied by $10.00, (ii) an amount equal to all accumulated and unpaid
dividends on Preferred Shares on such Evaluation Date, (iii) to the extent not
duplicative of clause (ii), an amount equal to the dividends projected to accrue
on the Preferred Shares outstanding on such Evaluation Date until the next
scheduled Dividend Payment Date for such Preferred Shares, at the Applicable
Dividend Rate in effect on such Evaluation Date for the AMPS and at __% for the
Series B Preferred Shares, (iv) an amount equal to the dividends projected to
accumulate on each Preferred Share outstanding on such Evaluation Date from and
after the scheduled Dividend Payment Date specified in clause (iii) until the
____ day after such Evaluation Date specified in clause (iii) above, at an
assumed applicable dividend rate equal to ____ times the Applicable Dividend
Rate for AMPS determined in the most recent Auction for a 28-day Dividend
Period, (v) except to the extent already included under the foregoing
provisions, the sum of all accrued liabilities that would appear on the face of
a balance sheet of the Company as of such Evaluation Date in accordance with
GAAP, including, without limitation, operating expenses of the Company and
securities sold under an obligation to repurchase, and (vi) projected expenses
for the next succeeding three-month period.
"Required Dividend Coverage" means that the Company has sufficient
Liquid Assets to pay dividends accumulated on the Preferred Shares. On each
Evaluation Date and Dividend Payment Date, the Company is required to deposit or
have on deposit with the Custodian and thereafter to maintain on deposit until
the Business Day prior to the next ensuing related Dividend Payment Date or
Dates, sufficient Liquid Assets to pay the dividends which will accumulate on
the then outstanding Preferred Shares from and after such Date of
83
Original Issue, the most recent Dividend Payment Date or such Dividend Payment
Date, as the case may be, until the next scheduled Dividend Payment Date for
each outstanding Preferred Share at the Applicable Dividend Rate for each share
of AMPS and at ___% per annum for each Series B Preferred Shares Outstanding.
"Residential Mortgage Loan" means a whole loan secured by a first
mortgage or deed of trust on a single family (one to four units) residential
real estate property.
"S&P" means Standard & Poor's Ratings Group.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Depository" means initially The Depository Trust Company or
a successor entity acting as securities depository.
"Sell Order" means an Order by an Existing Holder that indicates the
number of outstanding shares, if any, of AMPS, that such Existing Holder offers
to sell without regard to the Applicable Rate for the next succeeding Dividend
Period.
"Series B Preferred Shares" means the shares of Series B ___%
Cumulative Preferred Stock of the Company offered hereby.
"Series B Preferred Stock" means the Series B ____% Convertible
Preferred Stock of the Company.
"Servicer" means Webster Bank in its role as servicer under the
Servicing Agreement.
"Servicing Agreement" means the master service agreement, dated March
17, 1997, between Webster Bank and the Company, pursuant to which Webster Bank
services the Mortgage Loans owned by the Company.
"Settlement Procedures" means the settlement procedures attached to
this Prospectus as Appendix A.
"Short-term Money Market Instruments" means the following instruments
if, on the date of purchase or other acquisition by the Company, they have
remaining terms to maturity of not more than 90 days:
(i) zero coupon U.S. Treasury Securities and obligations fully
guaranteed as to principal and interest by the full faith and credit
of the United States which are not zero coupon securities;
(ii) demand or time deposits in, certificates of deposit of, or
bankers' acceptances issued by, any depository institution or trust
company incorporated under the laws of the United States or any state
thereof, if (A) the deposits of the Company in such depository
institution or trust company are fully insured by the FDIC or (B) the
commercial paper, if any, and the long-term unsecured debt obligations
(other than such obligations whose ratings are based on the credit of
a person or entity other than such institution or trust company) of
such depository institution or trust company (or, in the case of the
principal depository institution in a holding company system, the
commercial paper, if any, and the long-term unsecured debt obligations
of such holding company) at the time of the Company's investment
therein, or contractual commitment providing for such investment, have
a credit rating from S&P or Fitch of, at least A-1+ or F-1+,
respectively, in the case of commercial paper, and a rating from S&P
or Fitch of AAA, in the case of debt obligations:
(iii) repurchase obligations with respect to U.S. Treasury
Securities or any security described in clause (i) above entered into
with any depository institution, trust company or securities dealer
(acting as principal) which meets the credit rating requirements for
long-term unsecured debt obligation described in clause (ii) above,
and Next Business Day Repurchase Agreements with respect to Eligible
Assets with institutions that have outstanding commercial paper rated
at least A-1+ by S&P or F-1+ by Fitch provided that under the terms of
a repurchase agreement, the Company will purchase securities at a
specified price and agree to resell such securities to the seller on a
specified date; and
(iv) commercial paper of an institution rated at least A-1+ by
S&P or F-1+ by Fitch at the time of the Company's investment therein,
or contractual commitment providing for such investment.
"Submission Deadline" means 1:00 p.m., New York City time, on each
Auction Date, or such other time on the Auction Date specified by the Auction
Agent.
"Submitted Bid" means a Bid that is submitted or deemed submitted to
the Auction Agent by a Broker-Dealer.
"Submitted Hold Order" means a Hold Order that is submitted or deemed
submitted to the Auction Agent by a Broker-Dealer.
"Submitted Hold Orders" means a Hold Order submitted to the Auction
Agent by a Broker-Dealer.
"Submitted Order" means an Order that is submitted or deemed submitted
to the Auction Agent by a Broker-Dealer.
84
"Submitted Sell Order" means a Sell Order that is submitted or deemed
submitted to the Auction Agent by a Broker-Dealer.
"Sufficient Clearing Bids" with respect to an Auction will have been
made if the number of outstanding shares that are the subject of Submitted Bids
by Potential Holders (including Existing Holders who have submitted Bid Orders
to purchase additional shares) with rates not higher than the Maximum Applicable
Rate equals or exceeds the number of outstanding shares that are the subject of
Submitted Sell Orders (including the number of outstanding shares subject to
Submitted Bids by Existing Holders specifying rates higher than the Maximum
Applicable Rate) unless such excess or such equality exists because the number
of shares subject to such Submitted Sell Orders and Submitted Bids are each zero
because all of the outstanding shares are the subject of Submitted Hold Orders.
"Tax Event" means the receipt by the Company of an opinion of a
nationally recognized law firm experienced in such matters to the effect that,
as a result of (i) any amendment to, clarification of, or change (including any
announced prospective change) in, the laws or treaties (or any regulations
thereunder) of the United States or 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 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 Preferred Shares, there is a
substantial 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, (b) the
Company is, or will be, subject to more than a de minimis amount of other taxes,
duties or other governmental charges or (c) dividends received or to be received
by Webster Bank from the Company are not, or will not be, fully deductible by
Webster Bank for Connecticut corporation business tax purposes.
"Treasury Regulations" means the income tax regulations promulgated
under the Code.
"UBTI" means unrelated business taxable income.
"Underwriters" means Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Keefe, Bruyette & Woods, Inc., the Underwriters to whom the Company will
sell the Preferred Shares pursuant to the terms of the Underwriting Agreement.
"Underwriting Agreement" means the underwriting agreement between the
Company and the Underwriters.
"U.S. Stockholder" means a holder of Preferred Shares who (for United
States federal income tax purposes) (i) is a citizen or resident of the United
States, (ii) is a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof, (iii) is an estate the income of which is subject to United States
federal income taxation regardless of its source or (iv) is a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have the authority to
control all substantial decisions of the trust.
"U.S. Treasury Securities" means any obligations issued by the United
States and backed by the full faith and credit of the United States which are
not zero coupon securities, but which may include such zero coupon securities
having a maturity of less than one year that are sold at a discount from their
face amount.
85
"Webster" means Webster Financial Corporation, a Delaware corporation
and the parent of Webster Bank.
"Webster Bank" means Webster Bank, a federally chartered and federally
insured savings bank, and the parent of the Company.
"Winning Bid Rate" means the lowest rate specified in the Submitted
Bids of Existing Holders and Potential Holders at an Auction.
86
INDEX TO FINANCIAL STATEMENTS
OF
WEBSTER PREFERRED CAPITAL CORPORATION
Independent Auditors' Report............................................. F-2
Statement of Condition at June 30, 1997.................................. F-3
Statement of Income for the period from March 17, 1997 (Date of
Inception) to June 30, 1997............................................ F-4
Statement of Shareholder's Equity for the period from March 17, 1997
(Date of Inception) to June 30, 1997................................... F-5
Statement of Cash Flows for the period from March 17, 1997 (Date of
Inception) to June 30, 1997............................................ F-6
Notes to Financial Statements............................................ F-7
F-1
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholder
Webster Preferred Capital Corporation
Waterbury, Connecticut:
We have audited the accompanying statement of condition of Webster Preferred
Capital Corporation (a wholly-owned subsidiary of Webster Bank) as of June 30,
1997, and the related statements of income, shareholder's equity, and cash flows
for the period March 17, 1997 (date of inception) to June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Webster Preferred Capital
Corporation as of June 30, 1997, and the results of its operations and its cash
flows for the period March 17, 1997 (date of inception) to June 30, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
October 15, 1997
Hartford, Connecticut
F-2
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF CONDITION
(In Thousands, Except Share Data)
At June 30, 1997
----------------
Assets:
Cash ........................................................................ $ 13,415
Residential Mortgage Loans................................................... 615,063
Allowance for Loan Losses.................................................... (1,544)
-----------
Total Loans, Net (Note 2)................................................. 613,519
Accrued Interest Receivable.................................................. 3,751
Prepaid Expenses and Other Assets (Note 3)................................... 107
-----------
Total Assets.............................................................. $ 630,792
===========
Liabilities and Shareholders' Equity:
Accrued Dividend Payable..................................................... 58
Accrued Expenses and Other Liabilities....................................... 216
-----------
Total Liabilities......................................................... 274
Shareholder's Equity: (Note 4)
10% Cumulative Non-Convertible Preferred Stock ($1,000 stated value)
Authorized - 2,000 shares
Issued - 2,000 shares at June 30, 1997.................................... 2,000
Common Stock, par value $.01 per share:
Authorized - 1,000 shares
Issued - 100 shares at June 30, 1997...................................... 1
Paid in Capital.............................................................. 615,021
Retained Earnings............................................................ 13,496
-----------
Total Shareholder's Equity.............................................. 630,518
-----------
Total Liabilities and Shareholder's Equity.............................. $ 630,792
===========
See accompanying notes to financial statements.
F-3
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
For the Period from March 17, 1997
(Date of Inception) to June 30, 1997
(In Thousands, Except Share Data)
For the Period
from March 17, 1997
(Date of Inception)
to June 30, 1997
-------------------
Interest Income:
Loans ............................................................... $ 13,750
Less: Service Fees (Note 5)........................................... (137)
-----------
Total Net Interest Income....................................... 13,613
Provision for Loan Losses.............................................. -
-----------
Net Interest Income After Provision
for Loan Losses...................................................... 13,613
-----------
Noninterest Expenses:
Advisory Fee Expense (Note 6).......................................... 52
Amortization of Start-up Costs......................................... 6
Other Noninterest Expenses............................................. 1
-----------
Total Noninterest Expenses...................................... 59
Income Before Taxes.................................................... 13,554
Income Taxes (Note 7).................................................. -
-----------
Net Income............................................................. 13,554
Preferred Stock Dividends.............................................. 58
-----------
Net Income Available to Common Shareholder............................. $ 13,496
===========
Net Income per Common Share............................................ $ 134,960
===========
See accompanying notes to financial statements.
F-4
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM MARCH 17, 1997
(DATE OF INCEPTION) TO JUNE 30, 1997
(In Thousands)
Preferred Common Paid In Retained
Stock Stock Capital Earnings Total
--------- ------ ------- -------- -----
Balance, March 17, 1997................... $ - $ - $ - $ - $ -
Contribution by Webster Bank.............. 2,000 1 615,021 - 617,022
Net Income................................ - - - 13,554 13,554
Dividends Paid or
Accrued-Preferred Stock................ - - - (58) (58)
-------- ------- ----------- -------- -----------
$ 2,000 $ 1 $ 615,021 $ 13,496 $ 630,518
======== ======= =========== ========= ============
See accompanying notes to financial statements.
F-5
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
(In Thousands)
For the Period
from March 17, 1997
(Date of Inception)
to June 30, 1997
-----------------
Operating Activities:
Net Income.......................................................... $13,554
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Increase in Accrued Interest Receivable........................... (3,751)
Increase in Accrued Liabilities................................... 216
Increase in Prepaid Expenses and Other Assets..................... (107)
Amortization of Deferred Fees..................................... 24
Amortization of Mortgage Premium.................................. 125
-------
Net Cash Provided by Operating Activities.............................. 10,061
-------
Investing Activities:
Purchase of Loans................................................... (25,028)
Principal Repayments of Loans....................................... 28,381
-------
Net Cash Provided by Investing Activities....................... 3,353
-------
Financing Activities:
Investment from Webster Bank........................................... 1
-------
Net Cash Provided by Financing Activities....................... 1
-------
Increase in Cash and Cash Equivalents.................................. 13,415
Cash and Cash Equivalents at Beginning of Period....................... -
-------
Cash and Cash Equivalents at End of Period............................. $13,415
=======
Supplemental Disclosures:
Income Taxes paid................................................... $ -
Interest Paid....................................................... -
Supplemental Schedule of Financing Activity:
Contribution of Mortgage Assets, net by Webster Bank
In Exchange for 100 Shares of Common Stock and 2,000
Shares of 10% Cumulative Non-Convertible Preferred
Stock............................................................... 617,022
See accompanying notes to financial statements.
F-6
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
A) BUSINESS
Webster Preferred Capital Corporation ("the Company") is a Connecticut
corporation incorporated in March 1997 and a wholly owned subsidiary of Webster
Bank. The Company was organized to provide a cost-effective means of raising
funds, including equity capital, on a consolidated basis for Webster Financial
Corporation. The Company will acquire, hold and manage real estate mortgage
assets ("Mortgage Assets"). In March 1997, Webster Bank contributed
approximately $617.0 million of Mortgage Assets, net as part of the formation of
the Company. As of June 30, 1997, all of the Mortgage Assets owned by the
Company are whole loans secured by first mortgages or deeds of trusts on single
family (one to four unit) residential real estate properties ("Residential
Mortgage Loans"). Although the Company may acquire and hold a variety of
Mortgage Assets, its present intention is to acquire only Residential Mortgage
Loans and certain mortgage-backed securities. As of June 30, 1997, approximately
35.4% of the Company's Residential Mortgage Loans are fixed rate loans and
approximately 64.6% are adjustable rate loans.
The Company intends to elect to be treated as a Real Estate Investment Trust
("REIT") under the Internal Revenue Code of 1986, as amended (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, par value $0.01 per
share, are owned by Webster Bank, which is a federally chartered and federally
insured savings bank. Webster Bank has indicated to the Company that, for as
long as any Preferred Shares are outstanding, Webster Bank intends to maintain
direct ownership of 100% of the outstanding Common Stock of the Company.
B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheets
and revenues and expenses for the periods presented. The actual results of the
Company could differ from those estimates. Material estimates that are
susceptible to near term changes include the determination of the allowance for
loan losses.
C) ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is established based upon a review of the loan
portfolio, loss experience, specific problem loans, current and anticipated
economic conditions and other pertinent factors which, in management's judgment,
deserve current recognition in estimating loan losses.
Management believes that the allowance for loan losses is adequate. While
management believes it uses the best available information to recognize losses
on loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process of Webster Bank, periodically may review the
Company's allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance for loan losses based on judgments
different from those of management.
D) FORECLOSED PROPERTIES
Foreclosed properties consist of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. Foreclosed
properties are reported at the lower of fair value less estimated selling
expenses or cost with an allowance for losses to provide for declines in value.
Operating expenses are charged to current period earnings and gains and losses
upon disposition are reflected in the statements of income when realized.
F-7
E) LOANS
Loans are stated at the principal amounts outstanding. Interest on loans is
credited to income as earned based on the rate applied to principal amounts
outstanding. Interest which is more than 90 days past due is not accrued. Such
interest ultimately collected, if any, is credited to income in the period
received.
F) STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers cash on hand
and in banks to be cash equivalents.
NOTE 2: RESIDENTIAL MORTGAGE LOANS
- --------------------------------------------------------------------------------
At June 30, 1997
------------------------------------
Carrying
Amount Fair Value
-------- ----------
(In Thousands)
Residential Mortgage Loans:
Fixed Rate 15 yr Loans................................... $ 51,676 $ 51,615
Fixed Rate 20 yr Loans................................... 1,632 1,636
Fixed Rate 25 yr Loans................................... 835 828
Fixed Rate 30 yr Loans................................... 162,884 162,045
----------- -----------
Total Fixed Rate Loans............................... 217,027 216,124
----------- -----------
Variable Rate 15 yr Loans................................ 4,823 4,882
Variable Rate 20 yr Loans................................ 2,977 3,022
Variable Rate 25 yr Loans................................ 7,975 8,129
Variable Rate 30 yr Loans................................ 380,825 385,938
----------- -----------
Total Variable Rate Loans............................ 396,600 401,971
----------- -----------
Total Residential Mortgage Loans......................... $ 613,627 $ 618,095
===========
Premiums and Deferred Fees on Loans, Net................. 1,436
Less Allowance for Loan Losses........................... (1,544)
-----------
Residential Mortgage Loans, Net...................... $ 613,519
===========
In March 1997, Webster Bank contributed $617.0 million of Mortgage Assets, net
as part of the formation of the Company. The $617.0 million consisted of $215.8
million of fixed rate loans, and $401.3 million of variable rate loans, net of
premiums, deferred fees on loans and an allowance for loan losses.
The following table sets forth certain information regarding the Company's loans
accounted for on a nonacccrual basis at June 30, 1997. The Company had no real
estate acquired through foreclosure at that date.
JUNE 30, 1997
-------------
(In Thousands)
Residential Mortgage Loans accounted for on a
nonaccrual basis.................................................... $ 633
Real estate acquired through foreclosure............................... -
-------------
Total............................................................. $ 633
=============
The Company's Residential Mortgage Loans are exempt from the disclosure
provisions of Statement of Financial Accounting Standard ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," as
F-8
amended by SFAS No. 118, whereby large groups of smaller balance loans, are
collectively evaluated for impairment.
SUMMARY OF ESTIMATED FAIR VALUES
In estimating the fair value of residential real estate loans, loans with
similar financial characteristics were classified by type. The types were fixed
rate loans with a maturity of 30, 25, 20, and 15 years and variable rate loans
with a maturity of at 30, 25, 20 and 15 years. The fair value of each category
is calculated by discounting scheduled cash flows through estimated maturity
using market discount rates. Adjustments were made to reflect credit and rate
risks inherent in the portfolio.
The calculation of fair value estimates of financial instruments is dependent
upon certain subjective assumptions and involves significant uncertainties,
resulting in variability in estimates with changes in assumptions. Potential
taxes and other expenses that would be incurred in an actual sale or settlement
are not reflected in the amounts disclosed. Fair value estimates are not
intended to reflect the liquidation value of the financial instruments.
NOTE 3: PREPAID EXPENSES
- --------------------------------------------------------------------------------
Prepaid expenses represent organization costs which were incurred during the
formation of the company. These expenses are being amortized over periods of 3
and 5 years.
NOTE 4: SHAREHOLDER'S EQUITY
- --------------------------------------------------------------------------------
The Company has authorized 1,000 shares of $.01 par value common stock and 2,000
shares of $.01 par value ($1,000 stated value) 10% cumulative nonconvertible
preferred stock. On March 17, 1997, Webster Bank contributed $617.0 million of
Mortgage Assets, net in exchange for 100 shares of common stock and 2,000 shares
of preferred stock.
NOTE 5: SERVICING
- --------------------------------------------------------------------------------
The mortgage loans owned by the Company are serviced by Webster Bank pursuant to
the terms of the Servicing Agreement. Webster Bank in its role as Servicer under
the terms of the Servicing Agreement is herein referred to as the "Servicer".
The Servicer will receive fees at an annual rate of (i) 8 basis points for fixed
rate loan servicing and collection, (ii) 8 basis points for variable rate loan
servicing and collection and (iii) 5 basis points for all other services to be
provided, in each case based on the daily outstanding balances of all the
Company's loans for which the Servicer is responsible.
The Servicer will be entitled to retain any late payment charges, prepayment
fees, penalties and assumption fees collected in connection with Mortgage Loans
serviced by it. The Servicer 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 serviced by it.
At the end of each calendar month, the Servicer is required to invoice the
Company for all fees and charges due to the Servicer.
NOTE 6: ADVISORY SERVICES
- --------------------------------------------------------------------------------
Advisory services are being provided pursuant to an Advisory Service Agreement
with Webster Bank to provide the Company with the following types of services:
administer the day-to-day operations, monitor the credit quality of the real
estate mortgage assets, advise with respect to the acquisition, management,
financing, and disposition of real estate mortgage assets and provide the
necessary executive administration, human resource, accounting and control,
technical support, record keeping, copying, telephone, mailing and distribution.
The agreement also provides for investment and funds management services.
F-9
Operating expenses outside the scope of the Advisory Services Agreement will be
paid directly by Webster Preferred Capital Corporation. Such expenses would
include but not be limited to the following: fees for third party consultants,
attorneys, external auditors and any other expenses incurred that are not
directly related to the Advisory Services Agreement.
NOTE 7: INCOME TAXES
- --------------------------------------------------------------------------------
The Company intends to elect to be treated as a REIT under Sections 856 through
860 of the Code, commencing with its taxable year ending December 31, 1997, and
believes that its organization and proposed method of operation will enable it
to meet the requirements for qualification as a REIT. 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. Therefore, no provision for federal income taxes has been included in the
accompanying financial statements.
To maintain REIT status, an entity must meet a number of organizational and
operational requirements, including a requirement that it currently distributes
to stockholders at least 95% of its "REIT taxable income" (not including capital
gains and certain items of non-cash income). If the Company fails to qualify as
a REIT in any taxable year, it will be subject to federal income tax at regular
corporate rates.
F-10
APPENDIX A
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix A constitutes a
representation by Webster Preferred Capital Corporation (the "Company") that in
each Auction each party referred to herein will actually perform the procedures
described herein to be performed by such party. Capitalized terms used herein
shall have the respective meanings specified in the forepart of this Prospectus
or Appendix B hereto, as the case may be.
(a) On each Auction Date, by 3:00 p.m. the Auction Agent shall notify
by telephone the Broker-Dealers that participated in the Auction held on
such Auction Date and submitted an Order on behalf of any Existing Holder
or Potential Holder of:
(i) the Applicable Dividend Rate fixed for the next succeeding
Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the
determination of the Applicable Dividend Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted a Bid or a Sell Order on behalf of an Existing Holder, the
number of shares, if any, of AMPS then outstanding to be held or sold
by such Existing Holder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted
a Bid on behalf of a Potential Holder, the number of shares, if any,
of AMPS to be purchased by such Potential Holder;
(v) if the aggregate number of shares of AMPS to be sold by all
Existing Holders on whose behalf such Broker-Dealer submitted a Bid or
a Sell Order exceeds the aggregate number of shares of AMPS to be
purchased by all Potential Holders on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's
Broker-Dealers (and the name of the Agent Member, if any, of each such
Buyer's Broker-Dealer) acting for one or more purchasers of such
excess number of shares of AMPS and the number of such shares to be
purchased from one or more Existing Holders on whose behalf such
Broker-Dealer acted by one or more Potential Holders on whose behalf
each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of shares of AMPS to be purchased by
all Potential Holders on whose behalf such Broker-Dealer submitted a
Bid exceeds the aggregate number of shares of AMPS to be sold by all
Existing Holders on whose behalf such Broker-Dealer submitted a Bid or
a Sell Order, the name or names of one or more Seller's Broker-Dealers
(and the name of the Agent Member, if any, of each such Seller's
Broker-Dealer) acting for one or more sellers of such excess number of
shares of AMPS and the number of such shares to be sold to one or more
Potential Holders on whose behalf such Broker-Dealer acted by one or
more Existing Holders on whose behalf of such Seller's Broker-Dealers
acted; and
(vii) the Auction Date of the next succeeding Auction.
A-1
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Holder or Potential Holder shall:
(i) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, instruct each Potential Holder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
to instruct such Potential Holder's Agent Member to pay to such
Broker-Dealer (or its Agent Member) through the Securities Depository
the amount necessary to purchase the number of shares of AMPS to be
purchased pursuant to such Bid against receipt of such shares and
advise such Potential Holder of the Applicable Dividend Rate for the
next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Holder on whose behalf such
Broker-Dealer submitted a Sell Order that was accepted, in whole or in
part, or a Bid that was rejected, in whole or in part, to instruct
such Existing Holder's Agent Member to deliver to such Broker-Dealer
(or its Agent Member) through the Securities Depository the number of
shares of AMPS to be sold pursuant to such Order against payment
therefor and advise any such Existing Holder that will continue to
hold shares of AMPS of the Applicable Dividend Rate for the next
succeeding Dividend Period;
(iii) advise each Existing Holder on whose behalf such
Broker-Dealer submitted a Hold Order of the Applicable Dividend Rate
for the next succeeding Dividend Period;
(iv) advise each Existing Holder on whose behalf such
Broker-Dealer submitted an Order of the Auction Date of the next
succeeding Auction; and
(v) advise each Potential Holder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
of the Auction Date for the next succeeding Auction;
(c) On the basis of the information provided to it pursuant to (a)
above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf of
a Potential Holder or an Existing Holder shall, in such manner and at such
time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of AMPS
received by it pursuant to (b)(ii) above among the Potential Holders, if
any, on whose behalf such Broker-Dealer submitted Bids, the Existing
Holders, if any, on whose behalf such Broker-Dealer submitted Bids that
were rejected and the Existing Holders, if any, on whose behalf such
Broker-Dealer submitted Sell Orders, and any Broker-Dealer or
Broker-Dealers identified to it by the Auction Agent pursuant to (a)(v) or
(a)(vi) above.
(d) On each Auction Date,
(i) each Potential Holder and Existing Holder shall instruct its
Agent Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of
the Securities Depository shall instruct its Agent Member to (A) pay
through the Securities Depository to the Agent Member of the Existing
Holder delivering shares to such Broker-Dealer pursuant to (b)(ii)
above the amount necessary to purchase such shares against receipt of
such shares, and (B) deliver such shares through the Securities
Depository to a Buyer's Broker-Dealer (or its Agent Member) identified
to such Seller's Broker-Dealer pursuant to (a)(v) above against
payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of
the Securities Depository shall instruct its Agent Member to (A) pay
through the Securities Depository to a
A-2
Seller's Broker-Dealer (or its Agent Member) identified pursuant to
(a)(vi) above the amount necessary to purchase the shares to be
purchased pursuant to (b)(i) above against receipt of such shares, and
(B) deliver such shares through the Securities Depository to the Agent
Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date,
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions
described under (b)(i) or (ii) above, and the Securities Depository
shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall
instruct the Securities Depository to execute the transactions
described in (d)(ii) above, and the Securities Depository shall
execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall
instruct the Securities Depository to execute the transactions
described in (d)(iii) above, and the Securities Depository shall
execute such transactions.
A-3
*******
APPENDIX B
AUCTION PROCEDURES
The following procedures will be set forth in paragraph _ of the Amended
and Restated Certificate of Incorporation establishing the AMPS. The terms not
defined below (and referred to as defined in paragraphs _ through _ of the
Amended and Restated Certificate of Incorporation) are defined in the forepart
of this Prospectus, except that the term "Corporation" means the Company.
Nothing contained in this Appendix B constitutes a representation by the Company
that in each Auction each party referred to herein will actually perform the
procedures described herein to be performed by such party.
(a) Certain Definitions. Capitalized terms not defined in this
paragraph _ shall have the respective meanings specified in paragraphs _
through _ above of this Amended and Restated Certificate of Incorporation.
As used in this paragraph _, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "Affiliate" means any Person known to the Auction Agent to be
controlled by, in control of or under common control with the
Corporation.
(ii) "Agent Member" means the member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(iii) "AMPS" means the shares of Series A Auction Market
Cumulative Preferred Stock of the Corporation as are subject to an
Auction on any Auction Date.
(iv) "Auction" means the periodic implementation of the
procedures set forth in this paragraph _.
(v) "Auction Date" means, with respect to the shares of AMPS, the
Business Day next preceding the first day of each Dividend Period for
the shares of AMPS which commences after the Initial Dividend Period.
(vi) "Available AMPS" has the meaning specified in paragraph
_(d)(i)(A).
(vii) "Bid" has the meaning specified in paragraph _(b)(i).
(viii) "Bidder" has the meaning specified in paragraph _(b)(i).
(ix) "Bid Excess" has the meaning specified in paragraph
_(c)(iv)(B)(1).
(x) "Broker-Dealer" means any broker-dealer or other entity
permitted by law to perform the functions required of a Broker-Dealer
in this paragraph _ that has been selected by the Corporation to
perform such functions and has entered into a Broker-Dealer Agreement
with the Auction Agent that remains effective.
(xi) "Broker-Dealer Agreement" means an agreement between the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer
agrees to follow the procedures specified in this paragraph _.
B-1
(xii) "Existing Holder," when used with respect to shares of
AMPS, means a Person who is listed as the beneficial owner of such
shares of AMPS in the records of the Auction Agent.
(xiii) "Hold Order" has the meaning specified in paragraph
_(b)(i).
(xiv) "Order" has the meaning specified in paragraph _(b)(i).
(xv) "Outstanding", for purposes of this paragraph _, means, as
of any date, the shares of AMPS theretofore issued by the Corporation
except, without duplication, (A) any shares of AMPS theretofore
cancelled or delivered to the Auction Agent for cancellation, or
redeemed by the Corporation, or as to which Notice of Redemption shall
have been given by the Corporation, (B) any shares of AMPS as to which
the Corporation or any Affiliate thereof shall be an Existing Holder
and (C) any shares of AMPS represented by any certificate in lieu of
which a new certificate has been executed and delivered by the
Corporation.
(xvi) "Person" means and includes an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture
or other entity or a government or any agency or political subdivision
thereof.
(xvii) "Potential Holder," when used with respect to shares of
AMPS, means any Person, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing
Holder, additional shares of AMPS).
(xviii) "Securities Depository" means The Depository Trust
Company and its successors and assigns or any other securities
depository selected by the Corporation which agrees to follow the
procedures required to be followed by such securities depository in
connection with shares of AMPS.
(xix) "Sell Excess" has the meaning specified in paragraph
_(c)(iv)(C)(1).
(xx) "Sell Order" has the meaning specified in paragraph
_(b)(i).
(xxi) "Submission Deadline" means 1:00 p.m., New York City time,
on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as
specified by the Auction Agent from time to time.
(xxii) "Submitted Bid" has the meaning specified in paragraph
_(d)(i).
(xxiii) "Submitted Hold Order" has the meaning specified in
paragraph _(d)(i).
(xxiv) "Submitted Order" has the meaning specified in paragraph
_(d)(i).
(xxv) "Submitted Sell Order" has the meaning specified in
paragraph _(d)(i).
(xxvi) "Sufficient Clearing Bids" has the meaning specified in
paragraph _(d)(i)(B).
B-2
(xxvii) "Winning Bid Rate" has the meaning specified in
paragraph _(d)(i)(C).
(b) Orders by Existing Holders and Potential Holders.
(i) Prior to the Submission Deadline on each Auction Date for the
shares of AMPS:
(A) each Existing Holder may submit to a Broker-Dealer
information as to:
(1) the number of Outstanding shares, if any, of AMPS
held by such Existing Holder which such Existing Holder
desires to continue to hold without regard to the Applicable
Dividend Rate for the next succeeding Dividend Period;
(2) the number of Outstanding shares, if any, of AMPS
that such Existing Holder desires to sell, provided that the
Applicable Dividend Rate for the next succeeding Dividend
Period shall be less than the rate per annum specified by
such Existing Holder; and/or
(3) the number of Outstanding shares, if any, of AMPS
held by such Existing Holder which such Existing Holder
offers to sell without regard to the Applicable Dividend
Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Holders
that shall be maintained by such Broker-Dealer in good faith
for the purpose of conducting a competitive Auction, shall
contact Potential Holders, including Persons that are not
Existing Holders, on such list to determine the number of
shares, if any, of AMPS that each such Potential Holder
offers to purchase, provided that the Applicable Dividend
Rate for the next succeeding Dividend Period shall not be
less than the rate per annum specified by such Potential
Holder.
For the purposes hereof, the communication to a Broker-Dealer of the
information referred to in this paragraph _(b)(i) is hereinafter referred to as
an "Order" and each Existing Holder and each potential Holder placing an Order
is hereinafter referred to as a "Bidder"; an Order containing the information
referred to in clause (A)(1) of this paragraph _(b)(i) is hereinafter referred
to as a "Hold Order", an Order containing the information referred to in clause
(A)(2) or (B) of this paragraph __ (b)(i) in hereinafter referred to as a "Bid";
and an Order containing the information referred to in clause (A)(3) of this
paragraph _(b)(i) is hereinafter referred to as a "Sell Order."
(ii)(A) A Bid by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding shares of AMPS specified in
such Bid if the Applicable Dividend Rate determined on such
Auction Date shall be less than the rate per annum specified in
such Bid;
(2) the number of Outstanding shares of AMPS specified in
such Bid or a lesser number of Outstanding shares of AMPS to be
determined as set forth in paragraph _(e)(i)(D) if the Applicable
Dividend Rate determined on such Auction Date shall be equal to
the rate per annum specified in such Bid; or
B-3
(3) the number of Outstanding shares of AMPS specified in
such Bid or a lesser number of Outstanding shares of AMPS to be
determined as set forth in paragraph _(e)(ii)(C) if the rate per
annum specified in such Bid shall be higher than the Maximum
Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding shares of AMPS specified in
such Sell Order; or
(2) the number of Outstanding shares of AMPS specified in
such Sell Order or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph _(e)(ii)(C) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an
irrevocable offer to purchase:
(1) the number of Outstanding shares of AMPS specified in
such Bid if the Applicable Dividend Rate determined on such
Auction Date shall be higher than the rate per annum specified in
such Bid; or
(2) the number of Outstanding shares of AMPS specified in
such Bid or a lesser number of Outstanding shares of AMPS to be
determined as set forth in paragraph _(e)(i)(E) if the Applicable
Dividend Rate determined on such Auction Date shall be equal to
the rate per annum specified in such Bid.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders obtained
by such Broker-Dealer and shall specify with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of shares of AMPS that are the subject
of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of shares, if any, of AMPS subject to any
Hold Order placed by such Existing Holder;
(2) the number of shares, if any, of AMPS subject to any Bid
placed by such Existing Holder and the rate specified in such
Bid; and
(3) the number of shares, if any, of AMPS subject to any
Sell Order placed by such Existing Holder; and
(D) to the extent that such Bidder is a Potential Holder, the
rate and the number of shares of AMPS specified in such Potential
Holder's Bid.
B-4
(ii) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round such rate
up to the next higher one thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of
AMPS held by an Existing Holder is not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order to
have been submitted on behalf of such Existing Holder covering such number
of Outstanding shares.
(iv) If one or more Orders covering in the aggregate more than the
number of Outstanding shares of AMPS held by an Existing Holder are
submitted to the Auction Agent, such Orders shall be considered valid as
follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder
shall be considered valid up to and including the number of
Outstanding shares of AMPS held by Existing Holder; provided that if
more than one Hold Order is submitted on behalf of such Existing
Holder and the number of shares of AMPS subject to such Hold Orders
exceeds the number of Outstanding shares of AMPS held by such Existing
Holder, the number of shares of AMPS subject to such Hold Orders shall
be reduced pro rata so that such Hold Orders shall cover the number of
Outstanding shares of AMPS held by such Existing Holder;
(B)(1) any Bid shall be considered valid up to and including the
excess (the "Bid Excess") of the number of Outstanding shares of AMPS
held by such Existing Holder over the number of shares of AMPS subject
to Hold Orders referred to in paragraph _(c)(iv)(A); and
(2) subject to clause (1) above, if more than one Bid with
the same rate is submitted on behalf of such Existing Holder and
the number of Outstanding shares of AMPS subject to such Bids is
greater than the Bid Excess, the number of shares of AMPS subject
to such Bids shall be reduced pro rata so that such Bids shall
cover the number of shares of AMPS equal to the Bid Excess; and
(3) subject to clause (1) above, if more than one Bid with
different rates is submitted on behalf of such Existing Holder,
such Bids shall be considered valid in the ascending order of
their respective rates up to and including the Bid Excess, and in
any such event the number, if any, of such Outstanding shares
subject to Bids not valid under this clause (B) shall be treated
as the subject of a Bid by a Potential Holder; and
(C)(1) any Sell Order shall be considered valid up to and
including the excess (the "Sell Excess") of the number of Outstanding
shares of AMPS held by the Existing Holder over the number of shares
of AMPS subject to Hold Orders referred to in paragraph _(c)(iv)(A)
and Bids referred to in paragraph _(c)(iv)(B); and
(2) subject to clause (1) above, if more than one Sell Order
is submitted on behalf of such Existing Holder and the number of
Outstanding shares of AMPS subject to such Sell Orders is greater
than the Sell Excess, the number of shares of AMPS subject to
such Sell Orders shall be reduced pro
B-5
rata so that such Sell Orders shall cover the number of shares of
AMPS equal to the Sell Excess.
(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate and number
of shares of AMPS therein specified.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each such Order as submitted or deemed submitted by
a Broker-Dealer being hereinafter referred to individually as a "Submitted
Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may
be, or as a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of AMPS
over the number of Outstanding Shares of AMPS that are the subject of
Submitted Hold Orders (such excess being hereinafter referred to as
the "Available AMPS");
(B) from the Submitted Orders whether the number of Outstanding
shares of AMPS that are the subject of Submitted Bids by Potential
Holders specifying one or more rates equal to or lower than the
Maximum Applicable Rate exceeds or is equal to the sum of:
(x) the number of Outstanding shares of AMPS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates higher than
the Maximum Applicable Rate; and
(y) the number of Outstanding shares of AMPS that are subject to
Submitted Sell Orders
(if such excess or such equality exists (other than because the number of shares
of AMPS in clauses (x) and (y) is each zero because all of the Outstanding
shares of AMPS are the subject of Submitted Hold Orders), such Submitted Bids by
Potential Holders being hereinafter referred to collectively as "Sufficient
Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate specified
in the Submitted Bids (the "Winning Bid Rate") which if the Auction
Agent accepted:
(1) each Submitted Bid from Existing Holders specifying such
lowest rate and all other Submitted Bids from Existing Holders
specifying rates lower than such lowest rate, and
(2) each Submitted Bid from Potential Holders specifying
such lowest rate and all other Submitted Bids from Potential
Holders specifying rates lower than such lowest rate,
would result in such Existing Holders continuing to hold an aggregate number of
Outstanding shares of AMPS that, when added to the number of Outstanding shares
of AMPS to be purchased by such Potential Holders, would equal not less than the
Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to paragraph _(d)(i), with respect to shares of AMPS, the Auction
Agent shall advise the
B-6
Corporation of the Maximum Applicable Rate and, based on such
determinations, the Applicable Dividend Rate for the next succeeding
Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable
Dividend Rate for the next succeeding Dividend Period shall be
equal to the Winning Bid Rate so determined;
(B) if Sufficient Clearing Bids do not exist (other than
because all of the Outstanding shares of AMPS are the subject of
Submitted Hold Orders), then the Applicable Dividend Rate for
such next succeeding Dividend Period will be the Maximum
Applicable Rate on the Auction Date; or
(C) if all of the Outstanding shares of AMPS are the subject
of Submitted Hold Orders, that the Applicable Rate for the next
succeeding Dividend Period shall be equal to the All Hold Rate
in effect on such Auction Date.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Existing Holders shall continue to hold shares of AMPS
that are the subject of Submitted Hold Orders and, based on the determinations
made pursuant to paragraph _(d)(i), the Submitted Bids and the Submitted Sell
Orders shall be accepted or rejected and the Auction Agent shall take such other
action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph _(e)(iii), Submitted Bids and Submitted Sell Orders
shall be accepted or rejected in the following order of priority and all
other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be
accepted and the Submitted Bid of each of the Existing Holders
specifying any rate that is higher than the Winning Bid Rate shall be
accepted, thus requiring each such Existing Holder to sell the shares
of AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying
any rate that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
shares of AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying
any rate that is lower than the Winning Bid Rate shall be accepted,
thus requiring such Potential Holder to purchase the shares of AMPS
that are the subject of such Submitted Bid;
(D) the Submitted Bid of each of the Existing Holders specifying
a rate that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the shares of
AMPS that are the subject of such Submitted Bid, unless the number of
Outstanding shares of AMPS subject to all such Submitted Bids shall be
greater than the number of shares of AMPS ("remaining shares"); equal
to the excess of the Available AMPS over the number of shares of AMPS
subject to Submitted Bids described in paragraphs _(e)(i)(B) and
_(e)(i)(C), in which event the Submitted Bids of each such Existing
Holder shall be accepted, and each such Existing Holder shall be
required to sell shares of AMPS, but only in an amount equal to the
difference between (1) the number of Outstanding shares of AMPS then
held by such Existing Holder subject to such Submitted Bid and (2) the
number of shares of AMPS obtained by multiplying (x) the number of
remaining shares by (y) a fraction, the numerator of which shall be
the number of Outstanding shares of AMPS held by such
B-7
Existing Holder subject to such Submitted Bid and the denominator of
which shall be the sum of the number of Outstanding shares of AMPS
subject to such Submitted Bids made by all such Existing Holders that
specified a rate equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying
a rate that is equal to the Winning Bid Rate shall be accepted, but
only in an amount equal to the number of shares of AMPS obtained by
multiplying the difference between the Available AMPS and the number
of shares of AMPS subject to Submitted Bids described in paragraphs
_(e)(i)(B), _(e)(i)(C) and _(e)(i)(D) by a fraction, the numerator of
which shall be the number of Outstanding shares of AMPS subject to
such Submitted Bid and the denominator of which shall be the sum of
the number of Outstanding shares of AMPS subject to such Submitted
Bids made by all such Potential Holders that specified rates equal to
the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the Outstanding shares of AMPS are subject to Submitted Hold
Orders), subject to the provisions of paragraphs _(e)(iii) and _(e)(iv),
Submitted Orders shall be accepted or rejected as follows in the following
order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
shares of AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any
rate that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the
shares of AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bid of each Existing Holder specifying any rate
that is higher than the Maximum Applicable Rate and the Submitted Sell
Order of each Existing Holder shall be accepted, thus requiring such
Existing Holder to continue to hold the shares of AMPS that are the
subject of such Submitted Bid or Submitted Sell Order, in both cases
only in an amount equal to the difference between (1) the number of
Outstanding shares of AMPS then held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and (2) the number of
shares of AMPS obtained by multiplying (x) the difference between the
Available AMPS and the aggregate number of shares of AMPS subject to
Submitted Bids described in paragraphs _(e)(ii)(A) and _(e)(ii)(B) by
(y) a fraction, the numerator of which shall be the number of
Outstanding shares of AMPS held by such Existing Holder subject to
such Submitted Bid or Submitted Sell Order and the denominator of
which shall be the number of Outstanding shares of AMPS subject to all
such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph _(e)(i)
or _(e)(ii), any Existing Holder would be entitled or required to sell, or
any Potential Holder would be entitled or required to purchase, on any
Auction Date a fraction of a share of AMPS (or, if the issuance of
fractional shares shall have been authorized, a fraction of a share of AMPS
in a fractional denomination not authorized), the Auction Agent shall, in
such manner as, in its sole discretion, it shall determine, round up or
down the number of shares of AMPS to be purchased or sold by any Existing
Holder or Potential Holder on such Auction Date so that the number of
shares
B-8
purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be whole shares of AMPS (or fractional shares of AMPS of
authorized denomination).
(iv) If all of the Outstanding shares of AMPS are the subject of
Submitted Hold Orders, all Submitted Bids shall be rejected.
(v) Based on the results of each Auction, the Auction Agent shall
determine the aggregate number of shares of AMPS to be purchased and the
aggregate number of shares of AMPS to be sold by Potential Holders and
Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell
Orders, and, with respect to each Broker-Dealer, to the extent that such
aggregate number of shares to be purchased and such aggregate number of
shares to be sold differ, determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one
or more sellers such Broker-Dealer shall receive, as the case may be,
shares of AMPS.
(f) Miscellaneous. An Existing Holder (A) may sell, transfer or otherwise
dispose of shares of AMPS only pursuant to a Bid or Sell Order in accordance
with the procedures described in this paragraph _ to or through a Broker-Dealer,
provided that in the case of all transfers other than pursuant to Auctions such
Existing Holder, its Broker-Dealer or its Agent Member advises the Auction Agent
of such transfer, and (B) shall have the beneficial ownership of the shares of
AMPS held by it maintained in book-entry form by the Securities Depository in
the account of its Agent Member, which in turn will maintain records of such
Existing Holder's beneficial ownership. The Corporation and its Affiliates shall
not submit any Order in any Auction. The Auction Agent shall have no duty or
liability for monitoring or enforcing the requirements of this provision.
(g) Headings of Subdivisions. The headings of the various subdivisions of
this paragraph _ are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
B-9
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS WEBSTER PREFERRED CAPITAL CORPORATION
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES 2,600 SHARES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SERIES A
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY AUCTION MARKET CUMULATIVE
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. PREFERRED STOCK
(LIQUIDATION PREFERENCE $25,000.00 PER SHARE)
TABLE OF CONTENTS
PAGE
Prospectus Summary................................... 1
Risk Factors.........................................13
The Company..........................................18
Webster Bank.........................................19
Use of Proceeds......................................20 1,000,000 SHARES
Capitalization.......................................20
Business and Strategy................................22 SERIES B
Selected Financial Data .............................34
Management's Discussion and Analysis of Financial
Condition and Results of Operations................34
Management...........................................35 ___% CUMULATIVE
Benefits to Webster Bank.............................37
Required Asset Coverage..............................38 PREFERRED STOCK
Required Dividend Coverage...........................41
Description of Preferred Shares......................41 (LIQUIDATION PREFERENCE $10.00 PER SHARE)
Description of Capital Stock of the Company..........59
Federal Income Tax Considerations....................61
ERISA Considerations.................................72
Information Regarding Webster and Webster Bank.......74
Underwriting.........................................75
Experts..............................................77
Ratings..............................................77
Legal Matters........................................77
Available Information................................77
Glossary.............................................78
Index to Financial Statements........................F-1 -----------------
Appendices...........................................A-1 PROSPECTUS
-----------------
UNTIL __________ __ 1998 (THE 25TH DAY AFTER THE OFFERING DATE, ALL DEALERS MERRILL LYNCH & CO.
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT KEEFE, BRUYETTE & WOODS, INC.
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 ________ ___, 1997
SUBSCRIPTIONS.
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC Registration Fee $23,182.00
Nasdaq application fee $ *
Printing and Engraving Expenses $ *
Legal Fees and Expenses $ *
Accounting Fees and Expenses $ *
Blue Sky Fees and Expenses $ *
Miscellaneous $ *
Total $ *
- ---------------------------
* To be completed by amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
See response to Item 33 below.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
On March 17, 1997, the Company issued 100 shares of Common Stock, par
value $0.01 per share, and 2,000 shares of preferred stock, par value $0.01 per
share, to Webster Bank in consideration for the contribution to the Company by
Webster Bank of approximately $617.0 million of Mortgage Assets, net as part of
the formation of the Company. Prior to the consummation of the Offering, the
Company will redeem the 2,000 shares of preferred stock previously issued to
Webster Bank in consideration for the issuance of an additional 100 shares of
Common Stock to Webster Bank. In _______ 1997, the Company and its sole
stockholder approved an amended and restated certificate of incorporation that
authorized the issuance of the AMPS and Series B Preferred Shares with
respective par values of $25,000.00 and $10.00 per share. The shares of Common
Stock and preferred stock issued to Webster Bank in March 1997 were issued in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 33-770 to 33-778 of the Connecticut Corporation Law set forth
certain circumstances under which directors, officers, employees and agents may
be indemnified against liability that they may incur in their capacity as such.
Sections 33-770 to 33-778 of the Connecticut Corporation Law, which are filed as
Exhibit 99.2 to this Registration Statement, are incorporated herein by
reference.
The Certificate of Incorporation of the Company provides that, to the
fullest extent that the Connecticut Corporation Law as from time to time in
effect permits the limitation or elimination of the liability of directors, no
director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of duty as a director.
The Certificate of Incorporation empowers the Company to indemnify any
director, officer, employee or agent of the Company or any other person who is
serving at the Company's request in such capacity with another
II-1
corporation, partnership, joint venture, trust or other enterprise to the
fullest extent permitted under the Connecticut Corporation Law as from time to
time in effect, and any such indemnification may continue as to any person who
has ceased to be a director, officer, employee or agent and may inure to the
benefit of the heirs, executors and administrators of such a person.
The By-Laws also empower the Company by action of the Board of
Directors to purchase and maintain insurance in such amounts as the Board of
Directors deems appropriate on behalf of any director, officer, employee or
agent of the Company, or any individual who, while a director, officer, employee
or agent of the Company, serves at the Company's request as a director, officer,
partner, trustee, employee or agent of another domestic or foreign corporation,
partnership, joint venture, trust, employee benefit plan or other entity,
against liability asserted against or incurred by such individual in that
capacity or arising out of such individual's status as a director, officer,
employee or agent, whether or not the Company would have the power to indemnify
or advance expenses to any such individual against the same liability under
Sections 33-770 to 33-778, inclusive, of the Connecticut Corporation Law.
The foregoing indemnity and insurance provisions have the effect of
reducing directors' and officers' exposure to personal liability for actions
taken in connection with their respective positions.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company 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 Securities
Act and will be governed by the final adjudication of such issue.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not Applicable. See "Use of Proceeds" in Prospectus.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Webster Preferred Capital Corporation
attached to the Prospectus:
Independent Auditors' Report
Statement of Condition at June 30, 1997
Statement of Income for the period from March 17, 1997 (Date of
Inception) to June 30, 1997
Statement of Shareholder's Equity for the period from March 17, 1997
(Date of Inception) to June 30, 1997
Statement of Cash Flows for the period from March 17, 1997 (Date of
Inception) to June 30, 1997
Notes to Financial Statements
II-2
(b) Exhibits
EXHIBIT DESCRIPTION
- ------- -----------
NUMBER
- ------
1 Form of Underwriting Agreement between the Company and the
Underwriters.*
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company. *
3.2 By-Laws of the Company. *
4.1 Specimen of certificate representing Series A Auction Market
Cumulative Preferred Stock. *
4.2 Specimen of certificate representing Series B __ % Cumulative
Preferred Stock. *
5 Opinion of Hogan & Hartson L.L.P. as to the validity of the
securities registered hereunder, including the consent of that
firm.*
8 Form of opinion of Hogan & Hartson L.L.P. as to certain tax
matters, including the consent of that firm.*
10.1 Mortgage Assignment Agreement, made as of March 17, 1997, by and
between Webster Bank and the Company.
10.2 Master Service Agreement, dated March 17, 1997, between Webster
Bank and the Company.
10.3 Advisory Service Agreement, made as of October ___, 1997, by and
between Webster Bank and the Company. *
10.4 Form of Auction Agent Agreement between the Company and the
Auction Agent.*
21 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5
and Exhibit 8).*
27 Financial Data Schedule.
99.1 Form of Broker-Dealer Agreement between the Auction Agent and the
Broker-Dealer.*
99.2 Sections 33-770 to 33-778 of the Connecticut Business Corporation
Act. *
- ----------------
* To be filed by amendment.
ITEM 37. UNDERTAKINGS.
(a) The Company 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.
(b) The undertaking concerning indemnification is included as part of the
response to Item 34.
(c) The Company hereby undertakes that:
II-3
(1) For purposes of determining any liability under the Securities 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 Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
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.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Waterbury, State of Connecticut, on October 23,
1997.
WEBSTER PREFERRED CAPITAL CORPORATION
(Issuer)
/s/ John V. Brennan
By: -------------------------------
John V. Brennan
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below appoints John V. Brennan or Peter J. Swiatek, jointly and
severally, each in his own capacity, his true and lawful attorneys-in-fact, with
full power of substitution for him and in his name, place and stead, in any and
all capacities to sign any 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, hereby ratifying and
confirming all that said attorney-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on October 23, 1997.
SIGNATURE TITLE
/s/ John V. Brennan
- ----------------------------------- President and a Director
John V. Brennan (Principal Executive Officer)
/s/ Peter J. Swiatek
- ----------------------------------- Vice President and Treasurer
Peter J. Swiatek (Principal Financial Officer
and Principal Accounting Officer)
/s/ Ross M. Strickland
- ----------------------------------- Director
Ross M. Strickland
/s/ Harriet Munrett Wolfe
- ----------------------------------- Director
Harriet Munrett Wolfe
II-5
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
NUMBER
- ------
1 Form of Underwriting Agreement between the Company and the
Underwriters.*
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company. *
3.2 By-Laws of the Company. *
4.1 Specimen of certificate representing Series A Auction Market
Cumulative Preferred Stock. *
4.2 Specimen of certificate representing Series B __ % Cumulative
Preferred Stock. *
5 Opinion of Hogan & Hartson L.L.P. as to the validity of the
securities registered hereunder, including the consent of that
firm.*
8 Form of opinion of Hogan & Hartson L.L.P. as to certain tax
matters, including the consent of that firm.*
10.1 Mortgage Assignment Agreement, made as of March 17, 1997, by and
between Webster Bank and the Company.
10.2 Master Service Agreement, dated March 17, 1997, between Webster
Bank and the Company.
10.3 Advisory Service Agreement, made as of October ___, 1997, by and
between Webster Bank and the Company. *
10.4 Form of Auction Agent Agreement between the Company and the
Auction Agent.*
21 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5
and Exhibit 8).*
27 Financial Data Schedule.
99.1 Form of Broker-Dealer Agreement between the Auction Agent and the
Broker-Dealer.*
99.2 Sections 33-770 to 33-778 of the Connecticut Business Corporation
Act. *
- ------------------------
* To be filed by amendment.