UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO______
Commission file number 001-11981
MUNICIPAL MORTGAGE & EQUITY, LLC
(Exact name of Registrant as Specified in Its Charter)
Delaware 52-1449733
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
218 North Charles Street, Suite 500
Baltimore, Maryland 21201
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (443) 263-2900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Shares New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [x] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [X] NO [ ].
The aggregate market value of the Company's Common Shares held by
non-affiliates of the registrant as of March 20, 2003 (computed by reference to
the closing price of such shares on the New York Stock Exchange) was
$635,300,301. The Company had 28,826,284 Common Shares outstanding as of March
20, 2003.
Portions of the Company's Proxy Statement with respect to the 2003 Annual
Meeting of Shareholders to be filed subsequent to the date hereof are
incorporated by reference Items 10, 11, 12 and 13 of Part III.
Forward-Looking Information
Assumptions relating to various portions of the Company's Annual Report on Form
10-K involve judgments with respect to, among other things, future economic
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking information included herein are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
such forward-looking information will prove to be accurate. In light of the
significant uncertainties inherent in forward-looking information, the inclusion
of such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
MUNICIPAL MORTGAGE & EQUITY, LLC
INDEX TO FORM 10-K
Part I
Item 1. Description of Business .....................................Page 4
Item 2. Properties ..................................................Page 7
Item 3. Legal Proceedings ...........................................Page 8
Item 4. Submission of Matters to a Vote of Security Holders .........Page 8
Part II
Item 5. Market for Registrant's Equity Securities and Related
Stockholder Matters .........................................Page 9
Item 6. Selected Financial Data .....................................Page 11
Item 7. Management's Discussion and Analysis of Financial Condition..Page 12
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ..Page 35
Item 8. Financial Statements and Supplementary Data .................Page 38
Item 9. Changes in and Disagreements on Accounting and Financial ....Page 38
Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant ..........Page 39
Item 11. Executive Compensation ......................................Page 39
Item 12. Security Ownership of Certain Beneficial Owners and .........Page 39
Management
Item 13. Certain Relationships and Related Transactions ..............Page 39
Item 14. Controls and Procedures .....................................Page 39
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports ........Page 39
on Form 8-K
Part I
Item 1. Description of Business.
General Development of Business.
Municipal Mortgage & Equity, LLC ("MuniMae" and, together with its
subsidiaries, the "Company") provides debt and equity financing to developers of
multifamily housing. The Company invests in tax-exempt bonds, or interests in
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. Interest income derived from the
majority of these bond investments is exempt income for federal income tax
purposes. Multifamily housing developments, as well as the rents paid by the
tenants, secure these investments.
The Company is also a mortgage banker. Mortgage banking activities include
the origination, investment in and servicing of investments in multifamily
housing, both for its own account and on behalf of third parties. These
investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in real estate operating partnerships
and tax-exempt bonds, or interests in bonds, secured by student housing or
assisted living developments, and (2) tax-exempt community development bonds,
typically secured by special taxes imposed on single-family or other community
development districts or by assessments imposed on the residents or other lot
owners of those developments.
MuniMae is a Delaware limited liability company and is the successor to the
business of SCA Tax Exempt Fund Limited Partnership. As a limited liability
company, the Company combines the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Since MuniMae is classified as a partnership for federal income tax
purposes, no recognition of income taxes is made at the corporate level (except
for income earned through certain subsidiaries of the Company organized as
corporations). Instead, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return.
Prior to March 2002, the Company had four types of shares: preferred
shares, preferred capital distribution shares ("preferred cd shares"), term
growth shares and common shares. The Company's preferred shares, preferred cd
shares, term growth shares and common shares differed principally with respect
to allocation of income and cash distributions, as provided by the terms of the
Company's Operating Agreement. The Company was required to distribute to the
holders of preferred shares and preferred cd shares cash flow attributable to
such shares as defined in the Company's Operating Agreement. The Company was
required to distribute 2.0% of the net cash flow to the holders of term growth
shares. The balance of the Company's cash flow was available for distribution to
common shares.
The Company's Operating Agreement provided that the preferred shares and
the preferred cd shares were subject to partial redemption when any bond
attributable to the shares was sold, or beginning in the year 2000, when any
bond attributable to the shares reached par value based on an appraisal. The
Company was required to redeem the preferred shares and preferred cd shares
within six months of the occurrence of a redemption event.
A portion of the bonds attributable to preferred shares and preferred cd
shares reached par value in December 2000. As a result, in June 2001, the
Company redeemed a portion of the preferred shares and preferred cd shares. The
remaining bonds attributable to the preferred shares and preferred cd shares
were either paid off, sold and/or reached par value from September 2001 through
January 2002. As a result, in March 2002, the Company redeemed the remaining
preferred shares and preferred cd shares. The Operating Agreement required that
the term growth shares be redeemed after the last preferred share is redeemed.
As a result, the term growth shares, which had no residual value, were also
redeemed in 2002. Subsequent to March 2002, the common shares are the Company's
only outstanding shares.
Subsidiaries
MuniMae TE Bond Subsidiary, LLC
-------------------------------
In 1999, the Company placed a substantial portion of its tax-exempt bonds
and residual interests in bond securitizations in an indirect subsidiary of the
Company, MuniMae TE Bond Subsidiary, LLC ("TE Bond Sub"). TE Bond Sub sold
Series A, Series B and Series A-1 and Series B-1 Cumulative Preferred Shares
(collectively, the "TE Bond Sub Preferred Shares") to institutional investors in
May 1999, June 2000 and October 2001, respectively. The TE Bond Sub Preferred
Shares have a senior claim to the income derived from the investments owned by
TE Bond Sub. Any income from TE Bond Sub available after payment of the
cumulative distributions of the TE Bond Sub Preferred Shares is allocated to the
Company, which holds all of the common equity interests. As a result, the assets
of TE Bond Sub and its subsidiaries, while indirectly controlled by MuniMae and
thus included in the consolidated financial statements of the Company, are
legally owned by TE Bond Sub and are not available to the creditors of the
Company. The Company's common equity interest in TE Bond Sub was $271.4 million
and $268.4 million at December 31, 2002 and 2001, respectively. The common
equity interest in TE Bond Sub held by MuniMae is subject to the claims of the
creditors of MuniMae and in certain circumstances could be foreclosed.
The Series A and A-1 Preferred Shares bear interest at 6.875% and 6.30% per
annum, respectively, or, if lower, the aggregate net income of the issuing
company, TE Bond Sub. The Series A and A-1 Preferred Shares have a senior claim
to the income derived from the investments owned by TE Bond Sub. The Series A-1
Shares are equal in priority of payment to the Series A Preferred Shares. The
Series B and B-1 Preferred Shares bear interest at 7.75% and 6.80% per annum,
respectively, or, if lower, the aggregate net income of the issuing company, TE
Bond Sub, after payment of distributions to the Series A and Series A-1
Preferred Shares. The Series B-1 Preferred Shares are equal in priority of
payment to the Series B Preferred Shares. Any income from TE Bond Sub available
after payment of the cumulative distributions of the TE Bond Sub Preferred
Shares is allocated to the Company. Cash distributions on the TE Bond Sub
Preferred Shares are paid quarterly on each January 31, April 30, July 31 and
October 31. The TE Bond Sub Preferred Shares are subject to remarketing on
specified dates. On the remarketing date, the remarketing agent will seek to
remarket the shares at the lowest distribution rate that would result in a
resale of the TE Bond Sub Preferred Shares at a price equal to par plus all
accrued but unpaid distributions. The TE Bond Sub Preferred Shares will be
subject to mandatory tender on specified dates and on all subsequent remarketing
dates at a price equal to par plus all accrued but unpaid distributions.
MFH
---
The Company engages in a variety of mortgage banking activities. These
activities include the origination, investment in and servicing of investments
in multifamily housing, both for its own account and on behalf of third parties.
The mortgage banking activities are generally conducted through Midland
Financial Holdings, Inc. (together with its subsidiaries, "MFH"), a wholly owned
subsidiary of the Company.
The Company acquired MFH in 1999 for a total purchase price of $45.0
million ($46.0 million including acquisition costs). Of this amount, the Company
paid approximately $23.0 million in cash and $12.0 million in common shares at
the closing of the transaction and $10.0 million in additional common shares
paid in three equal installments, the last of which was paid in December 2002.
The acquisition has been accounted for as a purchase. The cost of the
acquisition was allocated on the basis of the estimated fair value of the net
assets acquired, which totaled $7.7 million.
Investment in Tax-Exempt Bonds and Residual Interests in Bond Securitizations
The Company originates investments in tax-exempt bonds and taxable loans
primarily to the affordable multifamily housing industry. Tax-exempt bonds are
issued by state and local government authorities to finance multifamily housing
developments or other real estate financings. The bonds are typically secured by
nonrecourse mortgage loans on the underlying properties. The Company's sources
of capital to fund these lending activities include proceeds from equity
offerings, securitizations, and draws on lines of credit. The Company earns
interest income from its investment in tax-exempt bonds and taxable loans. The
Company also earns origination and construction administration fees from
originating the bonds and servicing the bonds during the construction period.
The Company may also structure transactions whereby a third party buys
bonds directly from a seller and the Company subsequently purchases a residual
interest in securitization trusts holding the tax-exempt bonds.
The Company's strategy includes the maintenance and expansion of a
diversified portfolio of tax-exempt bonds and related investments, thereby
increasing the interest income earned by the Company. The Company's business
plan includes originating $375 million to $450 million in tax-exempt bonds in
2003, of which the Company would expect to retain up to $175 to $200 million in
its investment portfolio. For the years ended December 31, 2002 and 2001, the
Company structured $300.1 million and $468.4 million in tax-exempt bond
transactions, respectively.
Mortgage Banking Activities
The Company engages in a variety of mortgage banking activities. These
activities include the origination, investment in and servicing of investments
in multifamily housing, both for its own account and on behalf of third parties.
The Company originates construction, permanent and supplemental loans to
the multifamily housing industry. Supplemental loans include:
o bridge and pre-development loans, which are project-specific
short-term loans for qualifying pre-development and development
expenditures and are structured to be repaid from the construction or
permanent financing of the same project. Bridge loans fund timing gaps
between project expenditures and later installments of equity
financing or permanent debt, and pre-development loans fund early
stage project expenditures and are repaid by the first installments of
equity or construction financing; and
o term loans, lines of credit and workout loans, which have expenditure
purposes and sources of repayment that may or may not be limited to a
single project. Term loans, lines of credit and workout loans are
repaid with general operating cash flow of the development or other
capital sources of the borrower, including cash flows from other
investments.
Collateral for the supplemental loans can take many forms, including a
mortgage against land or other real estate, assignment of syndication proceeds,
assignment and pledges of developer fees, assignment and pledge of cash flows
from properties, corporate guarantees and personal guarantees.
The Company's sources of capital to fund these construction, permanent and
supplemental lending activities include: (1) warehousing facilities and
short-term lines of credit with commercial banks; (2) debt and equity financings
either through the Midland Affordable Housing Group Trust (the "Group Trust") or
the Midland Multifamily Equity REIT ("MMER"); and (3) working capital. The
Company earns income from the difference between the interest charged on its
loans and the interest due under its notes payable and other funding sources.
The Company also earns (1) origination fees, (2) loan servicing fees, or in the
case of construction loans, construction administration fees and (3) guarantee
and other fees in cases where the Company provides credit support to the
obligations of a borrower to a third party.
MFH is a Federal National Mortgage Association ("Fannie Mae") Delegated
Underwriter and Servicer ("DUS") and a Federal Housing Administration ("FHA")
approved mortgagee. A majority of the construction loans originated by the
Company are underwritten and structured so as to be eligible for sale to Fannie
Mae or FHA as or shortly after the loans are converted to permanent loans. The
Company usually retains the mortgage servicing rights on the permanent loans
which its sells to third parties.
The Company grows its mortgage banking business by increasing levels of
fees generated by affordable housing tax credit equity syndications, loan
servicing and origination services. The Company's business plan includes
originating $875 to $975 million in construction, permanent and supplemental
loans in 2003.
Equity Investments in Partnerships
The Company makes equity investments for its own account in
income-producing real estate operating partnerships. To date, the Company's
equity investments have been made in partnership with CAPREIT, Inc. and its
affiliates ("CAPREIT"). In 2001, the Company made a $3.4 million equity
investment in 12 property partnerships (the "CAPREIT Tera" investment). As a
result of the Company's CAPREIT Tera investment, the Company owns a 35% general
partnership interest in the 12 property partnerships.
In 2002, MuniMae invested $70.7 million to acquire a 35% general
partnership interest in 20 CAPREIT property partnerships and four related swap
partnerships (the "CAPREIT 3M" investment). The Company's liquidation percentage
in CAPREIT 3M is 30%.
Syndication of Low-Income Housing Tax Credits
The Company acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. The Company earns syndication fees
on the placement of these interests with investors, including Fannie Mae and a
number of corporate investors. In conjunction with the sale of these partnership
interests, the Company may provide performance guarantees on the underlying
properties owned by the partnerships or guarantees to the fund investors. The
Company also earns asset management fees for managing the low-income housing tax
credits funds syndicated.
The Company syndicated equity investments totaling $152.4 million, $114.7
million and $97.6 million, for the years ended December 31, 2002, 2001 and 2000,
respectively. Although the Company has endeavored to expand this product line
over the past several years, it estimates that its 2002 syndication volume
represents only 2-3% of approximately $6 billion of newly issued low-income
housing tax credit financings. Subject to pricing and market conditions,
including the potential impact of changes in tax law proposed by the Bush
administration in January 2003 (see "Management Discussion and Analysis of
Financial Condition and Results of Operations - Factors that Could Affect Future
Results" ), the Company plans to continue to expand this line of business in
order to gain the benefits of economies of scale in marketing, underwriting and
asset management. The Company's 2003 business plan includes syndicating $225
million of low-income housing tax credits.
Competition
In seeking out attractive multifamily and other housing-related investment
opportunities, the Company competes directly against a large number of lenders -
including banks, finance companies and other financial intermediaries - and
providers of related services such as portfolio loan servicing. Certain of the
Company's competitors, including GMAC, Prudential Mortgage Finance and Lend
Lease Mortgage Capital Co., have substantially greater financial and operational
resources than the Company. While the Company has historically been able to
compete effectively against such competitors on the basis of its service,
longstanding relationships with developers and a broad array of product
offerings, many of our competitors benefit from substantial economies of scale
in their business and have other competitive advantages.
In addition, in seeking permanent financing for their developments, the
Company's customers generally evaluate a wide array of taxable and tax-exempt
financing options. While tax-exempt financings offer specific attractions for
developers, they can be more complicated than taxable financings and can involve
ongoing restrictions on the owner's use of the property. As a result, the
relative attractiveness of tax-exempt permanent financing may increase or
decrease over time based on the availability and cost of taxable financing. In
particular, the differential in interest expense between tax-exempt and taxable
financing alternatives tends to be lower in a low interest rate environment,
which tends to make the Company's tax-exempt multifamily housing bond financings
less attractive to developers than taxable alternatives. Consequently, the
Company's primary (i.e., newly originated) tax-exempt bond originations have
declined to $17.3 million in the year ended December 31, 2002, from $18.2
million and $114.7 million in 2001 and 2000, respectively. In response, the
Company has taken advantage of opportunities in the secondary market for these
bonds and has begun to invest in other types of housing-related tax-exempt bond
financings. While our strategic emphasis on tax-exempt financing will - absent a
major change in the tax code - continue, the Company will continue to expand and
diversify its other lines of business.
Business Segments
In October 1999, as a result of the MFH acquisition, the Company
restructured its operations into two business segments: (1) an operating segment
consisting of MFH and other subsidiaries that primarily generate taxable fee
income by providing loan servicing, loan origination and other related services
and (2) an investing segment consisting primarily of subsidiaries holding
investments producing tax-exempt interest income. The revenues associated with
the investing segment consist primarily of interest earned on tax-exempt bonds,
residual interests in bond securitizations, taxable loans and derivative
financial instruments. The revenues associated with the operating segment
consist primarily of loan servicing fees, loan origination fees, syndication
fees, asset management fees, and advisory fees. Segment results include all
direct revenues and expenses of each segment and allocations of indirect
expenses based on specific methodologies. The Company's reportable segments are
strategic business units that primarily generate different income streams and
are managed separately.
For the years ended December 31, 2002, 2001 and 2000, the Company's
revenues, net income and identifiable assets have been distributed among the
following segments:
For the year ended December 31,
---------------------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------- ----------------------------------------------------
(000s) Investing Operating Adjustments (1) Total Investing Operating Adjustments (1) Total
----------- ---------- --------------- ---------- ---------- ----------- ---------------- ----------
Total income $ 65,329 $ 71,394 $ (3,095) $ 133,628 $ 57,914 $ 69,948 $ (820) $ 127,042
Net income 23,402 8,642 (3,095) 28,949 19,312 7,390 (820) 25,882
Identifiable assets 1,004,716 548,202 - 1,552,918 791,199 498,077 - 1,289,276
(1) Represents origination fees on purchased investments that are deferred and
amortized into income over the life of the investment.
Prior to October 1999, all of the Company's operations were attributable to
the investing segment.
Employees
As of March 26, 2003, the Company had 228 employees. The Company is not a
party to any collective bargaining agreement.
Item 2. Properties.
The Company leases office space as follows:
Baltimore, Maryland. In November 1998, the Company assumed the office lease
---------------------
agreement from an affiliate for office space. The office space contains 11,124
square feet and the lease expires in September 2003. In June 2001, the Company
entered into a lease agreement for additional space in the same office building.
The new office space contains 2,939 square feet and the lease expires in
September 2003. In December 2002, the Company entered into a lease agreement for
additional space in the same office building. The new office space contains
1,998 square feet and expires in June 2003.
Clearwater, Florida. In January 2001, the Company negotiated a new lease in
---------------------
Clearwater. The office space contains 36,004 square feet and the lease expires
in December 2005.
The Company also leases office space for its regional offices in Dallas,
Texas, San Francisco, California, Chicago, Illinois, Detroit, Michigan and
Washington D.C. The Company believes its facilities are suitable for its
requirements and are adequate for its current and contemplated future
operations.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's shareholders during the
three months ended December 31, 2002.
Part II
Item 5. Market for Registrant's Equity Securities and Related Stockholder
Matters
The following table sets forth the high and low sale prices per share of
the common shares as reported by the NYSE for each calendar quarter in 2002 and
2001 and the distributions declared with respect to such shares allocable to
such period.
Distributions
High Low Declared
----------- ----------- ---------------
2002:
First Quarter $ 26.40 $ 22.95 $ 0.4350
Second Quarter 26.16 24.03 0.4375
Third Quarter 26.35 22.11 0.4400
Fourth Quarter 25.69 21.75 0.4425
2001:
First Quarter $ 24.33 $ 21.75 $ 0.4250
Second Quarter 23.50 22.00 0.4275
Third Quarter 25.25 25.80 0.4300
Fourth Quarter 25.80 23.11 0.4325
As of March 20, 2003, there were approximaty 2,871 holders of record of
common shares.
The Company's current policy is to distribute to holders of common shares
at least 80% of cash available for distribution to common shares. The Company
pays distributions to its holders of common shares quarterly in February, May,
August and November.
The preferred shares and the preferred capital distribution shares
("preferred cd shares") that were redeemed in March 2002 are not listed for
trading on any national securities exchange and there was no established public
trading market for those shares.
Description of Shares
Prior to March 2002, the Company had four types of shares: preferred
shares, preferred cd shares, term growth shares and common shares. The Company's
preferred shares, preferred cd shares, term growth shares and common shares
differed principally with respect to allocation of income and cash
distributions, as provided by the terms of the Company's Operating Agreement.
The Company was required to distribute to the holders of preferred shares and
preferred cd shares cash flow attributable to such shares as defined in the
Company's Operating Agreement. The Company was required to distribute 2.0% of
the net cash flow to the holders of term growth shares. The balance of the
Company's cash flow was available for distribution to common shares.
The Company's Operating Agreement provided that the preferred shares and
the preferred cd shares were subject to partial redemption when any bond
attributable to the shares was sold, or beginning in the year 2000, when any
bond attributable to the shares reached par value based on an appraisal. The
Company was required to redeem the preferred shares and preferred cd shares
within six months of the occurrence of a redemption event.
A portion of the bonds attributable to preferred shares and preferred cd
shares reached par value in December 2000. As a result, in June 2001, the
Company redeemed a portion of the preferred and preferred cd shares. The
remaining bonds attributable to the preferred shares and preferred cd shares
were either paid off, sold and/or reached par value from September 2001 through
January 2002. As a result, in March 2002, the Company redeemed the remaining
preferred shares and preferred cd shares. The Operating Agreement also required
that the term growth shares be redeemed after the last preferred share is
redeemed. As a result, the term growth shares, which had no residual value, were
also redeemed in 2002.
Subsequent to March 2002, the common shares are the Company's only
outstanding shares. The common shares have no par value. At December 31, 2002,
29,083,599 common shares were authorized. The holders of the common shares are
entitled to distributions as and when declared by the Board of Directors out of
funds legally available therefor. As of December 31, 2002, it is the Company's
policy to distribute to the holders of the common shares at least 80% of cash
available for distribution.
The common shares are not redeemable (except pursuant to certain
anti-takeover provisions) and upon liquidation share ratably in any assets
remaining after payment of creditors. The holders of the common shares voting as
a single class have the right to elect the directors of the Company and have
voting rights with respect to a merger or consolidation of the Company in which
it is not the surviving entity or the sale of substantially all of its assets,
the removal of a director, the dissolution of the Company, and certain
anti-takeover provisions. Each common share entitles its holder to cast one vote
on each matter presented for shareholder vote.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information regarding the Company's securities
authorized for issuance under the Company's equity compensation plans as of
December 31, 2002.
Equity Compensation Plan Information
-----------------------------------------------------------------------------
Number of securities Weighted average
to be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available
Plan category warrants and rights (1) warrants and rights for future issuance
------------------------------------------- ------------------------ ----------------------- ----------------------
Equity compensation plans approved
by security holders:
Non-employee directors' share plans 136,000 $ 21.28 (2) 71,047
Employee share incentive plans 967,846 (3) $ 18.19 (2) 967,485
Equity compensation plans not approved
by security holders - - -
------------------------ ----------------------
Total 1,103,846 1,038,532
======================== ======================
(1) Does not include any restricted shares which have already vested, as such
shares are already reflected in the Company's common shares outstanding.
(2) Represents the weighted average exercise price of the outstanding stock
options.
(3) Includes 171,407 of unvested deferred shares and 796,439 of stock options.
ITEM 6. SELECTED FINANCIAL DATA
As of and for the year ended December 31, 2002 2001 2000 1999 1998
----------- ----------- ----------- ------------ ------------
INCOME STATEMENT DATA (000s):
Interest income $ 96,073 $ 89,864 $ 79,225 $ 43,826 $ 29,134
Fee income 28,997 28,956 19,308 7,040 1,581
Net gain on sales 8,558 8,222 2,319 2,680 4,743
----------- ----------- ----------- ------------ ------------
Total income 133,628 127,042 100,852 53,546 35,458
Interest expense 36,596 30,696 31,152 6,665 -
Operating expenses 34,658 33,409 24,249 9,815 6,002
Amortization expense 1,314 2,509 1,887 297 -
----------- ----------- ----------- ------------ ------------
Total expenses 72,568 66,614 57,288 16,777 6,002
Net holding losses on derivatives (14,863) (5,572) - - -
Impairments and valuation allowances related to investments (730) (3,256) (1,508) (1,120) (2,049)
Losses from equity investments in partnerships (3,057) (1,279) - - -
Income tax expense (1,484) (1,383) (2,006) (703) -
Income allocable to preferred shareholders in a subsidiary company (11,977) (10,779) (8,475) (3,433) -
Cumulative effect on prior years of change in
accounting for derivative financial instruments (1) - (12,277) - - -
----------- ----------- ----------- ------------ ------------
Net income $ 28,949 $ 25,882 $ 31,575 $ 31,513 $ 27,407
=========== =========== =========== ============ ============
Net income available to common shareholders $ 28,796 $ 23,847 $ 29,076 $ 28,796 $ 24,728
=========== =========== =========== ============ ============
NET INCOME PER SHARE:
Common shares (diluted earnings per share) $ 1.13 $ 1.09 $ 1.62 $ 1.67 $ 1.60
BALANCE SHEET DATA (000s):
Investment in tax-exempt bonds, net $ 770,345 $ 616,460 $ 500,190 $ 391,544 $ 298,424
Loans receivable, net 461,448 440,031 349,291 286,489 17,246
Investments in partnerships 99,966 5,393 - - -
Residual interests in bond securitizations 11,039 13,295 - - -
Investment in derivative financial instruments 18,762 2,912 - - -
Total assets 1,552,918 1,289,276 987,882 801,746 364,161
Notes payable 450,924 420,063 329,159 261,956 -
Short-term debt 219,945 78,560 41,290 - -
Long-term debt 147,357 134,881 70,899 67,000 -
Investment in derivative financial instruments 49,359 18,646 - - -
Preferred shareholders' equity in a subsidiary company 160,465 160,645 137,664 80,159 -
Total shareholders' equity 487,064 436,708 364,783 363,611 355,452
CASH DISTRIBUTIONS PER SHARE:
Common shares:
For the year ended December 31, paid quarterly (2) $ 1.7550 $ 1.7150 $ 1.6725 $ 1.6075 $ 1.5250
(1) The Company has several types of financial instruments that meet the
definition of a derivative financial instrument under FAS 133, including
interest rate swaps, put option contracts and total return swaps. FAS 133
requires the Company's investment in derivative financial instruments be
recorded on the balance sheet with changes in the fair value of these
instruments recorded in current earnings. As of January 1, 2001, the
Company's put option contracts were recorded on the balance sheet with a
fair value of zero and the Company's interest rate swaps and total return
swaps were reclassified to trading securities and those with a negative
balance were reflected as liabilties on the balance sheet. The cumulative
effect of adopting FAS 133 was a decrease to net income of approximately
$12.3 million as of January 1, 2001.
(2) This amount represents total dividends declared for the year.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Business
Municipal Mortgage & Equity, LLC ("MuniMae" or, together with its
subsidiaries, the "Company") provides debt and equity financing to developers of
multifamily housing. The Company invests in tax-exempt bonds, or interests in
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. Interest income derived from the
majority of these bond investments is exempt income for federal income tax
purposes. Multifamily housing developments, as well as the rents paid by the
tenants, secure these investments.
The Company is also a mortgage banker. Mortgage banking activities include
the origination, investment in and servicing of investments in multifamily
housing, both for its own account and on behalf of third parties. These
investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in real estate operating partnerships
and tax-exempt bonds, or interests in bonds, secured by student housing or
assisted living developments, and (2) tax-exempt community development bonds,
typically secured by special taxes imposed on single-family or other community
development districts or by assessments imposed on the residents or other lot
owners of those developments.
Although the Company has diversified into more fee-oriented lines of
business generating taxable income over the past several years, tax-exempt
interest income on bonds and residual interests in bond securitizations remains
the single largest component of the Company's revenue, as shown in the table
below:
For the year ended December 31,
-------------------------------------------------------------------------
(000s) 2002 % 2001 % 2000 %
----------- ---------- ----------- ---------- ----------- ----------
Interest on bonds and
residual interests in
bond securitizations $ 59,923 44.9% $ 53,443 42.1% $ 43,077 42.7%
Interest on loans 34,895 26.1% 33,340 26.2% 31,757 31.5%
Interest on short-term
investments 1,255 0.9% 3,081 2.4% 4,391 4.4%
----------- ---------- ----------- ---------- ----------- ----------
Total interest income 96,073 71.9% 89,864 70.7% 79,225 78.6%
Total fee income 28,997 21.7% 28,956 22.8% 19,308 19.1%
Net gain on sales 8,558 6.4% 8,222 6.5% 2,319 2.3%
----------- ---------- ----------- ---------- ----------- ----------
Total income $ 133,628 100.0% $ 127,042 100.0% $ 100,852 100.0%
=========== ========== =========== ========== =========== ==========
MuniMae is a Delaware limited liability company. As a limited liability
company, the Company combines the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Since MuniMae is classified as a partnership for federal income tax
purposes, no recognition of income taxes is made at the corporate level (except
for income earned through subsidiaries of the Company organized as
corporations). Instead, the distributive share of MuniMae's income, capital gain
or loss, deductions and credits is included in each shareholder's income tax
return.
Investment in Tax-Exempt Bonds and Residual Interests in Bond Securitizations
The Company originates investments in tax-exempt bonds and taxable loans
primarily to the affordable multifamily housing industry. Tax-exempt bonds are
issued by state and local government authorities to finance multifamily housing
developments or other real estate financings. The bonds are typically secured by
nonrecourse mortgage loans on the underlying properties. The Company also
invests in (1) other tax-exempt bonds, or interests in bonds, secured by student
housing or assisted living developments, and (2) tax-exempt community
development bonds, typically secured by special taxes imposed on single-family
or other community development districts or by assessments imposed on the
residents or other lot owners of those developments.
The Company may also structure transactions whereby a third party buys
bonds directly from a seller and the Company subsequently purchases a residual
interest in a bond securitization holding the tax-exempt bonds.
The Company's sources of capital to fund these lending activities include
proceeds from equity offerings, securitizations, and draws on lines of credit.
The Company earns interest income from its investment in tax-exempt bonds and
taxable loans. The Company also earns origination and construction
administration fees from originating the bonds and servicing the bonds during
the construction period.
The Company's strategy includes the maintenance and expansion of a
diversified portfolio of tax-exempt bonds and related investments, thereby
increasing the interest income earned by the Company. The Company's business
plan includes originating $475 million to $550 million in tax-exempt bonds and
related investments in 2003. This range includes $225 million to $250 million of
construction production and $250 million to $300 million of permanent
production. Although these construction and permanent loan production totals
relate to the same loans, the Company counts them as separate loans for
consistency with market practice for tracking of taxable lending, where
construction and permanent loans are legally distinct loans. For the years ended
December 31, 2002 and 2001, the Company structured $300.1 million and $468.4
million, respectively, in tax-exempt bond transactions.
Mortgage Banking Activities
The Company engages in a variety of mortgage banking activities. These
activities include the origination, investment in and servicing of investments
in multifamily housing and other real estate financings, both for its own
account and on behalf of third parties.
The Company's mortgage banking activities are generally conducted through
Midland Financial Holdings, Inc. (together with its subsidiaries, "MFH"), a
wholly owned subsidiary of the Company, which the Company acquired in 1999 for a
total purchase price of $45.0 million ($46.0 million including acquisition
costs). Of this amount, the Company paid approximately $23.0 million in cash,
$12.0 million in common shares at the closing of the transaction and $10.0
million in additional common shares paid in three equal annual installments, the
last of which was paid in December 2002. The acquisition has been accounted for
as a purchase. The cost of the acquisition was allocated on the basis of the
estimated fair value of the net assets acquired, which totaled $7.7 million. The
results of operations of MFH are included in the consolidated financial
statements of the Company.
The Company originates construction, permanent and supplemental loans to
the multifamily housing industry. Supplemental loans include:
o bridge and pre-development loans, which are project-specific
short-term loans for qualifying pre-development and development
expenditures and are structured to be repaid from the construction or
permanent financing of the same project. Bridge loans fund timing gaps
between project expenditures and later installments of equity
financing or permanent debt, and pre-development loans fund early
stage project expenditures and are repaid by the first installments of
equity or construction financing; and
o term loans, lines of credit and workout loans, which have expenditure
purposes and sources of repayment that may or may not be limited to a
single project. Term loans, lines of credit and workout loans are
repaid with general operating cash flow of the development or other
capital sources of the borrower, including cash flows from other
investments.
Collateral for the supplemental loans can take many forms, including a
mortgage against land or other real estate, assignment of syndication proceeds,
assignment and pledges of developer fees, assignment and pledge of cash flows
from properties, corporate guarantees and personal guarantees.
The Company's sources of capital to fund its mortgage banking activities
include (1) warehousing facilities and short-term lines of credit with
commercial banks, (2) debt and equity financings, either through the Midland
Affordable Housing Group Trust (the "Group Trust") or the Midland Multifamily
Equity REIT ("MMER"), and (3) working capital. The Company earns income from the
difference between the interest charged on its loans and the interest due under
its notes payable and other funding sources. The Company also earns (1)
origination fees, (2) loan servicing fees, or in the case of construction loans,
construction administration fees and (3) guarantee and other fees in cases where
the Company provides credit support to the obligations of a borrower to a third
party.
MFH is a Federal National Mortgage Association ("Fannie Mae") Delegated
Underwriter and Servicer ("DUS"). A majority of the construction loans
originated by the Company are underwritten and structured so as to be eligible
for sale to Fannie Mae as or shortly after the loans are converted to permanent
loans. The Company usually retains the mortgage servicing rights on the
permanent loans which its sells to third parties.
As a Fannie Mae DUS lender, MFH underwrites and originates multifamily
housing loans in accordance with Fannie Mae's underwriting guidelines and sells
those loans directly to Fannie Mae. Under the DUS loan program, MFH has agreed
to bear a portion of any loss incurred on a DUS loan originated by MFH and sold
to Fannie Mae in accordance with loss sharing formulas under which MFH would be
subject to a maximum responsibility to Fannie Mae of up to 30% of the original
principal balance of the defaulted loan.
MFH is also a Federal Housing Administration ("FHA") and US Department of
Housing and Urban Development ("HUD") approved mortgagee and is an approved
lender under HUD's Multifamily Accelerated Processing ("MAP") program. As a MAP
lender, MFH is responsible for underwriting and recommending loans to FHA/HUD
for mortgage insurance. As an FHA/HUD approved mortgagee, MFH must maintain a
minimum net worth.
MFH is a Government National Mortgage Association ("GNMA") approved
securities issuer, seller and servicer. All loans originated under HUD programs
are securitized through the GNMA Mortgage Backed Security ("MBS") program and
sold in the secondary market. The Company may earn premiums or incur discounts
on the securitization of these loans, and the Company retains the servicing
rights on all HUD loans sold under the GNMA MBS program. As a GNMA approved
issuer, seller and servicer, MFH must maintain a minimum net worth as well as
minimum insurance coverages.
As an FHA/HUD approved mortagee, MFH may share in losses relating to under
performing loans originated under the HUD programs. If a borrower fails to make
payments of principal, interest, taxes or insurance premiums on a HUD loan
securitized with GNMA, MFH may be required to make servicing advances to GNMA.
If a defaulted loan is assigned to HUD, insurance will generally limit MFH's
loss exposure to 1% of the loan's then outstanding unpaid principal balance.
However, the Company's loan documents generally hold the borrower liable for any
losses incurred by MFH in the event of a default and/or assignment of a loan to
HUD. In addition, GNMA allows for partial recovery of expenses for loans that
were assigned to HUD after default and subsequently paid out of a GNMA pool.
The Company grows its mortgage banking business by increasing production
levels which, in turn, is expected to increase the fees generated by affordable
housing tax credit equity syndications, loan servicing and origination services.
The Company's business plan includes originating $875 to $975 million in
construction, permanent and supplemental loans in 2003. The following table
shows the Company's originations for the years ended December 31, 2002, 2001 and
2000.
(000s) 2002 2001 2000
------ ---- ---- ----
Construction loans $ 338,202 $ 175,835 $ 280,548
Permanent loans 351,868 294,900 148,272
Supplemental loans (1) 76,154 - -
----------------------------------------------
Total $ 766,224 $ 470,735 $ 428,820
==============================================
(1) Prior to 2002, supplemental loan originations were not separately tracked.
The table below shows the carrying value of all three loan types as of December
31, 2002 and 2001:
(000s) 2002 2001
------ ---- ----
Construction loans $300,266 $268,775
Permanent loans 44,665 86,182
Supplemental loans 80,459 49,885
------------------------------
Total $425,390 $404,842
==============================
Because the majority of the Company's supplemental loans are
pre-construction or workout loans, these loans are considered to be riskier than
the Company's construction and permanent loans. As a result, the Company
attempts to limit the growth of its supplemental loan portfolio; however, as
these loans are important to the maintenance of the Company's relationships with
developers, the Company expects that they will continue to represent 5%-10% of
its origination volume going forward. As shown in the table above, the Company's
supplemental loan balances have increased significantly over the past two years.
In response, the Company has recently taken measures to upgrade its monitoring
and management of the supplemental loans in its portfolio.
Equity Investments in Partnerships
The Company makes equity investments for its own account in
income-producing real estate operating partnerships. To date, the Company's
equity investments have been made in partnership with CAPREIT, Inc. and its
affiliates ("CAPREIT"). In 2001, the Company made a $3.4 million equity
investment in 12 property partnerships (the "CAPREIT Tera" investment). As a
result of the Company's CAPREIT Tera investment, the Company owns a 35% general
partnership interest in the 12 property partnerships.
In 2002, the Company invested $70.7 million to acquire a 35% general
partnership interest in 20 CAPREIT property partnerships and four related swap
partnerships (the "CAPREIT 3M" investment). The Company's liquidation percentage
in the CAPREIT 3M investment is 30%.
Syndication of Low-income Housing Tax Credits
The Company acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. The Company earns syndication fees
on the placement of these interests with investors, including Fannie Mae and a
number of corporate investors. In conjunction with the sale of these partnership
interests, the Company may provide performance guarantees on the underlying
properties owned by the partnerships or guarantees to the fund investors. The
Company also earns asset management fees for managing the low-income housing tax
credit funds syndicated.
The Company syndicated equity investments totaling $152.4 million, $114.7
million and $97.6 million, for the years ended December 31, 2002, 2001 and 2000,
respectively. Although the Company has endeavored to expand this product line
over the past several years, it estimates that its 2002 syndication volume
represents only 2-3% of approximately $6 billion of newly issued low-income
housing tax credit financings. Subject to pricing and market conditions,
including the potential impact of changes in tax law proposed by the Bush
administration in January 2003 (see "Factors that Could Affect Future Results"
below), the Company plans to continue to expand this line of business in order
to gain the benefits of economies of scale in marketing, underwriting and asset
management. The Company's 2003 business plan includes syndicating $225 million
of low-income housing tax credits.
Liquidity and Capital Resources
As noted above, the Company relies on the regular availability of capital
from pension funds, government sponsored entities ("GSEs"), equity offerings,
bank lines of credit and securitization transactions to finance its growth. In
2002, the Company completed a common share equity offering and diversified its
access to securitization capital to fund its growth in the tax-exempt bond
business. The Company also expanded its access to capital through an expansion
of its bank lines of credit and in capital from pension funds to fund its
mortgage banking activities and tax credit equity business. The Company's
sources of capital are discussed below.
The Company expects to meet its cash needs in the short-term, which consist
primarily of funding of new investments, payment of distributions to
shareholders and funding of mortgage banking activities, from equity offering
proceeds, cash on hand and bank lines of credit. To continue to grow these
activities, the Company will need to increase its access to capital in 2003 and
future years. The Company expects it will need $300 to $400 million in new
capital to meet its 2003 production targets for its lending and tax credit
equity business. The Company's February 2003 equity offering generated net
proceeds of $72.2 million to satisfy a portion of the new capital needed. The
Company has entered into discussions with its existing capital providers to
increase their financing commitments. In addition, the Company is seeking to
establish relationships with additional pension funds and to expand its
relationships with GSEs. If the Company is unable to secure the remaining
additional capital needed during 2003, its production targets may decrease by
$400 to $450 million.
Pension Funds
The Company's mortgage banking activities depend on capital from a group of
pension funds with which MFH has had relationships for over twenty-five years.
Through the Group Trust and MMER, these funds provide the Company with debt
financing. In addition, from time to time the pension funds make direct
investments in debt or equity financings originated by the Company.
The Group Trust was established by a group of pension funds for the purpose
of investing in income-producing real estate investments. The Group Trust
provides loans and lines of credit to finance a variety of the Company's loan
products. MMER is a Maryland real estate investment trust established by the
same pension funds that participate in the Group Trust, plus an additional
pension fund. MMER invests in market rate income-producing real estate
partnerships and provides the Company short-term lines of credit to finance the
Company's lending activities. MFH is the investment manager for the Group Trust
and MMER and receives advisory fees for these services, as well as origination
fees on the placement of equity interests in real estate partnerships with MMER
and debt investments with the Group Trust and the placement of direct equity or
debt investments with individual pension funds.
During 2002, the Company expanded its credit lines with the Group Trust
from $120 million to $160 million. The Company also expanded the use of the
credit lines to include providing financing for the Company's tax-exempt bond
investments. The following table shows the balance of the Company's borrowings
from the Group Trust, MMER and direct pension funds at December 31, 2002 and
2001.
December 31, 2002 December 31, 2001
------------------------------------ -----------------------------------
Notes Lines of Notes Lines of
(000s) payable Credit (1) Total payable Credit Total
----------- ---------- ----------- ----------- ---------- ----------
Group Trust $ 128,152 $ 58,770 $ 186,922 $ 105,272 $ 65,318 $ 170,590
MMER - 30,283 30,283 - 7,459 7,459
Direct pension fund investment 64,256 N/A 64,256 77,495 N/A 77,495
----------- ---------- ----------- ----------- ---------- ----------
Total $ 192,408 $ 89,053 $ 281,461 $ 182,767 $ 72,777 $ 255,544
=========== ========== =========== =========== ========== ==========
(1) At December 31, 2002, the Company's borrowing facility under its lines of
credit with the Group Trust and MMER totaled $160.0 million and $80.0
million, respectively.
For the years ended December 31, 2002 and 2001, the Company structured
$47.6 and $46.0 million, respectively, in equity investments for MMER and direct
pension fund investments.
Government Sponsored Entities
The Company relies on the GSEs as a source of liquidity and credit
enhancement. Consequently, the Company's results may be impacted by changes in
the strategic direction of the GSEs, particularly those which diminish their
appetite for investments in affordable housing.
A majority of the construction loans originated by the Company are
underwritten and structured so as to be eligible for placement with Fannie Mae
as or shortly after the loans are converted to permanent loans. For the years
ended December 31, 2002 and 2001, the Company delivered $187.8 million and
$191.9 million of permanent loans to Fannie Mae through the DUS program. For the
years ended December 31, 2002 and 2001, the Company delivered $20.8 million and
$10.0 million, respectively, of permanent loans through the FHA/HUD program.
The Company's future results could also be impacted by deterioration in the
credit quality of Fannie Mae and Freddie Mac, which provide credit enhancement
that facilitate the securitization of certain of the Company's assets. If Fannie
Mae or Freddie Mac ceased to provide such support, the Company would have to
seek alternative forms of credit support in order to continue to leverage its
assets. The Company does not have any reason to believe that either entity will
cease to provide such support; nevertheless, the Company is negotiating with
other prospective providers of credit enhancement in order to limit this risk.
Fannie Mae and Freddie Mac also benefit from a number of
government-confirmed benefits; including, for example, the following: (1) their
earnings are exempt from state and local corporate income taxes; (2) their
securities are exempt from SEC registration requirements; and (3) their
securities are eligible for unlimited investment by federally insured thrifts,
national banks and state bank members of the Federal Reserve system. These
advantages, coupled with the size and prominence of Fannie Mae and Freddie Mac
in the mortgage-backed security market, have led to recent scrutiny of their
role in the mortgage market. A number of sizeable financial services companies
and trade associations have launched a concerted effort to limit the growth of
the GSEs and spur close examination of how the benefits of their GSE status are
being employed. While it is impossible to predict the ultimate impact of this
lobbying effort, it could conceivably result in a contraction of the GSEs'
support of the affordable housing market.
Fannie Mae is the Company's single largest corporate investor in low-income
housing tax credits. The Company estimates that Fannie Mae accounts for
approximately 30 to 40% of the approximately $4 billion market for syndicated
low-income housing tax credits. If Fannie Mae should significantly decrease its
demand or lower the price it offers for these credits, the Company's results
from operations could be adversely affected. In the fiscal years ended December
31, 2002, 2001 and 2000, Fannie Mae purchased 20.0%, 19.2% and 11.3%,
respectively, of the tax credits syndicated by the Company.
Equity Offerings
The Company periodically obtains equity capital from public offerings of
common shares and from preferred share equity offerings. The preferred share
offerings are conducted by an indirect subsidiary of the Company, MuniMae TE
Bond Subsidiary, LLC ("TE Bond Sub"), which the Company formed in 1999
specifically as a vehicle to raise additional capital. When TE Bond Sub was
formed, the Company placed a substantial portion of its tax-exempt bonds and
residual interests in bond securitizations in TE Bond Sub. TE Bond Sub then sold
Series A, Series B and Series A-1 and B-1 Cumulative Preferred Shares
(collectively, the "TE Bond Sub Preferred Shares") to institutional investors in
May 1999, June 2000 and October 2001, respectively. The TE Bond Sub Preferred
Shares have a senior claim to the income derived from the investments owned by
TE Bond Sub. Any income from TE Bond Sub available after payment of the
cumulative distributions of the TE Bond Sub Preferred Shares is allocated to the
Company, which holds all of the common equity interests in TE Bond Sub.
On February 8, 2002, the Company sold to the public 3.0 million of the
Company's common shares at a price of $24.70 per share and granted the
underwriters an option to purchase up to an aggregate of 450,000 common shares
to cover over-allotments at the same price. Net proceeds on the 3.0 million
shares approximated $70.5 million. On February 15, 2002, the underwriters
partially exercised their over-allotment option to purchase 300,000 common
shares generating additional net proceeds of $7.1 million. The net proceeds from
this offering were used for general corporate purposes, including funding of new
investments, paying down debt and working capital.
In February 2003, the Company sold to the public 3.2 million common shares
(including the entire underwriters' over-allotment option) at a price of $23.60
per share. Net proceeds of this offering were $72.2 million. The net proceeds
from this offering will be used for general corporate purposes, including
funding of new investments, paying down debt and working capital.
Lines of Credit
The Company relies on short-term lines of credit with commercial banks to
finance its growth. During 2002, the Company structured a line of credit
arrangement with one new bank. The following table summarizes the Company's
borrowings under short-term lines of credit as of December 31, 2002 and 2001:
December 31, 2002 December 31, 2001
------------------------- -------------------------
Aggregate Aggregate
(000s) Principal purpose facilities Balance facilities Balance
--------------------------------- ------------ ------------ ------------ ------------
General bank lines of credit Working capital and funding $ 24,000 $ 15,830 $ 24,000 $ 13,521
supplemental loans
Loan warehousing line Warehousing construction and 100,000 77,618 100,000 98,033
permanent loans
Tax credit equity warehousing line Property acquisition and 30,000 17,373 - -
working capital
------------ ------------ ------------ ------------
Total $ 154,000 $ 110,821 $ 124,000 $ 111,554
============ ============ ============ ============
At December 31, 2002, the Company was in compliance with all covenants of
the facilities listed above.
Securitizations
The Company securitizes assets in order to enhance its overall return on
its investments and to generate proceeds that facilitate the acquisition of
additional investments. The Company uses various programs to facilitate the
securitization and credit enhancement of its bond investments.
The Company securitizes assets by depositing bonds into a trust or
structuring a transaction whereby a third party deposits bonds into a trust. The
trust issues senior and subordinate certificates and the Company receives cash
proceeds from the sale of the senior certificates and retains the subordinate
certificates. The interest rate on the senior certificates may be fixed or
variable. If the interest rate is variable, the rate on the senior certificates
is reset weekly by a remarketing agent. To increase the attractiveness of the
senior certificates to investors, the senior certificates are credit enhanced or
the bond underlying the senior certificates is credit enhanced. The residual
interests retained by the Company are the subordinate security and receive the
residual interest on the bond after the payment of all fees and the senior
certificate interest. For certain programs, the counterparty or a third party
provides liquidity to the senior certificates. Liquidity advances are used to
provide bridge funding for the redemption of senior certificates tendered upon a
failure to remarket senior certificates or in the event of other mandatory
tender events.
During 2002, the Company expanded and diversified its securitization
programs through the structuring of a new facility with MBIA Insurance
Corporation ("MBIA"). The following table summarizes the results of the
Company's efforts to diversify its sources of securitization capital:
(000s) December 31, 2002
--------------------------------------------------------
Face Amount Percentage of
of Senior Fair Value Total Senior
Nature of Senior Provider of Credit Provider of Fair Value of Security of Residual Securities
Sponsor Security Enhancement Liquidity Total Bond Outstanding Interest Outstanding (1)
--------------------------------------------------------------------------- --------------------------------------------------------
On Balance Sheet Securitizations:
short-term,
floating rate, Merrill Lynch or
Merrill Lynch weekly reset Fannie Mae Merrill Lynch $ 62,695 $ 60,605 $ 2,090 10.4%
Freddie Mac fixed Freddie Mac Freddie Mac 91,290 68,970 22,320 11.8%
short-term,
floating rate, Bayerische
MBIA weekly reset MBIA Landesbank 146,624 147,010 (386) 25.2%
MMA Credit MMA Credit
Term Debt fixed Enhancement I, LLC Enhancement I, LLC 42,829 44,892 (2,063) 7.7%
weekly reset
Other or fixed Various N/A 17,612 17,740 (128) 3.0%
--------------------------------------------------------
Subtotal 361,050 339,217 21,833 58.1%
Off Balance Sheet Securitizations:
short-term,
floating rate, Merrill Lynch or
Merrill Lynch weekly reset Fannie Mae Merrill Lynch 187,404 177,812 9,592 30.4%
FSA Bonds fixed FSA N/A 119,188 67,400 51,788 11.5%
--------------------------------------------------------
Subtotal 306,592 245,212 61,380 41.9%
--------------------------------------------------------
Total $ 667,642 $ 584,429 $ 83,213 100.0%
========================================================
(000s) December 31, 2001
--------------------------------------------------------
Face Amount Percentage of
of Senior Fair Value Total Senior
Nature of Senior Provider of Credit Provider of Fair Value of Security of Residual Securities
Sponsor Security Enhancement Liquidity Total Bond Outstanding Interest Outstanding (1)
--------------------------------------------------------------------------- --------------------------------------------------------
On Balance Sheet Securitizations:
short-term,
floating rate, Merrill Lynch or
Merrill Lynch weekly reset Fannie Mae Merrill Lynch $ 104,516 $ 78,560 $ 25,956 13.1%
Freddie Mac fixed Freddie Mac Freddie Mac 89,929 69,020 20,909 11.5%
short-term,
floating rate, Bayerische
MBIA weekly reset MBIA Landesbank - - - -
MMA Credit MMA Credit
Term Debt fixed Enhancement I, LLC Enhancement I, LLC 44,737 44,992 (255) 7.5%
weekly reset
Other or fixed Various N/A 5,244 5,410 (166) 0.9%
--------------------------------------------------------
Subtotal 244,426 197,982 46,444 33.0%
Off Balance Sheet Securitizations:
short-term,
floating rate, Merrill Lynch or
Merrill Lynch weekly reset Fannie Mae Merrill Lynch 339,481 334,165 5,316 55.7%
FSA Bonds fixed FSA N/A 122,488 67,530 54,958 11.3%
--------------------------------------------------------
Subtotal 461,969 401,695 60,274 67.0%
--------------------------------------------------------
Total $ 706,395 $ 599,677 $106,718 100.0%
========================================================
(1) This percentage is calculated by dividing the face amount of the senior
security outstanding from each securitization program by the total face
amount of all senior securities outstanding.
Leverage
The Company previously reported its leverage ratio based upon management's
assessment of the actual economic risk to the Company of its financial assets
and liabilities. The Company employed a formulaic measure of "economic leverage"
as an internal management tool.
Recently, management determined to focus instead on a more traditional
leverage ratio derived directly from line items on the Company's consolidated
balance sheet. This decision was based on several factors:
o the original impetus for the economic measure of leverage was to apprise
investors of financial risks that did not appear on the face of the
Company's balance sheet under generally accepted accounting principles
("GAAP") then in effect. Since the Company's adoption of Statement of
Financial Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS 140") as of
January 1, 2001, the majority of those risks have been brought onto the
Company's balance sheet, as pre-FAS 140 securitizations recorded as sales
(i.e., as off-balance-sheet transactions) have been replaced by new
securitizations accounted for as borrowings;
o management concluded that few investors were likely to fully understand the
adjustments made to arrive at the Company's economic leverage measure; and
o management determined that a simpler definition would minimize internal
administrative burdens and would be more consistent with the recent
emphasis of the Securities and Exchange Commission on minimizing the use of
non-GAAP financial measures.
The Company's leverage ratio was 55.8% and 51.5% at December 31, 2002 and
2001, respectively. This leverage ratio is based on total debt (notes payable,
short- and long-term debt) divided by the Company's total capitalization (notes
payable, short- and long-term debt, preferred shareholders' equity in a
subsidiary company, and shareholders' equity). Management includes short-term
debt in this calculation because of the importance of short-term debt to the
Company's management of its overall cost of capital. It should be noted that
this leverage ratio is one of many ways to measure leverage. For example, as of
December 31, 2002, this ratio excludes $245.0 million of securitization
interests that are senior to the Company's investments that were previously
accounted for as sales and includes $128.2 million of construction loans where
the economic risk belongs to a third party.
The Company will continue to try to maintain, through the use of
securitizations, overall leverage ratios in the 50% to 65% range, with certain
assets at significantly higher ratios, up to approximately 99%, and other assets
not leveraged at all.
Factors that Could Affect Future Results
In seeking out attractive multifamily and other housing-related investment
opportunities, the Company competes directly against a large number of lenders -
including banks, finance companies and other financial intermediaries - and
providers of related services such as portfolio loan servicing. Certain of the
Company's competitors, including GMAC, Prudential Mortgage Finance and Lend
Lease Mortgage Capital Co., have substantially greater financial and operational
resources than the Company. While the Company has historically been able to
compete effectively against such competitors on the basis of its service,
longstanding relationships with developers and a broad array of product
offerings, many of our competitors benefit from substantial economies of scale
in their business and have other competitive advantages.
In addition, in seeking permanent financing for their developments, the
Company's customers generally evaluate a wide array of taxable and tax-exempt
financing options. While tax-exempt financings offer specific attractions for
developers, they can be more complicated than taxable financings and can involve
ongoing restrictions on the owner's use of the property. As a result, the
relative attractiveness of tax-exempt permanent financing may increase or
decrease over time based on the availability and cost of taxable financing. In
particular, the differential in interest expense between tax-exempt and taxable
financing alternatives tends to be lower in a low interest rate environment,
which tends to make the Company's tax-exempt multifamily housing bond financings
less attractive to developers than taxable alternatives. Consequently, the
Company's primary (i.e., newly originated) tax-exempt bond originations declined
to $17.3 million in the year ended December 31, 2002, from $18.2 million and
$114.7 million in 2001 and 2000, respectively. In response, the Company has
taken advantage of opportunities in the secondary market for these bonds and has
begun to invest in other types of housing-related tax-exempt bond financings.
While our strategic emphasis on tax-exempt financing will - absent a major
change in the tax code - continue, the Company will continue to expand and
diversify its other lines of business.
The Company's results of operations could also materially be affected by
changes in the performance of the properties underlying its investments. We
might receive less income from our investments than we expect due to any number
of factors, including:
o Adverse economic conditions, either locally, regionally or nationally,
limiting the amount of rent that can be charged for units at the
properties. Adverse economic conditions may also result in a reduction in
timely rent payments or a reduction in occupancy levels.
o Occupancy and rent levels may decrease due to the construction of
additional housing units or the establishment of rent stabilization or rent
control laws or similar agreements.
o A decline in the level of mortgage interest rates may encourage tenants in
multifamily rental properties to purchase housing, reducing the demand for
rental housing.
o Expenses at the property level, including but not limited to capital needs,
real estate taxes and insurance, may increase.
Periods of economic slowdown or recession that result in declining property
performance, particularly declines in the value or performance of multifamily
properties, may adversely affect our business. Any material decline in property
values weakens the collateral value of the properties we invest in, and
prolonged poor performance in the affordable housing market segment could result
in a decline in demand for financing. Additionally, some of our income comes
from contingent interest on participating tax-exempt bonds. A decline in the
performance of the related multifamily property would likely have a negative
effect on our cash available for distribution.
Other governmental policies relating to affordable housing also directly
impact the Company's business. For example, in late 2000 Congress passed
legislation increasing the supply of low-income housing tax credits ("LIHTC")
and tax-exempt and other "private activity" bonds. The LIHTC, which is
determined on a state-by-state basis according to each state's population, was
increased from $1.25 per capita in 2000 to $1.50 in 2001 and $1.75 in 2002. This
increase has facilitated the increase in the Company's tax credit equity
syndications to $152 million in 2002, as compared with $115 million in 2001 and
$98 million in 2000. Also in 2000, Congress approved a 50% increase in
allocations for tax-exempt and other "private activity" bonds, from $50.00 per
state resident for 2000 to $75.00 for 2002. Current legislation provides for
inflation-based adjustments to the LIHTC and tax-exempt bond allocations
starting in 2003.
The Company's business prospects are directly impacted by governmental tax
policies, which affect demand for the Company's debt and equity financing
products as well as investor demand for the Company's securities. For example,
in January 2003, the Bush Administration proposed changes to the tax laws that
would, if enacted as proposed, exclude certain corporate dividends from an
individual's taxable income. The proposal would reduce the importance of a
primary advantage of investing in municipal bonds - that interest received on
these bonds is tax-exempt while dividend income from investments in corporate
equity is taxed as ordinary income. This could increase the cost of municipal
financings, as interest rates offered by municipal borrowers rise to compensate
investors for the loss of the tax advantage. This could lead to a decrease in
municipal borrowing activities, which would reduce the Company's opportunities
to originate, structure and invest in municipal financings. In addition, the
proposed changes could significantly decrease investor demand for the tax credit
equity investments syndicated by the Company. Even if this proposal is not
enacted, while it is under consideration, borrowers and investors may postpone
transactions until the issue is resolved. The proposed changes and any temporary
reduction in transaction volume could adversely affect the Company's operations
and could negatively affect its net income.
Our future results are also dependent on the Company's maintenance of its
relationships with the GSEs participating in the affordable housing market,
particularly Fannie Mae. The maintenance of the Company's DUS license with
Fannie Mae is critical to the continued productivity and growth of the Company's
operating segment. As a DUS Lender, the Company is subject to periodic reviews
by Fannie Mae and must comply with a variety of underwriting and servicing
guidelines imposed by Fannie Mae contractually. Noncompliance or failure to
adhere to these guidelines could result in loss of delegated authority and a
revocation of the Company's DUS license. Alternatively, Fannie Mae could impact
the value of the DUS license to the Company by either (1) issuing new DUS
licenses to the Company's competitors or (2) changing the delegated authority of
its DUS lenders or making it more costly or otherwise more difficult for DUS
lenders to underwrite and service loans on Fannie Mae's behalf. In addition,
because Fannie Mae is the largest corporate buyer of low-income housing tax
credits, any change in its appetite for such credits, or the Company's loss of
Fannie Mae as a LIHTC customer, could adversely affect the Company's LIHTC
business. See "Government Sponsored Entities" above.
The pension fund participants in the Group Trust and MMER provide
significant financial support to the Company's mortgage banking activities.
While the Company believes its relations with these pension funds are good, it
is possible that these funds will reduce or withdraw their financing commitments
in the future. Moreover, these pension funds are relatively small: as of
December 31, 2002 their combined assets under management totaled $6.3 billion,
and their combined real estate assets under management totaled $0.9 billion. As
a result, the Company may not be able to maintain the rate of growth of its
mortgage banking activities without establishing relationships with additional
pension funds. Consequently, the Company is actively seeking additional pension
fund investors.
The Company's capital partners require collateral support for providing
capital to the Company. As a result, the Company posts its assets as collateral
to support its borrowings under notes payable, lines of credit, and
securitization facilities. The degree to which the Company's investments and
other assets are pledged as collateral varies according to asset class; however,
the Company's collateral arrangements can be summarized as follows:
o Tax-exempt Bonds. The majority (approximately $657.5 million carrying value
amount as of December 31, 2002) of the Company's tax-exempt bonds are owned
in a subsidiary, TE Bond Sub, which has issued four series of cumulative
preferred shares with an aggregate redemption value of $168.0 million. The
holders of the preferred shares have a senior claim to the income from this
subsidiary. In addition, $372.9 million (the majority of which is held in
TE Bond Sub) of the Company's investments in tax-exempt bonds are pledged
as collateral for securitization facilities as of December 31, 2002.
o Loans Receivable. Substantially all of the Company's construction loans
(approximately $302.4 million as of December 31, 2002) are pledged as
collateral to support borrowings under the Company's notes payable, bank
lines, pension fund credit lines or other credit facilities. Certain of the
Company's supplemental and permanent loans totaling $69.3 million and $41.6
million, respectively, as of December 31, 2002 are pledged as collateral
under short-term bank lines of credit. Certain of the Company's other
taxable loans totaling $3.8 million as of December 31, 2002 are pledged for
securitization facilities and other programs.
o Restricted Assets. The Company's restricted assets include cash and
short-term investments pledged as collateral under terms of the Company's
interest rate swap contracts, certain guarantees and other obligations (see
Note 7 to the Company's consolidated financial statements).
o Investments in Partnerships. A portion of the Company's investments in
partnerships is pledged as collateral for borrowings under a line of
credit.
The table below shows the proportion of the Company's total assets
(excluding goodwill), which was either pledged as collateral or otherwise
restricted as of December 31, 2002 and 2001.
(in millions) 2002 2001
------------- --------------
Tax-exempt bonds pledged $ 372.9 $ 358.4
Loans receivable pledged 417.1 406.3
Restricted assets 40.3 16.7
Bonds in securitization trusts 361.1 244.4
Residual interests in bond securitizations, net 9.6 5.3
Investments in partnerships pledged 20.7 -
------------- --------------
Total $ 1,221.7 $ 1,031.1
============= ==============
As % of total assets, excluding goodwill and net
of residual interests in bonds securitizations
carried as liabilities 80.5% 82.3%
In 2001 the Company embarked on a comprehensive overhaul of its information
systems infrastructure in an effort to: (1) standardize the Company's hardware
and internal communications platforms; (2) upgrade the Company's accounting and
financial systems to an enterprise resource planning (ERP) system; and (3)
develop scalable, integrated loan underwriting, deal management and loan
servicing systems tailored to the Company's needs and expected growth profile.
As of December 31, 2002, the Company had: implemented the accounting modules,
begun implementation of treasury and cash management modules and replaced its
local-area networks; and implemented a multi-year outsourcing arrangement with
an application services provider for wide-area network connectivity, secure
internet access and ERP application hosting. Management expects these
information systems upgrades to continue at least through 2004. The Company
believes that successful implementation of the upgrades will increase the
Company's efficiency in future years; however, delays or complications in
implementation may have an adverse impact on the Company's operations.
Contractual Obligations
The following table provides the Company's commitments, as of December 31,
2002, to make future payments under the Company's debt agreements and other
contractual obligations:
Payments due by Period
-----------------------------------------------------------------------------------
Less than More than
(000s) Total 1 year 1-3 years 3-5 years 5 years
--------------- --------------- -------------- --------------- --------------
Short-term debt $ 219,945 $ 219,945 $ - $ - $ -
Notes payable 450,924 326,284 124,640 - -
Long-term debt 147,357 - 12,239 69,792 65,326
Operating lease obligations 5,247 2,241 2,659 295 52
Unfunded loan commitments 311,136 311,136 - - -
Unfunded equity commitments 74,516 74,516 - - -
--------------- --------------- -------------- --------------- --------------
Total $ 1,209,125 $ 934,122 $ 139,538 $ 70,087 $ 65,378
=============== =============== ============== =============== ==============
Guarantees and Off-Balance Sheet Arrangements
The Company's maximum exposure under its guarantee obligations is not
indicative of the Company's expected loss under the guarantees. The Company
recognizes contingent liabilities on guarantees when the losses are probable and
can be reasonably estimated.
The following table summarizes the Company's guarantees by major group at
December 31, 2002.
(in millions) December 31, 2002
-------------------------------------------------------------------------------------
Maximum Carrying
Guarantee Note Exposure Amount Supporting Collateral
---------------------------------- ------- ----------- ---------- ----------------------------------------------------------
Loss-Sharing Agreements with
Fannie Mae and GNMA (1) $ 162.1 $ - $4.9 million Letter of Credit pledged
Bank Line of Credit Guarantees (2) 182.0 - Investment in partnership and loans totaling $153.6 million
Tax Credit Related Guarantees (3) 42.8 0.1 None
Other Financial/Payment Guarantees (4) 414.3 1.8 None
Put Options (5) 101.6 - $30 million of loans and tax exempt bonds
Letter of Credit Guarantees (6) 25.9 - None
Indemnification Contracts (7) 12.7 - None
----------- ----------
$ 941.4 $ 1.9
=========== ==========
Notes:
(1) As a Fannie Mae DUS lender and GNMA loan servicer, MFH may share in losses
relating to under performing real estate mortgage loans delivered to Fannie
Mae and GNMA. More specifically, if the borrower fails to make a payment on
a DUS loan originated by MFH and sold to Fannie Mae, of principal,
interest, taxes or insurance premiums, MFH may be required to make
servicing advances to Fannie Mae. Also, MFH may participate in a deficiency
after foreclosure on DUS and GNMA loans. As a DUS lender, MFH must maintain
a minimum net worth and collateral with a custodian. The term of the loss
sharing agreement is based on the contractual requirements of the
underlying loans delivered to Fannie Mae and GNMA, which varies to a
maximum of 30 years.
(2) The Company, or its subsidiaries, provides payment or performance
guarantees for certain borrowings under line of credit facilities with a
term of 1 year or less.
(3) The Company acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. In conjunction with the sale
of these partnership interests, the Company may provide performance
guarantees on the underlying properties owned by the partnerships or
guarantees to the fund investors. These guarantees have various expirations
to a maximum term of 18 years.
(4) The Company, or its subsidiaries, has entered into arrangements that
require the Company to make payment in the event a specified third party
fails to perform on its financial obligation. The Company typically
provides these guarantees in conjunction with the sale of an asset to a
third party or the Company's investment in equity ventures. The term of the
guarantee varies based on loan payoff schedules or Company divestitures.
(5) The Company has entered into put option agreements with counterparties
whereby the counterparty has the right to sell to the Company, and the
Company has the obligation to buy, an underlying investment at a specified
price. These put option agreements expire at various dates between February
26, 2003 and April 1, 2007.
(6) The Company, or its subsidiaries, provide a guarantee of the repayment on
losses incurred under letters of credit issued by third parties or provide
a guarantee to provide substitute letters of credits at a predetermined
future date. In addition, the Company may provide a payment guarantee for
certain assets in securitization programs. These guarantees expire at
various dates between March 1, 2003 and September 1, 2017.
(7) The Company has entered into indemnification contracts, which require the
guarantor to make payments to the guaranteed party based on changes in an
underlying investment that is related to an asset or liability of the
guaranteed party. These agreements typically require the Company to
reimburse the guaranteed party for legal and other costs in the event of an
adverse judgment in a lawsuit or the imposition of additional taxes due to
a change in the tax law or an adverse interpretation of the tax law. The
term of the indemnification varies based on the underlying program life,
loan payoffs, or Company divestitures. Based on the terms of the underlying
contracts, the maximum exposure amount only includes amounts that can be
reasonably estimated at this time; the actual exposure amount could vary
significantly.
The Company originates investments in tax-exempt bonds to the affordable
multifamily housing industry. From time to time, depending on its capital
position and needs, the Company may structure transactions whereby a third party
buys tax-exempt bonds directly from a seller. The third party subsequently
deposits the bonds into trusts and the trusts issue senior and subordinate
certificates. The senior certificates are sold to third party investors and the
Company purchases a residual interest in a bond securitization holding the
tax-exempt bonds. The Company has also structured transactions where the Company
deposited a bond into a trust and accounted for this transaction as a sale
arrangement. As a result of structuring transactions where a third party buys
the bond directly from the seller or in securitization transactions structured
as sale arrangements, the Company reports its investment in the subordinate
(residual) interest in a bond securitization on the balance sheet, however, the
senior certificate is not reflected on the balance sheet of the Company. The
senior certificates in securitization trusts that are not reflected on the
Company's balance sheet at December 31, 2002 totaled $245 million (face amount).
The effect on the Company's liquidity, capital resources, and market risk are
the same for securitization transactions regardless of whether the senior
certificates are accounted for as on- or off-balance-sheet debt (see discussion
in the Securitization section above).
Dividend Policy and Cash Available for Distribution
Consistent with its strategy of maximizing shareholder value through steady
increases in cash distributions to holders, the Company uses cash available for
distribution ("CAD") as a primary measure of its ability to pay distributions.
The Company believes CAD is the most relevant measure of its ability to pay
distributions, as CAD is a measure of current earnings. The Company uses this
measure of current earnings as a basis for declaring its quarterly
distributions.
CAD differs from net income because of variations between GAAP income and
actual cash received. There are four primary differences between CAD and GAAP
income. The first is the treatment of loan origination fees, which for CAD
purposes are recognized as income when received but for GAAP purposes are
amortized into income over the life of the associated investment. The second
difference is the non-cash gain and loss recognized for GAAP associated with
valuations, sales of investments and capitalization of mortgage servicing
rights, which are not included in the calculation of CAD. The third difference
is the treatment of the Company's investments in partnerships. For GAAP, the
Company records its allocable share of the income (loss) from the partnership as
income, while for CAD reporting, the Company records the cash distributions it
receives from the partnership as income. The fourth difference is the treatment
of goodwill, which, until January 1, 2002, was amortized into expense for GAAP,
but not included in the calculation of CAD. After January 1, 2002, amortization
of goodwill was discontinued for GAAP reporting.
Since the first quarter of 2002, when the Company completed the redemption
of preferred shares and term growth shares, the Company's net cash flow has been
available for distribution to the common shares. The Company's current policy is
to distribute to common shareholders at least 80% of its annual CAD to common
shares. The table below shows the Company's CAD available to common shares, CAD
per common share, dividend per common share and payout ratio for the years ended
December 31, 2002, 2001 and 2000.
2002 2001 2000
------------- ------------- -------------
CAD available to common shares (000s) $ 50,628 $ 41,566 $ 32,575
CAD per common share (1) 2.00 1.92 1.86
Dividend per common share 1.7550 1.7150 1.6725
Payout ratio 87.9% 89.2% 90.0%
(1) CAD per common share is calculated based on the number of shares
outstanding at the end of each fiscal quarter.
The following table reconciles the Company's GAAP net income to CAD for the
years ended December 31, 2002, 2001 and 2000:
For the year ended December 31,
-------------------------------------------------------
(000s) 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Net income allocated to common shares - GAAP Basis $ 28,796 $ 23,847 $ 29,076 $ 28,796 $ 24,728
========== ========== ========== ========== ==========
Conversion to Cash Available for Distribution:
(1) Mark to market and cumulative effect adjustments $ 14,863 $ 17,849 $ - $ - $ -
(2) Equity investments 6,603 1,612 - - -
(3) Net gain on sales (6,572) (8,019) (1,303) (1,236) (298)
(3) Amortization of capitalized mortgage servicing fees 1,314 936 780 - -
(4) Amortization of goodwill - 1,573 1,107 297 -
(5) Origination fees and other income, net 3,553 (127) 1,279 1,624 549
(6) Valuation allowances and other-than-temporary impairments 730 3,256 1,008 544 1,617
(7) Deferred tax expense 1,341 639 628 (252) -
---------- ---------- ---------- ---------- ----------
Cash Available for Distribution (CAD) (unaudited) $ 50,628 $ 41,566 $ 32,575 $ 29,773 $ 26,596
========== ========== ========== ========== ==========
Notes
(1) For GAAP reporting, the Company records the non-cash change in fair value
of its investment in interest rate swaps and other derivative financial
instruments through net income. These non-cash gains and losses are not
included in the Company's calculation of CAD.
(2) For GAAP reporting, the Company accounts for various investments in
partnerships using the equity method of accounting. As a result, the
Company's allocable share of the net income or loss from the partnerships
is reported in income (losses) from equity investments in partnerships. The
income from these partnerships includes depreciation expense and changes in
the fair value of investments in derivatives. For GAAP reporting,
distributions are treated as a return of capital. For CAD reporting, the
Company records the cash distributions it receives from the partnerships as
other income.
(3) For GAAP reporting, the Company recognizes non-cash gains and losses
associated with the sale of assets and the capitalization of mortgage
servicing rights. The capitalized mortgage servicing rights are amortized
into expense over the estimated life of the serviced loans. The non-cash
gains and the associated amortization expense are not included in CAD.
(4) For GAAP reporting, the amortization of goodwill was recognized as expense,
but was not included in the calculation of CAD. After Janurary, 1, 2002,
the amortization of goodwill was discontinued for GAAP reporting.
(5) Origination fees and certain other income amounts are recognized as income
when received for CAD purposes, but for GAAP reporting these items are
deferred and amortized into income over the life of the associated
investment. This adjustment represents the net difference, for the relevant
period, between fees taken into income when received for CAD and the
amortization of fees recorded for GAAP.
(6) For GAAP reporting, the Company records valuation allowances and
other-than-temporary impairments on its investments in loans, bonds and
other bond-related investments. Such non-cash charges do not affect the
cash flow generated from the operation of the underlying properties,
distributions to shareholders, or the tax-exempt status of the income of
the financial obligation under the bonds. Therefore, these items are not
included in the calculation of CAD.
(7) For GAAP reporting, the Company's income tax expense contains both a
current and a deferred component. Only the Company's current income tax
expense is reflected in CAD.
The calculation of CAD is the basis for the determination of the Company's
quarterly distributions to common shares, is used by securities analysts, and is
presented as a supplemental measure of the Company's performance. The
calculation is not approved by the Securities and Exchange Commission nor is it
required by GAAP and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to cash
flows as a measure of liquidity. The Company believes that CAD provides relevant
information about its operations and is necessary, along with net income, for
understanding its operating results.
Cash Flow - GAAP
At December 31, 2002 and 2001, the Company had cash and cash equivalents of
approximately $43.7 million and $97.4 million, respectively. Cash flow from
operating activities was $56.1 million, $28.3 million and $31.5 million for the
years ended December 31, 2002, 2001 and 2000, respectively. The increase in
operating cash flow for 2002 versus 2001 is due primarily to a decrease in other
receivables (included in other assets on the consolidated balance sheet), as a
result of draws on a new line of credit replacing the Company's warehousing of
tax credit equity properties using operating cash. The decrease in cash flow
from operating activities between 2001 and 2000 was the result of an increase in
the tax credit equity business and the growth of the tax-exempt bond portfolio.
These two factors increased the Company's net income and cash flow from
operating activities, however, the increase in income was fully offset by a
corresponding increase in receivables included in other assets and interest
receivable.
Results of Operations and Critical Accounting Estimates
Net Interest Income
For the year ended December 31,
-------------------------------------------------------------------------
(000s) 2002 % 2001 % 2000 %
----------- ---------- ----------- ---------- ----------- ----------
Interest on bonds and
residual interests in
bond securitizations $ 59,923 100.7% $ 53,443 90.3% $ 43,077 89.6%
Interest on loans 34,895 58.7% 33,340 56.4% 31,757 66.1%
Interest on short-term
investments 1,255 2.1% 3,081 5.2% 4,391 9.1%
----------- ----------- -----------
Total interest income 96,073 89,864 79,225
Interest expense (36,596) -61.5% (30,696) -51.9% (31,152) -64.8%
----------- ---------- ----------- ---------- ----------- ----------
Net interest income $ 59,477 100.0% $ 59,168 100.0% $ 48,073 100.0%
=========== ========== =========== ========== =========== ==========
Total interest income for the year ended December 31, 2002 increased $6.2
million over 2001 due primarily to an $8.0 million increase in collections of
interest on bonds, residual interests in bond securitizations, other notes and
loans due to an increase in on-balance sheet assets related to securitizations
and larger average notes receivable balances, offset by a decrease in interest
on short-term investments resulting from funding of operations as well as lower
investment yields. Interest expense increased $5.9 million primarily due to an
increase in financing costs related to on-balance sheet securitizations and
larger average notes payable balances outstanding during the year.
Total interest income for the year ended December 31, 2001 increased $10.6
million over 2000 due primarily to a $10.4 million increase in interest on bonds
and residual interests in bond securitizations resulting from growth in the
Company's investments and increased payments of additional interest paid on
participating bonds in 2001 compared with 2000.
Fee Income
For the year ended December 31,
-------------------------------------------------------------------------
(000s) 2002 % 2001 % 2000 %
------------ ---------- ------------ ---------- ------------ ----------
Syndication fees $ 7,221 24.9% $ 5,480 18.9% $ 4,410 22.8%
Origination fees 6,631 22.9% 6,451 22.3% 3,537 18.3%
Loan servicing fees 6,823 23.5% 6,982 24.1% 5,621 29.1%
Asset management and advisory fees 3,887 13.4% 2,961 10.2% 2,426 12.6%
Other income 4,435 15.3% 7,082 24.5% 3,314 17.2%
------------ ---------- ------------ ---------- ------------ ----------
Total fee income $ 28,997 100.0% $ 28,956 100.0% $ 19,308 100.0%
============ ========== ============ ========== ============ ==========
Total fee income for the year ended December 31, 2002 was unchanged as
compared to 2001. The most significant variances included a $1.7 million
increase in syndication fees and a $0.9 million increase in asset management and
advisory fees, offset by a $2.6 million decrease in other income. The increase
in syndication fees is due primarily to the volume of syndications closed. The
$0.9 million increase in asset management and advisory fees is due to an
increase in tax credit equity and MMER assets under management. The decrease in
other income is due to $3.3 million of non-recurring income earned in 2001
associated with the assumption of a purchase obligation on two bonds, partially
offset by a $0.2 million increase in commission fees on tax credit equity funds
in 2002. The increase in commission fees on tax credit equity funds is due to an
increase in the volume of syndications closed.
Total fee income for the year ended December 31, 2001 increased $9.6
million over 2000 due to: (1) a $1.1 million increase in syndication fees due to
an increase in the volume of syndications closed; (2) a $2.9 million increase in
origination fees due to an increase in loan production; (3) a $1.4 million
increase in loan servicing fees due to increase in loan production; (4) a $0.5
million increase in asset management and advisory fees due to an increase in tax
credit equity assets under management; and (5) a $3.8 million increase in other
income due to $3.3 million of non-recurring income earned in 2001 associated
with the assumption of a purchase obligation on two bonds and a $0.5 million
increase in commissions.
Net Gain on Sales
For the year ended December 31,
-------------------------------------------------------------------------
(000s) 2002 % 2001 % 2000 %
----------- ---------- ----------- ---------- ----------- ----------
Permanent loans sold $ 3,167 37.0% $ 3,169 38.5% $ 1,931 83.3%
Sales and payoffs of investments 4,915 57.4% 2,743 33.4% 390 16.8%
Sale of investment in partnerships 282 3.3% 2,322 28.2% - 0.0%
Other 194 2.3% (12) -0.1% (2) -0.1%
----------- ---------- ----------- ---------- ----------- ----------
Total net gain on sales $ 8,558 100.0% $ 8,222 100.0% $ 2,319 100.0%
=========== ========== =========== ========== =========== ==========
Net gain on sales for the year ended December 31, 2002 remained relatively
stable compared to 2001. The most significant variances were a $2.2 million
increase in sales and payoffs of investments, partially offset by a decrease of
$2.0 million in the sale of investment in partnerships. The increase in sales
and payoffs of investments was primarily due to a $1.4 million gain realized on
the purchase and resale of two related investments and a $1.0 million gain on
sale resulting from the restructuring of a securitization trust. The
securitization trust was restructured to increase the senior certificates
outstanding in the trust. The restructuring of this trust resulted in the
Company selling its larger interest in the old securitization trust and
re-purchasing a smaller interest in the new trust. The decrease in the gain on
sale of investment in partnerships is due to a one-time gain of $2.3 million on
the re-syndication of certain tax credits in 2001.
In 2001, net gain on sales increased $5.9 million, primarily due to: (1) a
$1.2 million increase in gains on the sale of permanent loans; (2) a one time
gain of $2.3 million on the re-syndication of certain tax credits through a sale
of the related partnership interests; and (3) a $2.2 million gain from the
pay-off of a $10.1 million (face amount) bond in 2001.
Operating Expenses and Amortization
For the year ended December 31,
-------------------------------------------------------------------------
(000s) 2002 % 2001 % 2000 %
----------- ---------- ----------- ---------- ----------- ----------
Salaries and benefits $ 22,678 63.0% $ 21,381 59.5% $ 15,300 58.5%
General and administrative 7,020 19.5% 6,527 18.2% 4,643 17.8%
Professional fees 4,960 13.8% 5,501 15.3% 4,306 16.5%
Amortization of goodwill and mortgage
servicing rights 1,314 3.7% 2,509 7.0% 1,887 7.2%
----------- ---------- ----------- ---------- ----------- ----------
$ 35,972 100.0% $ 35,918 100.0% $ 26,136 100.0%
=========== ========== =========== ========== =========== ==========
Total expenses for the year ended December 31, 2002 were relatively
unchanged as compared to 2001. The most significant variances were: (1) a $1.3
million increase in salaries and benefits due to a $2.0 million increase in
salaries and other compensation, offset by a $0.7 million decrease in bonuses;
and (2) a $1.2 million decrease in amortization expense due to changes in
accounting guidelines relating to amortization of goodwill.
Total expenses for the year ended December 31, 2001 increased $9.8 million
over the 2000 fiscal year, primarily due to: (1) a $6.1 million increase in
salary and related benefits expense, including additional bonuses associated
with increased syndication production; (2) a $1.9 million increase in general
and administrative expenses due primarily to a $0.6 million charitable
contribution made in 2001, an increase in rental expense due to additional
office space leased in 2001 versus 2000 and an increase in computer related
costs; (3) a $1.2 million increase in professional fees associated with various
information system initiatives and an increase in commissions paid on equity
syndication funds; and (4) a $0.6 million increase in goodwill and other
intangibles amortization.
Net Holding Losses on Derivatives and Cumulative Effect of Change in Accounting
Policy
As a result of the adoption of FAS 133, the Company recorded a negative
cumulative effect adjustment of $12.3 million on January 1, 2001. The Company
recorded net holding losses for mark-to-market adjustments on derivative
financial instruments of $14.9 million and $5.6 million for the years ended
December 31, 2002 and 2001, respectively.
Impairments and Valuation Allowances Related to Investments
In accordance with the Company's valuation and impairment policies, the
Company recorded $0.7 million in impairments and valuation allowances related to
four bonds and one taxable loan with an aggregate face amount of $57.6 million
in 2002. In 2001, the Company recorded an other-than-temporary impairment of
$3.3 million on two bonds with an aggregate face amount of $21.5 million. In
2000, the Company recorded $1.5 million in impairments and valuation allowances
related to one bond and one taxable loan with an aggregate face amount of $19.6
million.
Net Losses from Equity Investments in Partnerships
Net losses from equity investments in partnerships increased by $1.8
million for the year ended December 31, 2002, primarily due to losses generated
from investments totaling $70.7 million in income-producing real estate
operating partnerships and related swap partnerships made in 2002. While these
investments generate cash flow to the Company in the form of quarterly
distributions, on a GAAP basis for 2002 they generated a net loss due to
non-cash adjustments for depreciation and mark-to-market adjustments related to
the swap partnerships.
Net losses from equity investments in partnerships increased $1.3 million
for the year ended December 31, 2001 as compared with 2000, as 2001 was the
first year the Company made a significant investment in partnerships.
Income Tax Expense
Income tax expense for the year ended December 31, 2002 remained relatively
stable compared to 2001. The most significant variances include a decrease in
the deferred tax benefit relating to tax credits in 2002 versus 2001, partially
offset by a decrease in current tax expense as a result of tax benefits derived
from the Company's equity investment in the partnerships. These deductions
result from depreciation expenses generated by the underlying real estate
properties that collateralize the Company's investments in partnerships.
Income tax expense decreased $0.6 million for the year ended December 31,
2001 as compared with 2000, primarily as a result of the tax benefits resulting
from low-income housing tax credits earned in 2001 and the $0.6 million
charitable contribution in the same year.
Income Allocable to Preferred Shareholders in a Subsidiary Company
Income allocable to preferred shareholders in a subsidiary company
increased by $1.2 million for 2002 as compared with 2001. The 2002 figure
reflects a full year of income allocable to the two new series of preferred
shares issued in October 2001.
Income allocable to preferred shareholders in a subsidiary company
increased by $2.3 million for 2001 as compared with 2000 because: (1) 2001
reflects a full year of income allocable to the preferred shares that were
issued in June 2000; and (2) 2001 also reflects income allocable to the two new
series of preferred shares from their issuance in October 2001.
Net Income
Net income for the year ended December 31, 2002 increased by $3.1 million
compared to 2001, due primarily to: (1) a $3.0 million decrease in net holding
losses on securities and cumulative effect of a change in accounting method; (2)
a $2.5 million decrease in impairments and valuation allowance related to
investments; (3) a $0.3 million increase in the Company's operating income
(total income excluding net gain on sales less total expenses) due to growth in
the Company's investments; partially offset by (4) a $1.8 million increase in
net losses from equity investments in partnerships; and (5) a $1.2 million
increase in income allocable to preferred shareholders in a subsidiary company.
Net income for the year ended December 31, 2001 decreased by $5.7 million
as compared with 2000, due primarily to: (1) net holding losses on derivative
securities totaling $17.9 million, consisting of (a) a $12.3 million cumulative
effect adjustment upon adoption of FAS 133 and (b) $5.6 million of net holding
losses for mark-to-market adjustments in 2001 (prior to adoption of FAS 133 as
of January 1, 2001, these adjustments had been recorded through other
comprehensive income rather than net income); (2) a $1.7 million increase in
impairments and valuation allowances related to investments; (3) a $2.3 million
increase in income allocable to preferred shareholders in a subsidiary company;
partially offset by (4) an $11.0 million increase in the Company's operating
income (total income excluding net gain on sales less total expenses) due to
growth in the Company's loan production volume and investments; and (5) a $5.9
million increase in gain on sales.
Other Comprehensive Income
For the year ended December 31, 2002, the net adjustment to other
comprehensive income for unrealized holding gains on tax-exempt bonds and
residual interests in bond securitizations available for sale was $1.5 million.
After a reclassification adjustment for gains of $4.9 million included in net
income, other comprehensive loss for the year ended December 31, 2002 was $3.4
million and total comprehensive income was $25.6 million.
For the year ended December 31, 2001, the net adjustment to other
comprehensive income for unrealized holding losses on tax-exempt bonds and
residual interests in bond securitizations available for sale was $7.0 million.
After a reclassification adjustment for losses of $8.1 million included in net
income, other comprehensive income for the year ended December 31, 2001 was $1.1
million and total comprehensive income was $27.0 million.
For the year ended December 31, 2000, the net adjustment to other
comprehensive income for unrealized holding losses on tax-exempt bonds and
residual interests in bond securitizations available for sale was $2.1 million.
After a reclassification adjustment for gains of $0.2 million included in net
income, other comprehensive loss for the year ended December 31, 2000 was $2.3
million and total comprehensive income was $29.3 million.
Critical Accounting Policies and Estimates
The Company's discussion of its financial condition and results of
operations is based upon the Company's consolidated financial statements, which
are prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles. The Company believes the following critical
accounting policies contain significant estimates used in the preparation of its
consolidated financial statements.
Mortgage Servicing Rights
-------------------------
The Company accounts for its mortgage servicing rights under FAS 140. FAS
140 requires servicing rights retained by the Company after the origination and
sale of the related loan to be capitalized by allocating the carrying amount
between the loan and the servicing rights based on their relative fair values.
The fair value of the mortgage servicing rights is based on the expected future
net cash flow to be received over the estimated life of the loan discounted at
market discount rates. The capitalization of the mortgage servicing rights is
reported in the income statement as a gain or loss on sale and results in an
offsetting asset or liability. Mortgage servicing rights are amortized over the
estimated life of the serviced loans. The amortization expense is included in
amortization of goodwill and mortgage servicing rights in the consolidated
statements of income.
The Company selected a discount rate of 12% for the year ended December 31,
2002. Using a lower discount rate of 10% would result in increasing the recorded
asset on the Company's balance sheet by approximately $279,000, with an
offsetting increase in the Company's corresponding gain on sale of loans. Using
a higher discount rate of 14% would result in decreasing the recorded assets on
the Company's balance sheet by approximately $244,000, with an offsetting
decrease in the Company's corresponding gain on sale of
loans.
The Company evaluates all capitalized mortgage servicing rights for
impairment when changes indicate that impairment is probable, but no less than
at each reporting date. The mortgage servicing rights are considered to be
impaired when the carrying amount exceeds the fair value of the expected future
net cash flows to be received under the servicing contract. Impairment, if any,
is recognized through a valuation allowance.
Other-than-Temporary Impairments and Valuation Allowances
---------------------------------------------------------
The Company evaluates on an on-going basis the credit risk exposure
associated with its assets to determine whether other-than-temporary impairments
exist or a valuation allowance is needed. When the Company believes that it is
probable that it will not collect all amounts due, including principal and
interest, under the terms of an investment, it records an other-than-temporary
impairment or valuation allowance. The Company bases its measure of impairment
of an investment on the present value of expected future cash flows discounted
at the investment's effective interest rate, or the fair value of the collateral
if the investment is collateral dependent.
Goodwill
--------
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141")
and No. 142 "Goodwill and Other Intangible Assets," ("FAS 142") which were
effective July 1, 2001 and January 1, 2002, respectively. FAS 141 requires that
the purchase method of accounting be used for all business combinations
consummated after June 30, 2001. FAS 141 did not have an impact on the Company
for the years ended December 31, 2002 or 2001. The Company adopted FAS 142 on
January 1, 2002. Upon adoption of FAS 142, amortization of goodwill and
indefinitely lived intangible assets, including goodwill and indefinitely lived
intangible assets recorded in past business combinations, was discontinued. For
the year ended December 31, 2001, the Company recorded amortization expense of
$1.6 million. Application of the nonamortization provision resulted in
additional net income of approximately $1.6 million for the year ended December
31, 2002. All goodwill was tested for impairment in accordance with the
provisions of FAS 142 and the Company found no instances of impairment. The
Company determined that none of the intangible assets, other than goodwill,
recorded by the Company were indefinitely lived, therefore, amortization of
these intangible assets has not ceased.
The Company bases its test for impairment on the present value of estimates
of the future cash flows generated by the acquired business discounted at market
discount rates. The Company selected a discount rate of 9% for the year ended
December 31, 2002. Increasing the discount rate by 10% and 20% would result in a
decrease in the estimated value of the business of $3.7 million and $7.0
million, respectively. These decreases in value would not require the Company to
record impairment.
The Company estimated the growth in the future cash flows generated by the
acquired business based on assumptions of 4.0% annual growth in revenue and 4.0%
annual growth in expenses. Decreasing the assumed annual revenue growth rate by
10% and 20% would cause a decrease in the value of the asset and the Company
would record impairment of zero and $11.9 million, respectively. Increasing the
assumed annual expense rate by 10% and 20% would cause a decrease in the value
of the asset and the Company would record impairment of zero and $11.4 million,
respectively.
Investment in Tax-Exempt Bonds and Residual Interests in Bond Securitizations
-----------------------------------------------------------------------------
Investment in tax-exempt bonds and residual interests in bond
securitizations (collectively, "investments in bonds") are accounted for under
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115").
All investments in bonds are classified and accounted for as available-for-sale
debt securities and are carried at fair value; unrealized gains or losses
arising during the period are recorded through other comprehensive income in
shareholders' equity, while realized gains and losses and other-than-temporary
impairments are recorded through operations. The Company evaluates on an
on-going basis the credit risk exposure associated with these assets to
determine whether any other-than-temporary impairments exist in accordance with
the Company's policy discussed under the Other-than-Temporary Impairment section
of this discussion. Future adverse changes in market conditions or poor
operating results from the underlying real estate could result in losses or an
inability to recover the carrying value of the investments.
The Company determines the fair value of participating bonds (i.e., bonds
that participate in the net cash flow and net capital appreciation of the
underlying properties) that are wholly collateral dependent and for which only a
limited market exists by discounting the underlying collateral's expected future
cash flows using current estimates of discount rates and capitalization rates.
The Company selected discount rates ranging from 11.0% to 13.3% and selected
capitalization rates ranging from 8.3% to 12.0% for the year ended December 31,
2002. Increasing the discount rates by 50 basis points and the capitalization
rates by 100 basis points would result in decreasing the recorded asset on the
Company's balance sheet by approximately $12.8 million, with an offsetting
decrease to other comprehensive income.
The Company bases the fair value of non-participating bonds and residual
interests in bond securitizations, which also have a limited market, on quotes
from external sources, such as brokers, for these or similar bonds or
investments. Net operating income is one of the key assumptions used to value
the non-participating bonds and residual interests in bond securitizations. Had
net operating income been decreased by 10% and 20%, the fair value of the bonds
and residual interests in bond securitizations would have decreased by
approximately $6.2 million and $13.7 million, respectively.
Because the Company's investment in tax-exempt bonds and residual interests
in bond securitizations are secured by non-recourse mortgage loans on real
estate properties, the value of the Company's assets is subject to all of the
factors affecting bond and real estate values, including macro-economic
conditions, interest rate changes, demographics, local real estate markets and
individual property performance. Further, many of the Company's investments are
subordinated to the claims of other senior interests and uncertainties may exist
as to a borrower's ability to meet principal and interest payments.
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board approved
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under that
guarantee. FIN 45 is effective for guarantees issued or modified after December
31, 2002. The disclosure requirements under FIN 45 are effective for 2002
calendar year-end financial statements. The Company believes the provision
pertaining to the recognition of a liability for the fair value of the
obligation it assumes under the guarantee may have a significant impact on the
total liabilities and net income of the Company, but is unable to estimate the
effect at this time. The Company incorporated the appropriate disclosure
requirements in the Note 11 to the consolidated financial statements for the
year ended December 31, 2002.
In January 2003, the Financial Accounting Standards Board approved
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires the consolidation of a Company's equity investment in a variable
interest entity ("VIE") if the Company is the primary beneficiary of the VIE and
if risks are not effectively dispersed among the owners of the VIE. The Company
is considered to be the primary beneficiary of the VIE if the Company absorbs
the majority of the losses of the VIE. FIN 46 is effective for VIEs created
after January 31, 2003. For any VIE in which the Company held an interest that
it acquired before February 1, 2003, FIN 46 is effective for the first interim
reporting period after June 15, 2003. The Company is currently reviewing the
impact of FIN 46 on the tax credit syndication funds that a wholly owned
subsidiary of the Company sponsors and asset manages. The Company will continue
to review new investments in order to determine if they should be accounted for
in accordance with FIN 46.
Related Party Transactions
Pension Fund Advisory Business
The Company has established relationships with pension funds through the
Group Trust and MMER. The Group Trust was established by a group of pension
funds for the purpose of investing in income-producing real estate investments.
The Group Trust provides loans and lines of credit to finance a variety of the
Company's loan products. MMER is a Maryland real estate investment trust
established by the same pension funds that participate in the Group Trust, plus
one other pension fund. MMER provides the Company short-term lines of credit to
finance the Company's lending activities, in addition to investing in
income-producing real estate partnerships. MFH is the investment manager for the
Group Trust and MMER and receives advisory fees for these services. Furthermore,
MFH earns origination fees on the placement of permanent loans with the Group
Trust. MFH also earns origination fees on the placement of equity interests in
real estate partnerships with MMER. The Company's fees earned from the Group
Trust for the years ended December 31, 2002, 2001, and 2000 were $2.5 million,
$2.0 million and $1.0 million, respectively. The Company's fees earned from MMER
for the years ended December 31, 2002, 2001 and 2000 were $1.6 million, $1.4
million and zero, respectively.
As of December 31, 2002, the Company had $89.1 million outstanding on its
credit lines with the Group Trust and MMER. The Group Trust loans outstanding to
various subsidiaries of the Company totaled $128.2 million. For the years ended
December 31, 2002, 2001 and 2000, the Company recorded interest expense on these
borrowing arrangements of $11.1 million, $11.3 million, and $13.0 million,
respectively.
The Group Trust and MMER engage in business transactions exclusively with
the Company. Four of the five trustees of the Group Trust (Mr. Michael L.
Falcone, the Company's President and Chief Operating Officer, Mr. Robert J.
Banks, the Company's Vice Chairman, Mr. Keith J. Gloeckl, the Company's Chief
Investment Officer, and Mr. Gary A. Mentesana, the Company's Chief Capital
Officer) are officers of the Company. In addition, three of the six trustees of
MMER (Messrs. Falcone, Banks and Gloeckl) are Company officers. These officers
are not paid for Group Trust or MMER service. The Group Trust and MMER are
deemed to be affiliates of the Company.
The Shelter Group
Mr. Mark K. Joseph, the Company's Chief Executive Officer and Chairman of
its Board of Directors, controls and is an officer of Shelter Development
Holdings, Inc. ("Shelter Holdings"), which owns a minority interest in Shelter
Development, LLC and Shelter Properties, LLC (collectively, the "Shelter
Group"), engages in real estate development and provides property management
services to a wide variety of commercial and residential properties. One of the
Shelter Group companies provides property management functions for a number of
properties that serve as collateral for the Company's bond investments. Mr.
Falcone had an ownership interest in and was a board member of this entity until
he relinquished these positions in 2000.
The Shelter Group receives fees pursuant to management contracts for
properties which it manages. During 2002, 2001 and 2000, the Shelter Group had
10, 10, and 12, respectively, property management contracts for properties that
collateralize the Company's investments with fees at or below market rates.
During the years ended December 31, 2002, 2001 and 2000, these fees approximated
$1.1 million, $1.1 million, and $1.3 million, respectively. In addition, the
Shelter Group is the general partner in a real estate operating partnership that
the Company held a limited partner interest in at December 31, 2002. As of
December 31, 2002, the Company had invested $1.0 million in the property, and
the Shelter Group had received $58,063 in developer fees.
Each affiliate property management contract is presented to the independent
members of the Company's Board of Directors for approval with information
documenting the comparability of the proposed fees to those in the market area
of the property. Mr. Joseph has agreed to abstain from any involvement, as a
partner in the Shelter Group, in the structuring or review of any contracts or
transactions between the Shelter Group and the Company. He has likewise agreed
to excuse himself from review or involvement, as an officer or director of the
Company, in contracts and transactions involving the Shelter Group. The
Company's Board of Directors has approved all contracts and transactions
involving the Shelter Group and conducts an annual review of all property
management contracts between the Shelter Group and any properties that
collateralize the Company's investments.
Management of Defaulted Assets
In certain circumstances involving the Company's tax-exempt bonds,
borrowers have defaulted on their debt obligations to the Company. In such
circumstances the Company has, after evaluating its options, chosen not to
foreclose on the property. Instead, the Company has negotiated the transfer of a
property's deed in lieu of foreclosure to, or replaced the general partner of a
property with, an entity affiliated with the Company. The Company has done so in
order to preserve the original tax-exempt bond obligations and its participation
in cash flow from the property, consistent with its overall goal of providing
tax-exempt income to its shareholders.
Following the transfer of the property's deed to an affiliated entity, that
entity controls the collateral for certain investments held by the Company.
These affiliated entities are controlled by or are managed by certain officers
of the Company. The following table outlines these affiliate relationships at
December 31, 2002:
Number of Properties Owned Carrying Value of Company's
Affiliate Entity (directly or indirectly) Investment at December 31, 2002
---------------- ------------------------ -------------------------------
SCA Successor, Inc. (1) 4 $ 53,563,000
SCA Successor II, Inc. (1) 12 51,788,000
MMA Affordable Housing Corporation (2) 2 47,734,000
MuniMae Foundation, Inc. (3) /
MMA Successor I, Inc. (1) 3 12,035,000
------------ ------------
Total 21 $165,120,000
============ ============
(1) These corporations are general partners of the operating partnerships whose
property collateralizes the Company's investments. Mr. Joseph controls the
general partners of these operating partnerships and is a limited partner
in eight of these partnerships. Mr. Falcone and Mr. William S. Harrison,
the Company's Chief Financial Officer and Senior Vice President, serve as
officers and directors of one such general partner. Ms. Angela A. Barone,
the Company's Vice President of Finance and Budgeting, serves as a director
in one such general partner.
(2) MMA Affordable Housing Corporation ("MMAHC") is a 501(c)(3) non-profit
entity organized to provide charitable donations on behalf of the Company.
Mr. Joseph is the Chairman and one of five directors of the MMAHC. Mr.
Falcone, Mr. Harrison, Mr. Gary A. Mentesana, the Company's Chief Capital
Officer, and Mr. Earl W. Cole, III, Senior Vice President of the Company,
are also officers and directors of MMAHC.
(3) MuniMae Foundation Inc., is a private non-profit entity organized to
provide charitable donations on behalf of the Company. Mr. Joseph is the
Chairman and one of four directors of the MuniMae Foundation. Mr. Falcone
and Mr. Mentesana are also officers and directors of the MuniMae
Foundation.
The officers of the Company who serve as directors or officers of the
affiliated entities listed above are neither compensated for their services as
officer or director thereof, nor derive any other economic benefit from those
entities except for Mr. Joseph, who controls SCA Successor I, Inc., SCA
Successor II, Inc. and MMA Successor I, Inc.
Such entities could have interests that do not fully coincide with, or even
are adverse to, the interests of the Company. Such entities could choose to act
in accordance with their own interests, which could adversely affect the
Company. Among the actions such entities could take might be selling a property,
thereby causing a redemption event, at a time and under circumstances that would
not be advantageous to the Company.
Other Relationships
The Company leases office space from an affiliate. Mr. Joseph and a member
of the Company's Board of Directors have ownership interests in the partnership
that leases the office space to the Company. For the years ended December 31,
2002, 2001 and 2000, the Company paid $230,000, $208,000 and $178,000,
respectively, in rental lease payments under the related lease agreements. These
lease agreements with an affiliate were negotiated at market rate.
Mr. Banks and Mr. Gloeckl hold limited partnership interests in various
limited partnerships that function as the general partner of certain syndicated
low-income housing tax credit funds. The Company is the general partner in these
limited partnerships. The limited partnerships are as follows: Midland Equity IV
LP, Midland Equity V LP, Midland Equity VI LP, Midland Equity VII LP, Midland
Equity VIII LP, Midland Equity IX LP and Midland Equity X LP. Mr. Banks and Mr.
Gloeckl are also invested in Midland Tax Credit Investors Partnership, which is
a general partnership that invests as a limited partner in certain syndicated
low-income tax credit funds.
Mr. Banks and Mr. Gloeckl own shares in three corporations that are
invested in real estate operating partnerships as the general partner. In
addition, Mr. Banks and Mr. Gloeckl are directly invested in a real estate
operating partnership as the general partner with Mr. Gloeckl acting as the
managing general partner. All four of the real estate operating partnerships are
involved in equity transactions with certain of the Company's low-income housing
tax credit funds.
Until 2002, the Company owned a 75% interest in Whitehawk Capital, LLC and
Whitehawk Capital IV, LLC (collectively, "Whitehawk"). Mr. Charles M. Pinckney
and Mr. Mark S. Begeny, employees of Whitehawk, owned the remaining 25%. During
2002, the Company purchased the remaining 25% interest in Whitehawk from Mr.
Pinckney and Mr. Begeny for a total purchase price of $1.2 million ($1.1 million
in cash and $0.1 million in common shares of the Company). Subsequent to the
purchase of the 25% interest in Whitehawk, Mr. Pinckney and Mr. Begeny became
employees of the Company. In addition, each of Mr. Pinckney and Mr. Begeny
receives $32,500 per year through 2010 from the Company for deferred consulting
fees earned prior to becoming employees of the Company.
In conjunction with the sale of certain taxable notes in 1998 and 1999, the
Company provided a guarantee on behalf of 11 operating partnerships for the full
and punctual payment of interest and principal due under the taxable notes.
These taxable notes have a face amount of $16.2 million at December 31, 2002.
Mr. Joseph controls the general partners of these operating partnerships. The
Company's obligation under this guarantee is included in the summary of the
Company's guarantees in Note 11.
Shelter Development Holdings, Inc. (the "Special Shareholder") is
personally liable for the obligations and liabilities of the Company. Mr. Joseph
controls and is an officer of the Special Shareholder. In the event that a
business combination or change in control occurs, and the Special Shareholder
does not approve of such transaction, the Special Shareholder has the right to
terminate its status as the Special Shareholder. In the event of such
termination, the Company would be obligated to pay the Special Shareholder $1.0
million.
In 2000 and 2001, prior to his employment with the Company, Mr. William S.
Harrison, Senior Vice President and Chief Financial Officer of the Company,
provided consulting services to the Company through a corporation wholly owned
by Mr. Harrison. The Company paid approximately $31,000 and $79,000 in 2001 and
2000, respectively, for these services.
A member of the Company's Board of Directors is the managing general
partner of the law firm of Gallagher, Evelius and Jones LLP ("GEJ"), which
provides corporate and real estate legal services to the Company. For the year
ended December 31, 2002, $1.2 million in legal fees to GEJ was generated by
transactions structured by the Company, of which $0.8 million was directly
incurred by the Company. The total amount of $1.2 million represented 8% of
GEJ's total revenues for 2002. For the year ended December 31, 2001, $1.6
million in legal fees to GEJ was generated by transactions structured by the
Company, of which $1.0 million was directly incurred by the Company. The total
amount of $1.6 million represented 12.6% of GEJ's total revenues for 2001.
Until the redemption of the term growth shares in 2002 (see Note 13 to the
Company's consolidated financial statements), an affiliate of Merrill Lynch
owned 1,250 term growth shares of the Company. The Company may from time to time
enter into various investment banking, financial advisory and other commercial
services with Merrill Lynch for which Merrill Lynch receives and will receive
customary compensation. The Company also enters into various securitizations and
interest rate swap transactions with Merrill Lynch on terms generally available
in the marketplace.
The Company is the general partner in various partnerships that provide
low-income tax credits for investors. The Company sells the limited partner
interests in these partnerships to third party investors. In addition, the
Company may provide certain performance guarantees on the underlying properties
owned by the partnerships (see Note 11). The Company receives asset management
fees from these partnerships. For the year ended December 31, 2002, 2001, and
2000, the Company earned $3.0 million, $2.4 million and $1.9 million in asset
management fees, respectively.
For the year ended December 31, 2001, the Company made a $600,000
charitable contribution to MMA Affordable Housing Corporation.
Income Tax Considerations
MuniMae is organized as a limited liability company. This structure allows
MuniMae to combine the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Therefore, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return. In addition,
the tax-exempt income derived from certain investments remains tax-exempt when
it is passed through to the shareholders. The Company records cash dividends
received from subsidiaries organized as corporations as dividend income for tax
purposes. Shareholders' distributive share of MuniMae's income, deductions and
credits are reported to shareholders on Internal Revenue Service Schedule K-1.
The Company has elected under Section 754 of the Internal Revenue Code to
adjust the basis of the Company's property on the transfer of shares to reflect
the price each shareholder paid for its shares. While the bulk of the Company's
recurring interest income is tax-exempt, from time to time the Company may sell
or securitize various assets, which may result in capital gains and losses for
tax purposes. Since the Company is taxed as a partnership, these capital gains
and losses are passed through to shareholders and are reported on each
shareholder's Schedule K-1. The capital gain and loss allocated from the Company
may be different for each shareholder due to the Company's Section 754 election
and is a function of, among other things, the timing of the shareholder's
purchase of shares and the timing of transactions that generate gains or losses
for the Company. This means that for assets purchased by the Company prior to a
shareholder's purchase of shares, the shareholder's basis in the assets may be
significantly different than the Company's basis in those same assets. Although
the procedure for allocating the basis adjustment is complex, the result of the
election is that each share is homogeneous, while each shareholder's basis in
the assets of the Company may be different. Consequently, the capital gains and
losses allocated to individual shareholders may be significantly different than
the capital gains and losses recorded by the Company.
In January 2003, the Company applied to have its election under Section 754
of the Internal Revenue Code revoked effective January 1, 2003. The Company
applied for the revocation due to the increased administrative burden
attributable to this election resulting form the increased numbers of partners
and frequency of shifts in ownership. The Internal Revenue Service has not yet
responded to the Company's application to revoke its election under Section 754.
A portion of the Company's interest income is derived from private activity
bonds that for income tax purposes are considered tax preference items for
purposes of alternative minimum tax ("AMT"). AMT is a mechanism within the
Internal Revenue Code to ensure that all taxpayers pay at least a minimum amount
of taxes. All taxpayers are subject to the AMT calculation requirements although
the vast majority of taxpayers will not actually pay AMT. As a result of AMT,
the percentage of the Company's income that is exempt from federal income tax
may be different for each shareholder depending on that shareholder's individual
tax situation.
The Company has numerous corporate subsidiaries, which are subject to
income taxes. The Company provides for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company invests in a variety of financial instruments and other
investments, including available-for-sale investments in tax-exempt bonds and
residual interests in bond securitizations, taxable construction, permanent and
related loans and investments in income-producing real estate partnerships,
which are subject to various forms of market risk including real estate risk,
interest rate risk, credit and liquidity risk and prepayment risk. The Company
seeks to prudently and actively manage such risks, to earn sufficient
compensation to justify the undertaking of such risks and to maintain capital
levels consistent with the risks the Company
undertakes.
The following is a discussion of various categories of risk that the
Company may be subject to in the foreseeable future.
Real Estate Risk
The Company's investments in bonds and residual interests in bond
securitizations are primarily collateralized by non-recourse mortgage loans on
real estate properties. One of the major risks of owning investments
collateralized by multifamily residential properties is the possibility that the
owner of a property collateralizing the investment will not make the payments
due to the Company and therefore defaults on the debt obligation. Defaults are
subject to a wide variety of factors, including, but not limited to, property
performance, property management, supply and demand forces, economic trends,
interest rates and other factors beyond the control of the Company. Adverse
economic conditions may limit the amounts of rent that can be charged for rental
units at the properties or may reduce a property's occupancy level. Occupancy
and rent levels may decrease due to the construction of additional housing
units. City, state or federal housing programs that subsidize many of the
properties may impose rent limitations and may limit the ability of a property
to increase rents. The property may experience an increase in expenses,
including but not limited to capital needs, real estate taxes and insurance. All
of these conditions and events may increase the possibility that a property
owner may be unable to meet its obligations to the Company under its tax-exempt
bond. This could affect the Company's cash available for distribution to
shareholders. The Company manages this risk through a diligent underwriting
process and by carefully monitoring loan performance.
The Company may be adversely affected by periods of economic slowdown or
recession that result in declining property values or property performance,
particularly declines in the value or performance of multifamily properties. Any
material decline in property values weakens the value of the properties as
collateral for the Company's investments and increases the possibility of a loss
in the event of a default. Additionally, some of our income comes from
additional interest on participating tax-exempt bonds. The collection of
additional interest may decrease in times of economic slowdown due to lower cash
available from the properties. Further, many of the Company's investments are
subordinated to the claims of other senior interests and uncertainties may exist
as to a borrower's ability to meet principal and interest payments. As a result
of these factors, debt service on the investments, and therefore cash flow
available for distribution to shareholders, is dependent upon the performance of
the underlying properties. Accordingly, a decline in the performance of the
related multifamily property could have a negative effect on our cash available
for distribution to shareholders.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including
governmental, monetary and tax policies, domestic and international economic and
political considerations and other factors beyond the Company's control. The
interest income collected on investments that bear interest at fixed rates or
pay interest based on the cash flow available from the underlying property are
not directly impacted by fluctuations in interest rates, unless the investment
is prepaid as discussed below. In contrast, certain of the Company's investments
in residual interests in bond securitizations, which bear interest at floating
rates, are directly impacted by fluctuations in market interest rates. If
interest rates had changed by 100 basis points and 200 basis points at December
31, 2002, the Company's annual interest income on these investments would have
changed by $479,000 and $958,000, respectively. If interest rates had changed by
100 basis points and 200 basis points at December 31, 2001, the Company's annual
interest income on these investments would have changed by $95,000 and $200,000,
respectively.
The majority of Company's loans receivable and notes payable related to the
Company's mortgage banking activities are generally not expected to be directly
subject to interest rate risk. The Company typically provides loans to borrowers
(loans receivable) by borrowing from third parties (notes payable). The Company
earns net interest income that represents the difference between the interest
charged to borrowers and the interest paid to the Company's lenders. The Company
typically attempts to match the terms and rates of its loans receivable and
notes payable to fix the interest income the Company will receive.
Changing interest rate environments could reduce the demand for multifamily
tax-exempt and taxable financing, which could limit the Company's ability to
structure transactions. Conversely, falling interest rates may prompt historical
renters to become first time homebuyers, in turn potentially reducing the demand
for multifamily housing. In addition, in a falling interest rate environment,
demand for taxable financing could increase relative to tax-exempt financing.
Developing an effective interest rate management strategy can be complex,
and no strategy can insulate the Company from all potential risks associated
with interest rate changes. Management believes the majority of the Company's
interest rate risk arises in connection with: (1) certain of its residual
interests in bond securitizations; (2) CAPREIT; and (3) to the extent not
match-funded as described above, floating-rate debt used to finance the
Company's mortgage banking activities. The Company manages its interest rate
exposure on its investments in certain residual interests in bond
securitizations, which are inverse floaters, through the use of interest rate
swaps in the notional amount of the outstanding senior interests in the
securitization trusts. Historically, the Company has attempted to hedge
substantially all of the floating interest rate exposure arising from residual
interests; however, from time to time, a portion of this floating rate exposure
may not be fully mitigated by hedging instruments. As a result, changes in
interest rates could result in either an increase or decrease in the Company's
interest income and cash flows associated with these investments. Also, certain
of the interest rate swap agreements are subject to risk of early termination,
possibly at times unfavorable to the Company. There can be no assurance that the
Company will be able to acquire hedging instruments at favorable prices, or at
all, when the existing arrangements expire or are terminated. In this case, the
Company would be fully exposed to interest rate risk to the extent the hedging
instruments are terminated by the counterparty while the securitization trust
remains in existence.
In addition, there is no guarantee that the securitization trust will be in
existence for the duration of the hedge, as these securitization trusts would be
collapsed if the related credit enhancement or liquidity facilities are not
renewed.
The interest required to be paid on certain of the Company's floating
senior interests in bond securitization trusts includes a remarketing spread
over market interest rate. This remarketing spread varies on a weekly basis and
is not mitigated by the hedging instruments discussed above. As a result,
changes in the remarketing spread could result in either an increase or decrease
in the Company's interest income and cash flows associated with its residual
interests in bond securitizations. At December 31, 2002, the Company's weighted
average remarketing spread was 0.16%. If the remarketing spread had changed by
50% and 100% at December 31, 2002, the Company's annual interest income on these
investments would have changed by $318,000 and $636,000, respectively.
The Company's investments in tax-exempt bonds, residual interests in bond
securitizations, and investments in derivative financial instruments are carried
at fair value. Significant changes in market interest rates could affect the
amount and timing of unrealized and realized gains or losses on these
investments. If interest rates had changed by 100 basis points and 200 basis
points at December 31, 2002, the market value of these investments would have
changed by 6% and 11%, respectively. If interest rates had changed by 100 basis
points and 200 basis points at December 31, 2001, the market value of these
investments would have changed by 8% and 16%, respectively. However, for the
participating tax-exempt bonds for which the fair value is determined by
discounting the underlying collateral's expected future cash flows using current
estimates of discount rates and capitalization rates, changes in market interest
rates do not have a strong enough correlation to discount and capitalization
rates from which to draw a conclusion. There are many mitigating factors to
consider in determining what causes discount and capitalization rates to change,
such as macroeconomic issues, real estate capital markets, economic events and
conditions, and investor risk perceptions.
Credit and Liquidity Risks
Substantially all of the Company's bonds and residual interests in bond
securitization investments lack a regular trading market and are illiquid. This
lack of liquidity could be exacerbated during turbulent market conditions or if
any of the tax-exempt bonds become taxable or go into default. If the Company
were required to raise additional cash during a turbulent market, the Company
might have to liquidate its investments on unfavorable terms. In addition, the
illiquidity associated with the Company's bond and residual interests in bond
securitization investments can result in increased volatility in the fair value
of the Company's investments, which could impact the Company's balance sheet and
other comprehensive income (loss).
There can also be significant credit risk assigned by investors to the
types of investments held by the Company. The illiquid assets held by the
Company trade at yields that can be traced to spreads over "investment grade"
instruments. On occasion there may be periods of market volatility during which
the market investors demand an increased credit spread to "investment grade'
investments for the investments owned by the Company. During these times, the
market value of the Company's investments may decline significantly. If the
investors' required rate of return on the Company's investments had changed 100
basis points and 200 basis points at December 31, 2002, the market value of
these investments would have changed by 6% and 11%, respectively. If the
investors' required rate of return on the Company's investments had changed 100
basis points and 200 basis points at December 31, 2001, the market value of
these investments would have changed by 8% and 16% respectively.
Under the terms of the Company's interest rate swap agreements with
counterparties and certain other transactions (see Note 7 to the consolidated
financial statements), the Company is required to maintain cash deposits with
its counterparties (margin call deposits). These cash margin call deposits have
risen from $15.1 million at December 31, 2001 to $30.0 million at December 31,
2002. There is a risk that the Company could be required to liquidate
investments to satisfy margin calls on its interest rate swap contracts if
interest rates rise or fall dramatically. Additionally, the Company is exposed
to the credit risks of the Company's counterparties in the interest rate swap.
The Company's counterparties, under certain circumstances, may not pay or
perform under the contracts or they may terminate the contract at times
unfavorable to the Company.
In order to facilitate the securitization of certain assets at higher than
normal leverage ratios, the Company has pledged additional bonds that act as
collateral for the senior interests in the securitization trusts. In the event
that a securitization trust cannot meet its obligations, all or a portion of the
bonds pledged as collateral may be sold to satisfy the obligations of the senior
interest in the securitization trust. In addition, if short-term tax-exempt
interest rates rise dramatically and exceed the coupon rate of the underlying
fixed rate bond in a securitization trust, the securitization trust would be
collapsed as a result of insufficient interest from the underlying fixed rate
bond available to service the floating senior interest obligation.
Prepayment Risk
A decrease in market interest rates may result in the redemption of an
investment or a borrower prepaying or refinancing the investment prior to its
stated maturity. The Company may not be able to reinvest the proceeds of the
redeemed investment at an attractive rate of return. This may affect the
Company's ability to generate sufficient cash to pay distributions.
Risk Associated with Securitizations
Through securitizations, the Company seeks to enhance its overall return on
its investments and to generate proceeds that facilitate the acquisition of
additional investments. In certain of the Company's securitization trusts, the
investment bank (the "credit enhancer") provides liquidity to the trust and
credit enhancement to the bonds, which enables the senior interests to be sold
to certain accredited third party investors seeking investments rated "AA" or
better. The liquidity and credit enhancement facilities are generally for
one-year terms and are renewable annually by the credit enhancer. To the extent
that the credit enhancer is downgraded below "AA", either an alternative credit
enhancement provider would be substituted to reinstate the desired investment
rating or the senior interests would be marketed to other accredited investors.
In either case, it is anticipated that the return on the residual interests
would decrease, which would negatively impact the Company's income. If the
credit enhancer does not renew the liquidity or credit enhancement facilities,
the Company would be forced to find alternative liquidity or credit enhancement
facilities, repurchase the underlying bonds or liquidate the underlying bond and
its investment in the residual interests. If the Company is forced to liquidate
its investment in the residual interests and potentially the related interest
rate swaps (discussed above), the Company would recognize gains or losses on the
liquidation, which may be significant depending on market conditions. As of
December 31, 2002, $385.4 million and $165.7 million of the Company's senior
interests in securitization trusts were subject to annual "rollover" renewal for
liquidity and credit enhancement, respectively. As of December 31, 2001, $412.7
million and $280.7 million of the Company's senior interests in securitization
trusts were subject to annual "rollover" renewal for liquidity and credit
enhancement, respectively. The Company has already extended, in advance, the
liquidity and credit enhancement of the senior interests for a period of one
year on each trust. The expiration of each facility is staggered for the trusts
so that the annual renewals are not concentrated in any one month. In addition,
the Company entered an agreement whereby the liquidity and credit enhancement
facilities will be automatically extended for six month increments on each six
month anniversary thereafter unless notified by the credit enhancer six months
in advance of their termination of the facilities. The extension and renewal of
the liquidity and credit enhancement facilities have the same terms as the
original facilities. The Company continues to review alternatives that would
reduce and diversify credit risks.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company, together with the
report thereon of PricewaterhouseCoopers LLP dated February 27, 2003, are listed
in Item 14(a)(1) and included at the end of this report.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is contained in the Company's proxy
statement for its 2003 annual shareholders meeting under the captions "Election
of Directors," "Identification of Executive Officers," and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" and is incorporated herein
by reference.
Item 11. Executive Compensation.
The information required by Item 11 is contained in the Company's proxy
statement for its 2003 annual shareholders meeting under the heading "Report of
the Compensation Committee of the Board of Directors" and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is contained in the Company's proxy
statement for its 2003 annual shareholders meeting under the same caption and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is contained in the Company's proxy
statement for its 2003 annual shareholders meeting under the same caption and is
incorporated herein by reference.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c)
and 15d-14(c) of the Securities and Exchange Act of 1934 (the "Exchange Act").
These rules refer to the controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized
and reported within required time periods. Our Chief Executive Officer and our
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of a date within 90 days before the filing of this
annual report (the "Evaluation Date"), and they have concluded that, as of the
Evaluation Date, such controls and procedures were effective at ensuring that
required information will be disclosed on a timely basis in our reports filed
under the Exchange Act.
(b) Changes in internal controls
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the quarter ended December 31, 2002, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) List of Financial Statements. The following is a list of the
consolidated financial statements included at the end of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for the Years Ended December 31,
2002, 2001 and 2000
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedules.
All schedules prescribed by Regulation S-X have been omitted as the
required information is inapplicable or the information is presented
elsewhere in the consolidated financial statements or related notes.
(3) List of Exhibits. The following is a list of exhibits furnished.
3.1 Second Amended and Restated Certificate of Formation and Operating
Agreement of the Company dated as of August 12, 2002.
3.4 Amended and Restated By-laws of the Company
10.1 Master Repurchase Agreement among the Registrant, Trio Portfolio
Investors, L.L.C., Rio Portfolio Partners, L.P., Blackrock Capital
Finance, L.P., Brazos Fund, L.P. and M.F. Swapco, Inc. dated June 30,
1997 (filed as Item 7 (c) Exhibit 10.4 to the Company's report on Form
8-K, filed with the Commission on January 28, 1998 and incorporated by
reference herein).
10.2 Stock Purchase and Contribution Agreement among the Registrant and
Messrs. Robert J. Banks, Keith J. Gloeckl and Ray F. Mathis dated
September 30, 1999 (filed as Item 7 (c) Exhibit 2.1 to the Company's
report on Form 8-K, filed with the Commission on November 8, 1999 and
incorporated by reference herein).
10.3 Registration Rights Agreement among the Registrant and Messrs. Robert
J. Banks, Keith J. Gloeckl and Ray F. Mathis dated October 20, 1999
(filed as Item 16 Exhibit 2.2 to the Company's report on Form S-3,
File No. 333-56049, filed with the Commission on January 24, 2000 and
incorporated by reference herein).
10.4 Employment Agreement between the Registrant and Robert J. Banks, dated
October 20, 1999 (filed as part of the Company's Form 10-K for the
fiscal year ended December 31, 1999 and incorporated by reference
herein).
10.5 Employment Agreement between the Registrant and Keith J. Gloeckl,
dated October 20, 1999 (filed as part of the Company's Form 10-K for
the fiscal year ended December 31, 1999 and incorporated by reference
herein).
10.6 Employment Agreement between the Registrant and Mark K. Joseph, dated
December 31, 1999 (filed as part of the Company's Form 10-K, as
amended, for the fiscal year ended December 31, 1999 and incorporated
by reference herein).
10.7 Employment Agreement between the Registrant and Michael L. Falcone,
dated December 31, 1999 (filed as part of the Company's Form 10-K, as
amended, for the fiscal year ended December 31, 1999 and incorporated
by reference herein).
10.8 Employment Agreement between the Registrant and Gary A. Mentesana,
dated December 31, 1999 (filed as part of the Company's Form 10-K, as
amended, for the fiscal year ended December 31, 1999 and incorporated
by reference herein).
10.9 Employment Agreement between the Registrant and William S. Harrison,
dated April 9, 2001 (filed as Item 6 (a) Exhibit 10.13 to the
Company's report on Form 8-K, filed with the Commission on May 15,
2001.
10.10Employment Agreement between the Registrant and Keith J. Gloeckl,
dated August 30, 2001 (filed as Item 6 (a) Exhibit 10.1 to the
Company's report on Form 8-K, filed with the Commission on August 14,
2001.
10.11Employment Agreement between the Registrant and Robert J. Banks,
dated August 30, 2001 (filed as Item 6 (a) Exhibit 10.1 to the
Company's report on Form 8-K, filed with the Commission on November
13, 2001.
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
99 Officers' Certificate pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K.
On October 21, 2002, the Company filed a Form 8-K containing the
supplemental information reported to securities analysts for the three
months ended September 30, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Municipal Mortgage & Equity, LLC
By: /s/ Mark K. Joseph
-----------------------
Mark K. Joseph
Chief Executive Officer
Date: March 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons, in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Mark K. Joseph Chairman of the Board, Chief Executive March 26, 2003
----------------------- Officer (Principal Executive Officer),
Mark K. Joseph and Director
/s/ Robert J. Banks Vice Chairman and Director March 26, 2003
-----------------------
Robert J. Banks
/s/ Michael L. Falcone President, Chief Operating Officer March 26, 2003
----------------------- and Director
Michael L. Falcone
/s/ William S. Harrison Senior Vice President, Chief Financial March 26, 2003
----------------------- Officer and Secretary
William S. Harrison
/s/ Charles Baum Director March 26, 2003
-----------------------
Charles Baum
/s/ Richard O. Berndt Director March 26, 2003
-----------------------
Richard O. Berndt
/s/ Robert S. Hillman Director March 26, 2003
-----------------------
Robert S. Hillman
/s/ Douglas A. McGregor Director March 26, 2003
-----------------------
Douglas A. McGregor
/s/ Carl W. Stearn Director March 26, 2003
-----------------------
Carl W. Stearn
CERTIFICATIONS
--------------
I, William S. Harrison, certify that:
1. I have reviewed this annual report on Form 10-K of Municipal Mortgage
& Equity, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ William S. Harrison
--------------------------------
Name: William S. Harrison
Title: Chief Financial Officer
I, Mark K. Joseph, certify that:
1. I have reviewed this annual report on Form 10-K of Municipal Mortgage
& Equity, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Mark K. Joseph
--------------------------------
Name: Mark K. Joseph
Title: Chief Executive Officer
Report of Independent Accountants
---------------------------------
To the Shareholders and Board of Directors of Municipal Mortgage & Equity, LLC:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows, and shareholders' equity present
fairly, in all material respects, the financial position of Municipal Mortgage &
Equity, LLC and its subsidiaries at December 31, 2002 and December 31, 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
------------------------------
Baltimore, Maryland
February 27, 2003
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 2002 December 31, 2001
-------------------- ---------------------
ASSETS
Investment in tax-exempt bonds, net (Note 2) $ 770,345 $ 616,460
Loans receivable, net (Note 3) 461,448 440,031
Investments in partnerships (Note 4) 99,966 5,393
Residual interests in bond securitizations (Note 5) 11,039 13,295
Investment in derivative financial instruments (Note 6) 18,762 2,912
Cash and cash equivalents 43,745 97,373
Interest receivable 16,157 15,859
Restricted assets (Note 7) 40,318 16,710
Other assets 46,592 43,077
Mortgage servicing rights, net (Note 8) 11,009 9,161
Goodwill 33,537 29,005
-------------------- ---------------------
Total assets $ 1,552,918 $ 1,289,276
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable (Note 9) $ 450,924 $ 420,063
Short-term debt (Note 9) 219,945 78,560
Long-term debt (Note 9) 147,357 134,881
Residual interests in bond securitizations (Note 5) 1,447 7,979
Investment in derivative financial instruments (Note 6) 49,359 18,646
Accounts payable and accrued expenses 14,113 13,104
Unearned revenue and other liabilities 19,250 15,910
Distributions payable 2,994 2,960
-------------------- ---------------------
Total liabilities 905,389 692,103
-------------------- ---------------------
Commitments and contingencies (Note 11) - -
Preferred shareholders' equity in a subsidiary company (Note 12) 160,465 160,465
Shareholders' equity:
Preferred shares:
Series I (0 and 10,995 shares issued and outstanding, respectively) - 6,914
Series II (0 and 3,176 shares issued and outstanding, respectively) - 2,326
Preferred capital distribution shares:
Series I (0 and 5,742 shares issued and outstanding, respectively) - 2,552
Series II (0 and 1,391 shares issued and outstanding, respectively) - 411
Term growth shares (0 and 2,000 shares issued and outstanding,
respectively) - 229
Common shares, par value $0 (29,083,599 shares authorized,
including 25,571,580 shares issued and outstanding, and
29,844 deferred shares at December 31, 2002 and 24,594,597
authorized, 21,857,312 shares issued and outstanding, and 22,254
deferred shares at December 31, 2001) 471,946 406,733
Less common shares held in treasury at cost (55,444 and 59,330
shares respectively) (857) (912)
Less unearned compensation (deferred shares) (Note 15) (3,274) (4,145)
Accumulated other comprehensive income 19,249 22,600
-------------------- ---------------------
Total shareholders' equity 487,064 436,708
-------------------- ---------------------
Total liabilities and shareholders' equity $ 1,552,918 $ 1,289,276
==================== =====================
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
For the year ended December 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
INCOME:
Interest income
Interest on bonds and residual interests in bond securitizations $ 59,923 $ 53,443 $ 43,077
Interest on loans 34,895 33,340 31,757
Interest on short-term investments 1,255 3,081 4,391
-------------- -------------- ---------------
Total interest income 96,073 89,864 79,225
-------------- -------------- ---------------
Fee income
Syndication fees 7,221 5,480 4,410
Origination fees 6,631 6,451 3,537
Loan servicing fees 6,823 6,982 5,621
Asset management and advisory fees 3,887 2,961 2,426
Other income 4,435 7,082 3,314
-------------- -------------- ---------------
Total fee income 28,997 28,956 19,308
-------------- -------------- ---------------
Net gain on sales 8,558 8,222 2,319
-------------- -------------- ---------------
Total income 133,628 127,042 100,852
-------------- -------------- ---------------
EXPENSES:
Interest expense 36,596 30,696 31,152
Salaries and benefits 22,678 21,381 15,300
General and administrative 7,020 6,527 4,643
Professional fees 4,960 5,501 4,306
Amortization of goodwill and mortgage servicing rights 1,314 2,509 1,887
-------------- -------------- ---------------
Total expenses 72,568 66,614 57,288
-------------- -------------- ---------------
Net holding losses on derivatives (14,863) (5,572) -
Impairments and valuation allowances related to investments (Notes 2 and 3) (730) (3,256) (1,508)
Net losses from equity investments in partnerships (3,057) (1,279) -
-------------- -------------- ---------------
Net income before income taxes, income allocated to
preferred shareholders in a subsidiary company,
and cumulative effect of accounting change 42,410 50,321 42,056
Income tax expense 1,484 1,383 2,006
-------------- -------------- ---------------
Net income before income allocated to preferred shareholders
in a subsidiary company and cumulative effect of
accounting change 40,926 48,938 40,050
Income allocable to preferred shareholders in a subsidiary company (Note 12) 11,977 10,779 8,475
-------------- -------------- ---------------
Net income before cumulative effect of accounting change 28,949 38,159 31,575
Cumulative effect on prior years of change in
accounting for derivatives - (12,277) -
-------------- -------------- ---------------
Net income $ 28,949 $ 25,882 $ 31,575
============== ============== ===============
Net income allocated to:
Preferred shares:
Series I $ - $ 720 $ 840
============== ============== ===============
Series II - 109 472
============== ============== ===============
Preferred capital distribution shares:
Series I $ - $ 324 $ 338
============== ============== ===============
Series II - 16 148
============== ============== ===============
Term growth shares $ 153 $ 866 $ 701
============== ============== ===============
Common shares $ 28,796 $ 23,847 $ 29,076
============== ============== ===============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
For the year ended December 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Basic earnings per share:
Preferred shares:
Series I $ - $ 57.05 $ 56.25
============== ============== ===============
Series II $ - $ 22.51 $ 65.31
============== ============== ===============
Preferred capital distribution shares:
Series I $ - $ 49.22 $ 43.34
============== ============== ===============
Series II $ - $ 7.44 $ 46.73
============== ============== ===============
Common shares:
Earnings before cumulative effect of accounting change $ 1.16 $ 1.70 $ 1.67
Cumulative effect on prior years of change in
accounting for derivatives - (0.58) -
-------------- -------------- ---------------
Basic earnings per common share $ 1.16 $ 1.12 $ 1.67
============== ============== ===============
Weighted average common shares outstanding 24,904,437 21,204,209 17,459,829
Diluted earnings per share:
Common shares:
Earnings before cumulative effect of accounting change $ 1.13 $ 1.66 $ 1.62
Cumulative effect on prior years of change in
accounting for derivatives - (0.57) -
-------------- -------------- ---------------
Diluted earnings per common share $ 1.13 $ 1.09 $ 1.62
============== ============== ===============
Weighted average common shares outstanding 25,473,815 21,804,186 18,088,366
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the year ended December 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Net income $ 28,949 $ 25,882 $ 31,575
-------------- -------------- --------------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period 1,536 (6,951) (2,093)
Reclassification adjustment for (gains) losses
included in net income (4,887) 8,086 (181)
-------------- -------------- --------------
Other comprehensive income (loss) (3,351) 1,135 (2,274)
-------------- -------------- --------------
Comprehensive income $ 25,598 $ 27,017 $ 29,301
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Preferred Capital
Preferred Shares Distribution Shares Term
----------------------- ---------------------- Growth
Series I Series II Series I Series II Shares
----------- ----------- ---------- ----------- -----------
Balance, January 1, 2000 $ 10,105 $ 5,720 $ 3,756 $ 1,632 $ 165
Net income 840 472 338 148 701
Unrealized losses on investments, net of
reclassifications - - - - -
Distributions (1,351) (1,324) (605) (512) (669)
Purchase of treasury shares - - - - -
Reissuance of treasury shares - - - - -
Options exercised - - - - -
Issuance of common shares - - - - -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) - - - - -
Deferred share grants (Note 15) - - - - -
Amortization of deferred compensation (Note 15) - - - - -
----------- ----------- ---------- ----------- -----------
Balance, December 31, 2000 9,594 4,868 3,489 1,268 197
Net income 720 109 324 16 866
Unrealized gains on investments, net of
reclassifications - - - - -
Distributions (602) (1,101) (237) (440) (834)
Redemption of preferred shares (2,798) (1,550) (1,024) (433) -
Reissuance of treasury shares - - - - -
Options exercised - - - - -
Issuance of common shares - - - - -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) - - - - -
Deferred share grants (Note 15) - - - - -
Amortization of deferred compensation (Note 15) - - - - -
Tax benefit from exercise of options and
vesting of deferred shares - - - - -
----------- ----------- ---------- ----------- -----------
Balance, December 31, 2001 6,914 2,326 2,552 411 229
Net income - - - - 153
Unrealized losses on investments, net of
reclassifications - - - - -
Distributions (115) (15) (49) (1) (382)
Redemption of preferred shares (6,799) (2,311) (2,503) (410) -
Options exercised - - - - -
Issuance of common shares - - - - -
Reissuance of treasury shares - - - - -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) - - - - -
Deferred share grants (Note 15) - - - - -
Amortization of deferred compensation (Note 15) - - - - -
Tax benefit from exercise of options and -
vesting of deferred shares - - - - -
----------- ----------- ---------- ----------- -----------
Balance, December 31, 2002 $ - $ - $ - $ - $ -
=========== =========== ========== =========== ===========
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Other
Common Treasury Unearned Comprehensive
Shares Shares Compensation Income (Loss) Total
------------- ----------- ------------ ------------- ----------
Balance, January 1, 2000 $ 324,443 $ (2,481) $ (3,468) $ 23,739 $ 363,611
Net income 29,076 - - - 31,575
Unrealized losses on investments, net of
reclassifications - - - (2,274) (2,274)
Distributions (29,011) - - - (33,472)
Purchase of treasury shares - (191) - - (191)
Reissuance of treasury shares (1,707) 1,728 - - 21
Options exercised 895 - - - 895
Issuance of common shares 3,415 - - - 3,415
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) 115 - - - 115
Deferred share grants (Note 15) 1,764 - (1,764) - -
Amortization of deferred compensation (Note 15) - - 1,088 - 1,088
------------- ----------- ------------ ------------- ----------
Balance, December 31, 2000 328,990 (944) (4,144) 21,465 364,783
Net income 23,847 - - - 25,882
Unrealized gains on investments, net of
reclassifications - - - 1,135 1,135
Distributions (35,195) - - - (38,409)
Redemption of preferred shares (1,363) - - - (7,168)
Reissuance of treasury shares (32) 32 - - -
Options exercised 2,558 - - - 2,558
Issuance of common shares 85,992 - - - 85,992
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) 151 - - - 151
Deferred share grants (Note 15) 1,418 - (1,418) - -
Amortization of deferred compensation (Note 15) - - 1,417 - 1,417
Tax benefit from exercise of options and
vesting of deferred shares 367 - - - 367
------------- ----------- ------------ ------------- ----------
Balance, December 31, 2001 406,733 (912) (4,145) 22,600 436,708
Net income 28,796 - - - 28,949
Unrealized losses on investments, net of
reclassifications - - - (3,351) (3,351)
Distributions (42,683) - - - (43,245)
Redemption of preferred shares (7,275) - - - (19,298)
Options exercised 3,541 - - - 3,541
Issuance of common shares 81,286 - - - 81,286
Reissuance of treasury shares (55) 55 - - -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) 190 - - - 190
Deferred share grants (Note 15) 830 - (830) - -
Amortization of deferred compensation (Note 15) - - 1,701 - 1,701
Tax benefit from exercise of options and
vesting of deferred shares 583 - - - 583
------------- ----------- ------------ ------------- ----------
Balance, December 31, 2002 $ 471,946 $ (857) $ (3,274) $ 19,249 $ 487,064
============= =========== ============ ============= ==========
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Preferred Capital
Preferred Shares Distribution Shares Term
--------------------- ---------------------- Growth Common Treasury
SHARE ACTIVITY: Series I Series II Series I Series II Shares Shares Shares
---------- --------- ---------- ---------- ---------- ------------ ---------
Balance, January 1, 2000 14,933 7,226 7,798 3,164 2,000 17,392,064 146,076
Purchase of treasury shares - - - - - (9,042) 9,042
Reissuance of treasury shares - - - - - 59,745 (59,745)
Options exercised - - - - - 52,034 (34,534)
Issuance of common shares - - - - - 155,234 -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) - - - - - 5,702 -
---------- --------- ---------- ---------- ---------- ------------ ---------
Balance, December 31, 2000 14,933 7,226 7,798 3,164 2,000 17,655,737 60,839
Redemption of preferred shares (3,938) (4,050) (2,056) (1,773) - - -
Reissuance of treasury shares - - - - - 1,509 (1,509)
Options exercised - - - - - 147,800 -
Issuance of common shares - - - - - 3,933,920 -
Issuance of common shares under
employee share incentive plans (Note 15) - - - - - 74,847 -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) - - - - - 6,423 -
---------- --------- ---------- ---------- ---------- ------------ ---------
Balance, December 31, 2001 10,995 3,176 5,742 1,391 2,000 21,820,236 59,330
Redemption of preferred shares (10,995) (3,176) (5,742) (1,391) (2,000) - -
Options exercised - - - - - 192,031 -
Issuance of common shares - - - - - 3,436,463 -
Reissuance of treasury shares - - - - - 3,886 (3,886)
Issuance of common shares under
employee share incentive plans (Note 15) - - - - - 85,774 -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 15) - - - - - 7,590 -
---------- --------- ---------- ---------- ---------- ------------ ---------
Balance, December 31, 2002 - - - - - 25,545,980 55,444
========== ========= ========== ========== ========== ============ =========
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended December 31,
------------------------------------------
2002 2001 2000
------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,949 $ 25,882 $ 31,575
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to preferred shareholders in a subsidiary company 11,977 10,779 8,475
Cumulative effect of accounting change - 12,277 -
Net holding losses on trading securities 14,863 3,457 -
Impairments and valuation allowances related to investments 730 3,153 1,503
Net gain on sales (8,558) (5,546) (2,118)
Loss from investments in partnerships 3,057 1,279 -
Distributions received from equity investments 497 205 -
Net amortization of premiums, discounts and fees on investments (203) 248 302
Depreciation and amortization 1,856 2,883 2,087
Tax benefit from deferred share benefit 583 367 -
Deferred share compensation expense 1,701 1,417 1,088
Common and deferred shares issued under the Non-Employee Directors' Share Plans 224 178 115
Director fees paid and share awards made by reissuance of treasury shares - - 21
Net change in assets and liabilities:
Increase in interest receivable (298) (5,881) (1,860)
Increase in other assets (3,651) (27,835) (11,771)
Increase in accounts payable, accrued expenses and other liabilities 4,349 5,465 2,082
------------- -------------- -------------
Net cash provided by operating activities 56,076 28,328 31,499
------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tax-exempt bonds and residual interests in bond securitizations (191,619) (159,969) (148,838)
Loan originations (384,787) (459,253) (364,559)
Acquisition of an unconsolidated subsidiary (1,100) - -
Purchases of property and equipment (290) (2,096) (321)
Net reduction (investment) in restricted assets (23,387) 8,502 (9,379)
Principal payments received 364,755 397,304 292,101
Investment in partnerships (123,351) (15,543) (2,451)
Return of capital invested in partnerships 25,328 18,666 -
Proceeds from sales of investments 33,149 5,188 50,303
------------- -------------- -------------
Net cash used in investing activities (301,302) (207,201) (183,144)
------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities 711,002 674,030 422,274
Repayment of credit facilities (680,141) (578,542) (360,155)
Proceeds from short-term debt 179,700 48,970 41,290
Repayment of short-term debt (38,315) (11,700) -
Proceeds from long-term debt 13,063 131,130 4,023
Repayment of long-term debt (587) (67,148) (124)
Issuance of common shares 77,821 82,645 -
Issuance of preferred shares in a subsidiary company - 22,801 57,604
Redemption of preferred shares (19,298) (7,168) -
Proceeds from stock options exercised 3,541 2,558 895
Purchase of treasury shares - - (191)
Distributions on common shares (43,245) (38,409) (33,472)
Distributions to preferred shareholders in a subsidiary company (11,943) (10,425) (7,412)
------------- -------------- -------------
Net cash provided by financing activities 191,598 248,742 124,732
------------- -------------- -------------
Net (decrease) increase in cash and cash equivalents (53,628) 69,869 (26,913)
Cash and cash equivalents at beginning of period 97,373 27,504 54,417
------------- -------------- -------------
Cash and cash equivalents at end of period $ 43,745 $ 97,373 $ 27,504
============= ============== =============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended December 31,
------------------------------------------
2002 2001 2000
------------- -------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 29,399 $ 33,727 $ 30,192
============= ============== =============
Income taxes paid 1,180 1,173 1,579
============= ============== =============
DISCLOSURE OF NON-CASH ACTIVITIES:
Disposal of advance to related party $ 2,618 $ - $ -
============= ============== =============
Investment in partnership under a note payable obligation - - 5,084
============= ============== =============
Contribution of investment in partnership to a subsidiary - 4,584 -
============= ============== =============
Issuance of common stock in connection with the acquisition of an
unconsolidated subsidiary 100 - -
============= ============== =============
Issuance of common stock in connection with MFH acquisition 3,331 3,320 3,415
============= ============== =============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Municipal Mortgage & Equity, LLC ("MuniMae" and, together with its
subsidiaries, the "Company") provides debt and equity financing to developers of
multifamily housing. The Company invests in tax-exempt bonds, or interests in
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. Interest income derived from the
majority of these bond investments is exempt income for federal income tax
purposes. Multifamily housing developments, as well as the rents paid by the
tenants, secure these investments.
The Company is also a mortgage banker. Mortgage banking activities include
the origination, investment in and servicing of investments in multifamily
housing, both for its own account and on behalf of third parties. These
investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in real estate operating partnerships
and tax-exempt bonds, or interests in bonds, secured by student housing or
assisted living developments, and (2) tax-exempt community development bonds,
typically secured by special taxes imposed on single-family or other community
development districts or by assessments imposed on the residents or other lot
owners of those developments.
MuniMae is a Delaware limited liability company. As a limited liability
company, the Company combines the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Since MuniMae is classified as a partnership for federal income tax
purposes, no recognition of income taxes is made at the corporate level (except
for income earned through subsidiaries of the Company organized as
corporations). Instead, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return.
Basis of Presentation
The consolidated financial statements of the Company are prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles in the United States ("GAAP"). The presentation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates. Certain
amounts in prior years' financial statements have been reclassified to conform
to the current year presentation.
The following is a summary of the Company's significant accounting
policies.
Consolidation
The consolidated financial statements include the accounts of MuniMae, its
wholly owned subsidiaries and its majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Preferred
shareholders' equity in a subsidiary company represents a minority ownership
interest in the Company.
Investment in Tax-Exempt Bonds and Residual Interests in Bond Securitizations
The Company originates investments in tax-exempt bonds and taxable loans
primarily to the affordable multifamily housing industry. Tax-exempt bonds are
issued by state and local government authorities to finance multifamily housing
developments or other real estate financings. The bonds are typically secured by
nonrecourse mortgage loans on the underlying properties. The Company's sources
of capital to fund these lending activities include proceeds from equity
offerings, securitizations, and draws on lines of credit. The Company earns
interest income from its investment in tax-exempt bonds and taxable loans. The
Company also earns origination and construction administration fees from
originating the bonds and servicing the bonds during the construction period.
The Company may also structure transactions whereby a third party buys
bonds directly from a seller and the Company subsequently purchases a residual
interest in a bond securitization holding the tax-exempt bonds.
General Terms of Tax-Exempt Bonds
The Company's rights under the bonds it holds are defined by the terms of
the underlying mortgage loans, which are pledged to the Company to secure the
payment of principal and interest under the bonds. The mortgage loans are first
mortgage or subordinate loans on multifamily housing developments and are
generally nonrecourse, except upon the occurrence of certain events. The
mortgage loans bear interest at rates determined by arm's-length negotiations
that reflect market conditions existing at the time the bonds were acquired or
originated by the Company. Non-participating bonds, which account for the
majority of the Company's tax-exempt bonds (see Note 2), provide for payment of
a fixed rate of interest. Participating bonds have additional interest features
that allow the Company to participate in the growth of the underlying property.
The participating bonds provide for payment of additional interest from
available cash flow of the property in addition to the base interest. The terms
of the additional interest to be received on a bond are specific to that bond
and are set forth in the bond documents. Certain participating and
non-participating bonds are considered subordinate bonds, as the payment of
interest and principal on the bonds occurs only after payment of principal and
interest on a bond that has priority to the cash flow of the underlying
collateral.
Principal amortization on the bonds, if any, is received in accordance with
amortization tables set forth in the bond documents. If no principal
amortization is required during the bond term, the outstanding principal balance
will be required to be repaid or refinanced in a lump sum payment at the end of
the holding period or at such earlier time as the Company may require. The
mortgage loans are non-assumable except with the consent of the Company. The
bonds contain provisions that prohibit prepayment of the bond for a specified
period of time.
Securitization Programs
The Company securitizes assets in order to enhance its overall return on
its investments and to generate proceeds that, along with equity offering
proceeds, facilitate the acquisition of additional investments. The Company uses
various programs to facilitate the securitization and credit enhancement of its
bond investments.
Summary of Major Securitization Programs
To date, the Company securitizes mortgage bonds in its portfolio primarily
through three programs: (1) the Merrill Lynch Pierce Fenner & Smith Incorporated
("Merrill Lynch") Puttable Floating Option Tax-Exempt Receipts ("P-FLOATsSM")
program, (2) a tender option bond program with the Federal Home Loan Mortgage
Corporation ("Freddie Mac"), and (3) a securitization program with MBIA
Insurance Corporation ("MBIA"). The Company securitizes assets by depositing
bonds into a trust or structuring a transaction whereby a third party deposits
bonds into a trust. The trust issues senior and subordinate certificates and the
Company receives cash proceeds from the sale of the senior certificates and
retains the subordinate certificates. The interest rate on the senior
certificates may be fixed or variable. If the interest rate is variable, a
remarketing agent typically resets the rate on the senior certificates weekly.
To increase the attractiveness of the senior certificates to investors, the
senior certificates are credit enhanced or the bond underlying the senior
certificates is credit enhanced. The residual interests retained by the Company
are subordinate securities and receive the residual interest on the bond after
the payment of all fees and the senior certificate interest. For certain
programs, a counterparty provides liquidity to the senior certificates. In such
programs, liquidity advances would be used to provide bridge funding for the
redemption of senior certificates tendered upon a failure to remarket senior
certificates or in the event of other mandatory tender events. The Company also
enters into various forms of interest rate protection in conjunction with these
securitization programs (See "Financial Risk Management and Derivatives" in Note
1).
Term Securitization Facility
In March 1999, the Company securitized $67.0 million in bonds through a
long-term securitization trust ("Term Securitization Facility"). In July 2001,
the Company refinanced this Term Securitization Facility. The result of the
refinancing was a reduction of the outstanding bonds in the facility from $67.0
million to $45.0 million. The Term Securitization Facility issued two classes of
certificates, Class A and Class B. The Class A certificates, which are senior to
the Class B certificates, were sold to qualified third party investors and bear
interest at a fixed tax-exempt rate of 4.95% per annum through the remarketing
date, August 15, 2005. The interest rate will be reset on the remarketing date
to the lowest rate that would result in the sale of the Class A certificates at
par plus any appreciation in the value of the underlying bonds attributable to
the Class A certificates. The Company owns the Class B certificates. The Class B
certificates receive the residual interest from the Term Securitization Facility
after payment of (1) trustee fees and expenses, (2) all interest and any
principal due on the Class A certificates in accordance with the terms of the
documents and (3) servicing fees. The Term Securitization Facility is subject to
optional liquidation in whole, but not in part, on each February 15, May 15,
August 15 and November 15, at the direction of a majority of the Class B
certificate holders. The Class A certificates are subject to mandatory tender on
the remarketing date. The Term Securitization Facility terminates on August 1,
2008. The Company receives a fee of 0.15% of the weighted average balance of the
trust certificates outstanding per annum for acting as the servicer of the Term
Securitization Facility. In conjunction with this transaction, a subsidiary of
the Company provides credit enhancement for the bonds and liquidity support for
the Class A certificates in the Term Securitization Facility. In fulfillment of
this obligation, the Company pledged assets as collateral to the Term
Securitization Facility.
FSA Securitization Facility
In February 1995, the Company securitized 11 bonds with an aggregate
principal of $126.6 million through a long-term securitization trust (the "FSA
Securitization Facility"). Prior to this transaction, the 11 bonds were refunded
into a Series A Bond and a Series B Bond with aggregate principal amounts of
$67.7 million and $58.9 million, respectively. The Company deposited the Series
A Bonds and the Series B Bonds into a trust. The Series A Bonds, which are
senior to the Series B Bonds, were credit enhanced by Financial Security
Assurance Inc. ("FSA") and sold to qualified third party investors. The Series A
Bonds bear interest at various fixed rates ranging from 7.05% to 7.40% per
annum. The Series A Bonds mature January 1, 2030 and are subject to mandatory
sinking fund redemptions. The Company retained the Series B Bonds. The Series B
Bonds mature January 1, 2030.
Other Securitization Programs
From time to time, the Company will securitize a single bond investment
with a new counterparty. The terms of these securitizations are similar to the
programs described in the "Summary of Major Securitization Programs" discussed
above.
Management of Counterparty Risk
The Company attempts to manage counterparty risk by diversifying its
securitization programs. The following table summarizes the results of the
Company's efforts to diversify its sources of securitization capital:
(000s) December 31, 2002
--------------------------------------------------------
Face Amount Percentage of
of Senior Fair Value Total Senior
Nature of Senior Provider of Credit Provider of Fair Value of Security of Residual Securities
Sponsor Security Enhancement Liquidity Total Bond Outstanding Interest Outstanding (1)
--------------------------------------------------------------------------- --------------------------------------------------------
On Balance Sheet Securitizations:
short-term,
floating rate, Merrill Lynch or
Merrill Lynch weekly reset Fannie Mae Merrill Lynch $ 62,695 $ 60,605 $ 2,090 10.4%
Freddie Mac fixed Freddie Mac Freddie Mac 91,290 68,970 22,320 11.8%
short-term,
floating rate, Bayerische
MBIA weekly reset MBIA Landesbank 146,624 147,010 (386) 25.2%
MMA Credit MMA Credit
Term Debt fixed Enhancement I, LLC Enhancement I, LLC 42,829 44,892 (2,063) 7.7%
weekly reset
Other or fixed Various N/A 17,612 17,740 (128) 3.0%
--------------------------------------------------------
Subtotal 361,050 339,217 21,833 58.1%
Off Balance Sheet Securitizations:
short-term,
floating rate, Merrill Lynch or
Merrill Lynch weekly reset Fannie Mae Merrill Lynch 187,404 177,812 9,592 30.4%
FSA Bonds fixed FSA N/A 119,188 67,400 51,788 11.5%
--------------------------------------------------------
Subtotal 306,592 245,212 61,380 41.9%
--------------------------------------------------------
Total $ 667,642 $ 584,429 $ 83,213 100.0%
========================================================
(000s) December 31, 2001
--------------------------------------------------------
Face Amount Percentage of
of Senior Fair Value Total Senior
Nature of Senior Provider of Credit Provider of Fair Value of Security of Residual Securities
Sponsor Security Enhancement Liquidity Total Bond Outstanding Interest Outstanding (1)
--------------------------------------------------------------------------- --------------------------------------------------------
On Balance Sheet Securitizations:
short-term,
floating rate, Merrill Lynch or
Merrill Lynch weekly reset Fannie Mae Merrill Lynch $ 104,516 $ 78,560 $ 25,956 13.1%
Freddie Mac fixed Freddie Mac Freddie Mac 89,929 69,020 20,909 11.5%
short-term,
floating rate, Bayerische
MBIA weekly reset MBIA Landesbank - - - -
MMA Credit MMA Credit
Term Debt fixed Enhancement I, LLC Enhancement I, LLC 44,737 44,992 (255) 7.5%
weekly reset
Other or fixed Various N/A 5,244 5,410 (166) 0.9%
--------------------------------------------------------
Subtotal 244,426 197,982 46,444 33.0%
Off Balance Sheet Securitizations:
short-term,
floating rate, Merrill Lynch or
Merrill Lynch weekly reset Fannie Mae Merrill Lynch 339,481 334,165 5,316 55.7%
FSA Bonds fixed FSA N/A 122,488 67,530 54,958 11.3%
--------------------------------------------------------
Subtotal 461,969 401,695 60,274 67.0%
--------------------------------------------------------
Total $ 706,395 $ 599,677 $106,718 100.0%
========================================================
(1) This percentage is calculated by dividing the face amount of the senior
security outstanding from each securitization program by the total face
amount of all senior securities outstanding.
Fannie Mae Credit Enhancement
The Company participates in a structured finance program developed by
Federal National Mortgage Association ("Fannie Mae") to facilitate the credit
enhancement of bonds for which there is shared risk. Under this program, Fannie
Mae provides credit enhancement to the assets in a cross-collateralized pool. In
order to provide credit enhancement to the bonds secured by this facility, the
Company pledged additional collateral to this facility. The Company is required
to post collateral as part of the risk sharing agreement. To date, the Company
has credit enhanced $100 million in bonds through this program. This program is
open-ended, which allows the Company to add additional assets to the program.
Collateral
In order to facilitate the securitization of certain assets at higher
leverage ratios than otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional bonds and taxable
loans as collateral for senior interests in certain securitization trusts and
credit enhancement facilities. The following table summarizes the carrying
amount of the bonds and taxable loans pledged as collateral for the programs
discussed above.
Carrying Value at
December 31,
-------------------------------
(000s) 2002 2001
-------------- ---------------
Merrill Lynch P-FLOATs $ 190,462 $ 260,371
MBIA 86,366 -
Term Securitization Facility 41,816 41,986
Fannie Mae 28,595 19,455
FSA - -
Other - -
-------------- ---------------
Total (1) $ 347,239 $ 321,812
============== ===============
(1) This table reflects collateral pledged for the securitization and credit
enhancement facilities discussed above. The Company has other assets
pledged as collateral to secure other programs, as discussed in Notes 2, 3,
and 7.
The Company's significant accounting policies that directly relate to the
investment in tax-exempt bonds and residual interests in bond securitizations
are described below.
Investment in Tax-Exempt Bonds and Residual Interests in Bond Securitizations
Investment in tax-exempt bonds and residual interests in bond
securitizations (collectively, "investments in bonds") are accounted for under
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115").
All investments in bonds are classified and accounted for as available-for-sale
debt securities and are carried at fair value; unrealized gains or losses
arising during the period are recorded through other comprehensive income in
shareholders' equity, while realized gains and losses and other-than-temporary
impairments are recorded through operations. The Company evaluates on an
on-going basis the credit risk exposure associated with these assets to
determine whether any other-than-temporary impairments exist in accordance with
the Company's policy discussed in the "Other-than-Temporary Impairments and
Valuation Allowances on Investments" section of this Note.
The Company determines the fair value of bonds that participate in the net
cash flow and net capital appreciation of the underlying properties and/or that
are wholly collateral dependent and for which only a limited market exists by
discounting the underlying collateral's expected future cash flows using current
estimates of discount rates and capitalization rates. The Company bases the fair
value of all other bonds and residual interests in bond securitizations on
quotes from external sources, such as brokers, for these or similar investments.
The Company recognizes base interest on the bonds as revenue as it accrues.
Interest income in excess of the base interest ("participation interest'") may
be available to the Company through participation features of a bond.
Participation interest is recognized as income when received. Delinquent bonds
are placed on non-accrual status for financial reporting purposes when
collection of interest is in doubt, which is generally considered to be after 90
days of non-payment. The Company applies interest payments on non-accrual bonds
first to previously recorded accrued interest and, once previously accrued
interest is satisfied, as interest income when received. The accrual of interest
income would be reinstated once a bond's ability to perform is adequately
demonstrated and all interest has been paid.
For tax purposes, the Company recognizes base interest as income as it
accrues. For certain investments, in accordance with the terms of the bond
document, the Company may also recognize participation interest as income as it
accrues for tax reporting. Base interest and participation interest in certain
bonds is accrued for tax purposes even when the interest income is not
collected. Base interest recognized on the bonds is exempt from federal income
tax purposes for the shareholders. In accordance with the terms and conditions
of the underlying bond documents and tax regulations, participation interest in
certain bonds may be taxable to the shareholders for federal income tax
purposes.
Securitization Transactions
For financial reporting purposes, transactions where the Company
securitizes a bond and subsequently purchases or retains a residual interest are
accounted for in accordance with Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" "FAS 140"). Under FAS 140, the accounting for
these transactions is partially dependent on certain call provisions. If the
residual interest holder is granted a call provision under the terms of the
transaction, then effective control over the transferred assets has not been
relinquished and the transaction is accounted for as a borrowing. When the
residual interest holder is not granted a call provision and effective control
has been relinquished, the transaction is accounted for as a sale and the
Company recognizes gains and losses on the sale of its bonds. The portion of the
unrealized gain or loss on a bond that is recognized as a result of the sale is
determined by allocating the net amortized cost at the time of sale between the
senior interest and the corresponding residual interest based upon their
relative fair values, in accordance with FAS 140. The Company may also structure
transactions whereby a third party buys bonds directly from a seller and the
Company subsequently purchases or retains residual interests related to the
bonds. In this case, the Company may retain the call provision associated with
its investment in the residual interest position without requiring borrowing
treatment because the Company does not own the bond.
Origination Fees and Premiums and Discounts on Purchased Investments
Origination fees and premiums and discounts on purchased investments are
deferred and amortized into income to approximate a level yield over the
estimated lives of the related investments. Upon the sale of an investment, the
unamortized balance of origination fees and premiums and discounts is recorded
as income through the calculation of gains and losses on the sale of
investments.
Mortgage Banking Activities
The Company engages in a variety of mortgage banking activities. These
activities include the origination, investment in and servicing of investments
in multifamily housing, both for its own account and on behalf of third parties.
The mortgage banking activities are generally conducted through Midland
Financial Holdings, Inc. (together with its subsidiaries, "MFH"), a wholly owned
subsidiary of the Company.
The Company acquired MFH in 1999 for a total purchase price of $45.0
million ($46.0 million including acquisition costs). Of this amount, the Company
paid approximately $23.0 million in cash and $12.0 million in common shares at
the closing of the transaction and $10.0 million in additional common shares
paid in three equal installments, the last of which was paid in December 2002.
The acquisition has been accounted for as a purchase. The cost of the
acquisition was allocated on the basis of the estimated fair value of the net
assets acquired, which totaled $7.7 million. The results of operations of MFH
are included in the consolidated financial statements of the Company.
The Company originates construction, permanent and supplemental loans
within the multifamily housing industry. Supplemental loans include:
o bridge and pre-development loans, which are project-specific short-term
loans for qualifying pre-development and development expenditures and are
structured to be repaid from the construction or permanent financing of the
same project. Bridge loans fund timing gaps between project expenditures
and later installments of equity financing or permanent debt, and
pre-development loans fund early stage project expenditures and are repaid
by the first installments of equity or construction financing; and
o term loans, lines of credit and workout loans, which have expenditure
purposes and sources of repayment that may or may not be limited to a
single project. Term loans, lines of credit and workout loans are repaid
with general operating cash flow of the development or other capital
sources of the borrower, including cash flows from other investments.
Collateral for the supplemental loans can take many forms, including a
mortgage against land or other real estate, assignment of syndication proceeds,
assignment and pledges of developer fees, assignment and pledge of cash flows
from properties, corporate guarantees and personal guarantees.
The Company's sources of capital to fund these construction, permanent, and
supplemental lending activities include notes and warehousing facilities with
various pension funds and commercial banks, various short-term bank lines of
credit, and working capital. The Company generates profit from the difference
between the interest earned on its loans and the interest due under its notes
payable and other funding sources. The Company also earns (1) origination fees,
(2) loan servicing fees, or in the case of construction loans, construction
administration fees and (3) guarantee and other fees in cases where the Company
provides credit support to the obligations of a borrower to a third party.
The Company has established relationships with pension funds through the
Midland Affordable Housing Group Trust (the "Group Trust") and the Midland
Multifamily Equity REIT ("MMER"). The Group Trust was established by a group of
pension funds for the purpose of investing in income-producing real estate
investments. The Group Trust provides loans and lines of credit to finance a
variety of the Company's loan products. MMER is a Maryland real estate
investment trust established by the same pension funds that participate in the
Group Trust. MMER provides the Company short-term lines of credit to finance the
Company's lending activities, in addition to investing in income-producing real
estate partnerships. MFH is the investment manager for the Group Trust and MMER
and receives advisory fees for these services. Furthermore, MFH earns
origination fees on the placement of permanent loans with the Group Trust. MFH
also earns origination fees on the placement of equity interests in real estate
partnerships with MMER.
MFH is a Fannie Mae Delegated Underwriter and Servicer ("DUS"). A majority
of the construction loans originated by the Company are underwritten and
structured so as to be eligible for sale to Fannie Mae as or shortly after the
loans are converted to permanent loans. The Company usually retains the mortgage
servicing rights on the permanent loans which its sells to third parties.
As a Fannie Mae DUS lender, MFH may share in losses relating to under
performing real estate mortgage loans delivered to Fannie Mae (see Note 11).
More specifically, if the borrower fails to make a payment of principal,
interest, taxes or insurance premiums on a DUS loan originated by MFH and sold
to Fannie Mae, MFH may be required to make servicing advances to Fannie Mae.
Also, MFH may participate in a deficiency after foreclosure. As a DUS lender,
MFH must maintain a minimum net worth and collateral with a custodian. Its
financial exposure, however, is subject to certain deductibles and loss limits.
The servicing portfolio balance originated through the DUS program was $752.6
million and $584.6 million at December 31, 2002 and 2001, respectively. MFH is
indemnified by the Group Trust against losses it may incur in connection with
its servicing of $312.3 million of these loans. As of December 31, 2002, the
Company had not incurred any losses on this portfolio.
MFH is a Federal Housing Administration ("FHA") and US Department of
Housing and Urban Development ("HUD") approved mortgagee and is an approved
lender under HUD's Multifamily Accelerated Processing ("MAP") program. As a MAP
lender, MFH is responsible for underwriting and recommending loans to FHA/HUD
for mortgage insurance. As an FHA/HUD approved mortgagee, MFH must maintain a
minimum net worth.
MFH is also a Government National Mortgage Association ("GNMA") approved
securities issuer, seller and servicer. All loans originated under HUD programs
are securitized through the GNMA Mortgage Backed Security ("MBS") program and
sold in the secondary market. The Company may earn premiums or incur discounts
on the securitization of these loans, and the Company retains the servicing
rights on all HUD loans sold under the GNMA MBS program. As a GNMA approved
issuer, seller and servicer, MFH must maintain a minimum net worth as well as
minimum insurance coverages.
As an FHA/HUD approved mortagee, MFH may share in losses relating to
underperforming loans originated under the HUD programs. If a borrower fails to
make payments of principal, interest, taxes or insurance premiums on a HUD loan
securitized with GNMA, MFH may be required to make servicing advances to GNMA.
If a defaulted loan is assigned to HUD, insurance will generally limit MFH's
loss exposure to 1% of the loan's then outstanding unpaid principal balance.
However, the Company's loan documents generally hold the borrower liable for any
losses incurred by MFH in the event of a default and/or assignment of a loan to
HUD. In addition, GNMA allows for partial recovery of expenses for loans that
were assigned to HUD after default and subsequently paid out of a GNMA pool. The
servicing portfolio originated through the FHA/HUD program was $273.6 million
and $208.1 million at December 31, 2002 and 2001, respectively. As of December
31, 2002, the Company had not incurred any losses on this portfolio.
The Company's significant accounting policies that directly relate to the
mortgage banking activities are described below.
Loans Receivable
The Company's loans receivable consist of construction loans, permanent
loans, and supplemental loans. The Company carries loans receivable at net
realizable value. The Company evaluates on an on-going basis the credit risk
exposure associated with these assets to determine whether any impairment exists
in accordance with the Company's policy discussed in this Note. When the Company
believes that it is probable that it will not collect all amounts due, including
principal and interest, under the terms of a loan, it records a valuation
allowance.
The Company recognizes interest on loans as revenue as it accrues. The
Company places delinquent loans on non-accrual status for financial reporting
purposes when collection of interest is in doubt, which is generally considered
to be after 90 days of non-payment. The Company applies interest payments on
non-accrual loans first to previously recorded accrued interest and then, once
previously accrued interest has been satisfied, as interest income when
received. The accrual of interest income would be reinstated once a loan's
ability to perform is adequately demonstrated. Interest income is also
recognized for the portion of any principal payments received in excess of GAAP
basis, including payments for previously unaccrued interest.
Mortgage Servicing Rights
When the Company sells a loan to a third party but retains the right to
service the loan, the Company recognizes as an asset or liability the right to
service the mortgage loan. The Company accounts for these mortgage servicing
rights in accordance with FAS 140. FAS 140 requires servicing rights retained by
the Company after the origination and sale of the related loan to be capitalized
by allocating the carrying amount between the loan and the servicing rights
based on their relative fair values. The fair value of the mortgage servicing
rights is based on the expected future net cash flow to be received over the
estimated life of the loan discounted at market discount rates. The
capitalization of the mortgage servicing rights is reported in the income
statement as a gain or loss on sale and results in an offsetting asset or
liability. Mortgage servicing rights are amortized over the estimated life of
the serviced loans. The amortization expense is included in amortization of
goodwill and mortgage servicing rights in the consolidated statements of income.
The Company evaluates all capitalized mortgage servicing rights for
impairment when changes indicate that impairment is probable, but no less than
at each reporting date. The mortgage servicing rights are considered to be
impaired when the carrying amount exceeds the fair value of the expected future
net cash flows to be received under the servicing contract. Impairment, if any,
is recognized through a valuation allowance.
Origination Fees
The Company earns origination fees on the origination of permanent and
supplemental loans. Origination fees on permanent loans are recognized into
income at the time Fannie Mae or other investors (via the GNMA MBS program)
commit to purchase the loan and collectibility is reasonably assured.
Origination fees on supplemental loans are deferred and amortized into income to
approximate a level yield over the estimated life of the related loan.
Loan Servicing and Construction Administration Fees
Loan servicing and construction administration fees are recognized into
income over the period in which the Company performs the associated services.
Construction administration fees are included in loan servicing fees on the
consolidated statements of income.
Asset Management and Advisory Fees
Asset management fees, derived from the Company's tax credit equity
syndication business, and advisory fees, derived from serving as investment
manager to the Group Trust and MMER, are recognized into income over the period
in which the Company performs the associated services.
Investments in Partnerships
The Company's investments in partnerships consist of equity interests in
real estate operating partnerships. The Company's investments in partnerships
are accounted for using the equity method. The Company uses the equity method of
accounting when the Company owns an interest in a partnership and can exert
significant influence over the partnership's operations but cannot control the
partnership's operations. Under the equity method, the Company's ownership
interest in the partnership's capital is reported as an investment on the
consolidated balance sheets and the Company's allocable share of the income or
loss from the partnership is reported as income (loss) from equity investments
in partnerships in the consolidated statements of income.
Investments in Income-Producing Real Estate Operating Partnerships
The Company makes equity investments in income-producing real estate
operating partnerships. To date, the Company's equity investments have been made
in partnership with CAPREIT, Inc. and its affiliates ("CAPREIT").
Tax Credit Equity Funds: Limited Partner Investments in Real Estate Operating
Partnerships
The Company earns revenues from the syndication of low-income housing tax
credits. The Company acquires, through limited partnership interests, equity
interests in properties expected to earn such tax credits and, as and when it
has a sufficient number of such limited partnership interests and has identified
tax credit investors, transfers those interests to a syndicated fund for the
investors' benefit. The Company typically owns these partnership interests for
three to nine months before they are transferred to a fund.
Tax Credit Equity Funds: General Partner Interests
The Company is also the general partner in the syndicated low-income
housing tax credit funds, which it originates. The Company's general partner
interests represent a one percent or less interest in each such fund.
Financial Risk Management and Derivatives
The Company's investments in residual interests in certain securitization
trusts bear interest at floating rates. These floating rate investments expose
the Company to interest rate risk. To reduce the Company's exposure to interest
rate risks on residual interests retained, the Company may enter into interest
rate swaps. Historically, the Company has attempted to offset substantially all
of its floating interest rate exposure related to securitization trusts;
however, from time to time, a portion of this floating rate exposure may not be
fully mitigated by hedging instruments. As a result, changes in interest rates
could result in either an increase or a decrease in the Company's interest
income and cash flows associated with these investments. Under the terms of the
Company's interest rate swap agreements with counterparties, the Company is
required to maintain cash deposits ("margin call deposits"). The margin call
deposit requirements are specific to each counterparty. The Company must make
margin call deposits when the total fair value of the Company's outstanding swap
obligations to any one counterparty is greater than $1.0 million. In certain
cases, the Company is also required to post up-front collateral on the swap
contracts.
The Company has occasionally entered into put option agreements with
counterparties whereby the counterparty has the right to sell to the Company,
and the Company has the obligation to buy, an underlying investment at a
specified price. Under the put options, the Company may receive an annual
payment for assuming the purchase obligation and providing asset management
services on the underlying investments. The purchase price can be reduced in the
event of a material adverse change (as defined in the put agreements). (See Note
11, "Guarantees, Commitments and Contingencies.")
The Company's significant accounting policies that directly relate to the
Company's financial risk management and derivatives are described below.
Investment in derivative financial instruments is accounted for under the
provisions of Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." These statements (collectively, "FAS 133")
establish accounting and reporting standards for derivative financial
instruments, including certain derivative financial instruments embedded in
other contracts, and for hedging activity. FAS 133 requires the Company to
recognize all derivatives as either assets or liabilities in its financial
statements and to record these instruments at their fair values. In order to
achieve hedge accounting treatment, hedging activities must be appropriately
designated, documented and proven to be effective as a hedge pursuant to the
provisions of FAS 133.
The Company has elected, as permitted by FAS 133, not to prove the hedging
effectiveness of its derivative investments due to the cost and administrative
burden of complying with FAS 133. As a result, changes in fair value of
derivatives are recorded through current earnings.
The Company has several types of financial instruments that meet the
definition of a derivative financial instrument under FAS 133, including
interest rate swap agreements and put options. Under FAS 133, the Company's
investment in these derivative financial instruments is recorded on the balance
sheet with changes in the fair value of these instruments recorded in current
earnings.
The adoption of FAS 133 does not affect cash available for distribution,
the Company's ability to pay distributions, the characterization of the
tax-exempt income or the borrowers' financial obligations under the bonds. Upon
its adoption of FAS 133, the Company reclassified its interest rate swap
agreements as trading securities and those with a negative balance were
reflected as liabilities on the balance sheet. As of January 1, 2001, the
Company's put option contracts were recorded on the balance sheet with a fair
value of zero. The cumulative effect of adopting FAS 133 was a decrease to net
income of approximately $12.3 million as of January 1, 2001, and is reflected in
the income statement as a cumulative effect of accounting change. The Company
recognized a decrease in net income of $14.9 and $5.6 million for the years
ended December 31, 2002 and 2001, respectively, due to the change in fair value
of its derivative instruments. These changes are reflected in net holding losses
on derivatives in the consolidated statements of income.
Prior to the adoption of FAS 133 in January 2001, the interest rate swap
agreements were accounted for as hedges and were carried at fair value and
included in residual interests in bond securitizations, with unrealized gains or
losses included in accumulated other comprehensive income.
The Company determines the fair value of its investment in interest rate
swap agreements based on quotes from external sources, such as brokers, for
these or similar investments. Investments in interest rate swap agreements with
market values below zero are reflected as liabilities in the accompanying
consolidated balance sheets. The Company recognizes the differential paid or
received under these agreements as an adjustment to interest income. Net swap
payments received by the Company, if any, will be taxable income, even though
the investment being hedged pays tax-exempt interest.
The Company determines the fair value of its put option agreements by
discounting the underlying collateral's expected future cash flows using current
estimates of discount rates and capitalization rates. Income received on put
options for assuming the purchase obligation and providing asset management
services on the underlying investment is recognized ratably over the term of the
associated put option and guarantee agreements and is included in other income
in the consolidated statements of income.
Syndication of Low-Income Housing Tax Credits
The Company acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. The Company earns syndication fees
on the placement of these interests with investors, including Fannie Mae and a
number of corporate investors. In conjunction with the sale of these partnership
interests, the Company may provide performance guarantees on the underlying
properties owned by the partnerships or guarantees to the fund investors (see
Note 11). The Company also earns asset management fees for managing the
low-income housing tax credit funds syndicated. Syndication fees are considered
earned and are recognized as income upon receipt of the initial cash payment
from investors into the syndicated low-income housing tax credit funds and after
the following have occurred: (1) the properties for funds are identified; (2) a
firm contract exists that requires an investor to fund capital contribution
installments; (3) all services required to earn the fee have been performed to
contract specifications; and (4) all appropriate documents have been executed.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of investments in money
market mutual funds and short-term marketable securities with original
maturities of 90 days or less, all of which are readily convertible to known
amounts of cash in seven days or less. Cash equivalents are carried at cost,
which approximates fair value.
Other Assets
The Company's investment in other assets includes prepaid expenses, other
receivables, debt issue costs, property and equipment, and certain investments
in interest-only securities. Prepaid expenses and debt issue costs are amortized
over the contract period or the estimated life of the related debt.
Property and equipment, consisting primarily of furniture, fixtures,
computer hardware, computer software, and leasehold improvements, is stated at
cost. Depreciation of property and equipment are provided on the 150% declining
balance method over the estimated useful lives of the assets as follows:
Years
-------------
Furniture and fixtures 10
Computer hardware 5
Computer software 5
Leasehold improvements 10
Accumulated depreciation was $1.8 million and $1.4 million at December 31,
2002 and 2001, respectively.
The Company holds interest-only securities (see Note 11), which represent
the right to receive the excess interest on certain mortgage loans sold to
Fannie Mae. These rights result from the contractual right to receive the
difference between the interest paid at the borrower's loan rate and interest
paid to Fannie Mae at the rate at which the loan was sold to Fannie Mae. The
Company classifies these investments as available-for-sale securities under FAS
115 and carries them at fair value with unrealized gains and losses included in
accumulated other comprehensive income. The fair value of the interest-only
securities is estimated by discounting the expected future cash flows. Due to
the existence of a related obligation to pay all or a portion of these cash
flows to the Group Trust, a corresponding liability is reflected on the balance
sheet in other liabilities.
Goodwill
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141")
and No. 142 "Goodwill and Other Intangible Assets," ("FAS 142") which were
effective July 1, 2001 and January 1, 2002, respectively. FAS 141 requires that
the purchase method of accounting be used for all business combinations
consummated after June 30, 2001. FAS 141 did not have an impact on the Company
for the years ended December 31, 2002 or 2001. The Company adopted FAS 142 on
January 1, 2002. Upon adoption of FAS 142, amortization of goodwill and
indefinitely lived intangible assets, including goodwill and indefinitely lived
intangible assets recorded in past business combinations, was discontinued. For
the year ended December 31, 2001, the Company recorded amortization expense of
$1.6 million. In 2002, all goodwill was tested for impairment in accordance with
the provisions of FAS 142 and the Company found no instances of impairment. The
Company determined that none of the intangible assets recorded by the Company
were indefinitely lived, therefore, amortization of these intangible assets ,
other than goodwill, has not ceased.
The Company's goodwill at December 31, 2002 and December 31, 2001
represents the excess of cost over market value of the net assets acquired from
the acquisition of businesses in the Company's operating segment. For the year
ended December 31, 2002, the Company's carrying value of goodwill increased by
$4.5 million as a result of an acquisition of an unconsolidated subsidiary and
the final installment payment for the purchase of MFH. The following table shows
the effect of goodwill amortization on net income and earnings per share for the
periods presented:
For the year ended December 31,
---------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Reported net income allocated to common shares $ 28,796 $ 23,847 $ 29,076
Add back: goodwill amortization - 1,572 1,107
--------------- --------------- ---------------
Adjusted net income allocated to common shares $ 28,796 $ 25,419 $ 30,183
=============== =============== ===============
Basic earnings per share:
Reported earnings per share $ 1.16 $ 1.12 $ 1.67
Goodwill amortization - 0.07 0.06
--------------- --------------- ---------------
Adjusted earnings per share $ 1.16 $ 1.19 $ 1.73
=============== =============== ===============
Diluted earnings per share:
Reported earnings per share $ 1.13 $ 1.09 $ 1.62
Goodwill amortization - 0.07 0.06
--------------- --------------- ---------------
Adjusted earnings per share $ 1.13 $ 1.16 $ 1.68
=============== =============== ===============
Other-than-Temporary Impairments and Valuation Allowances on Investments
The Company evaluates on an on-going basis the credit risk exposure
associated with its assets to determine whether other-than-temporary impairments
exist or a valuation allowance is needed. When the Company believes that it is
probable that it will not collect all amounts due, including principal and
interest, under the terms of an investment, it records an other-than-temporary
impairment or valuation allowance. The Company bases its measure of impairment
of an investment on the present value of expected future cash flows discounted
at the investment's effective interest rate, or the fair value of the collateral
if the investment is collateral dependent.
Other Income
The Company's other income includes income from put options, guarantee fees
and other miscellaneous income. Put option and guarantee income is recognized
ratably over the term of the associated put option and guarantee agreements.
Stock Compensation Plans
The Company accounts for both the non-employee director share plans and the
employee share incentive plans (see Note 15) under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation expense
has been recognized for the options issued under the plans during 2002, 2001 or
2000. Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," requires the Company to make certain
disclosures as if the compensation expense for the Company's plans had been
determined based on the fair value on the date of grant for awards under those
plans. The Company estimated the fair value of each option awarded in 2002, 2001
and 2000 using the Black-Scholes option-pricing model with the following
assumptions:
2002 2001 2000
---------------- ---------------- ----------------
Risk-free interest rate 4% 5% 5%
Dividend yield 6.9% 6.8% 7.5%
Volatility 18% 19% 19%
Expected option life 7.5 years 7.5 years 7.5 years
Weighted average fair value of options $ 1.79 $ 2.67 $ 2.72
The following table illustrates the effect on net income and earnings per
share as if the compensation expense had been determined based on the fair value
recognition provisions of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation":
(000s) 2002 2001 2000
---------------- ---------------- ----------------
Net income allocated to common shares, as reported $ 28,796 $ 23,847 $ 29,076
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (54) (281) (656)
---------------- ---------------- ----------------
Net income allocated to common shares, pro forma $ 28,742 $ 23,566 $ 28,420
================ ================ ================
Earnings per common share:
Basic - as reported $ 1.16 $ 1.12 $ 1.67
================ ================ ================
Basic - pro forma $ 1.15 $ 1.11 $ 1.63
================ ================ ================
Diluted - as reported $ 1.13 $ 1.09 $ 1.62
================ ================ ================
Diluted - pro forma $ 1.13 $ 1.08 $ 1.59
================ ================ ================
Earnings per Share
The Company calculates earnings per share in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128"). FAS 128 requires the dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures.
Income Taxes
MuniMae is organized as a limited liability company. This structure allows
MuniMae to combine the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Therefore, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return. In addition,
the tax-exempt income derived from certain investments remains tax-exempt when
it is passed through to the shareholders. The Company records cash dividends
received from subsidiaries organized as corporations as dividend income for tax
purposes. Shareholders' distributive share of MuniMae's income, deductions and
credits are reported to each shareholder on Internal Revenue Service Schedule
K-1.
Prior to January 2003, the Company had elected under Section 754 of the
Internal Revenue Code to adjust the basis of the Company's property on the
transfer of shares to reflect the price each shareholder paid for his or her
shares. While the bulk of the Company's recurring interest income is tax-exempt,
from time to time the Company may sell or securitize various assets, which may
result in capital gains and losses for tax purposes. Since the Company is taxed
as a partnership, these capital gains and losses are passed through to
shareholders and are reported on each shareholder's Schedule K-1. The capital
gain and loss allocated from the Company may be different for each shareholder
due to the Company's Section 754 election and is a function of, among other
things, the timing of the shareholder's purchase of shares and the timing of
transactions that generate gains or losses for the Company. This means that for
assets purchased by the Company prior to a shareholder's purchase of shares, the
shareholder's basis in the assets may differ significantly from the Company's
basis in those same assets. Although the procedure for allocating the basis
adjustment is complex, the result of the election is that each share is
homogeneous, while each shareholder's basis in the assets of the Company may be
different. Consequently, the capital gains and losses allocated to individual
shareholders may differ significantly from the capital gains and losses recorded
by the Company.
In January 2003, the Company applied to have its election under Section 754
of the Internal Revenue Code revoked effective January 1, 2003. The Company
applied for the revocation due to the administrative burden attributable to this
election resulting from the increased numbers of partners and frequency of
shifts in ownership. The Internal Revenue Service has not yet responded to the
Company's application to revoke its election under Section 754.
A portion of the Company's interest income is derived from private activity
bonds that for income tax purposes are considered tax preference items for
purposes of alternative minimum tax ("AMT"). AMT is a mechanism within the
Internal Revenue Code to ensure that all taxpayers pay at least a minimum amount
of taxes. All taxpayers are subject to the AMT calculation requirements although
the vast majority of taxpayers will not actually pay AMT. As a result of AMT,
the percentage of the Company's income that is exempt from federal income tax
may be different for each shareholder depending on that shareholder's individual
tax situation.
The Company has numerous corporate subsidiaries which are subject to income
taxes. The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax basis of assets and liabilities
(see Note 10).
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board approved
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under that
guarantee. FIN 45 is effective for guarantees issued or modified after December
31, 2002. The disclosure requirements under FIN 45 are effective for 2002
calendar year-end financial statements (See Note 11). The Company believes the
provision pertaining to the recognition of a liability for the fair value of the
obligation it assumes under the guarantee may have a significant impact on the
total liabilities and net income of the Company, but is unable to estimate the
effect at this time.
In January 2003, the Financial Accounting Standards Board approved
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires the consolidation of a Company's equity investment in a variable
interest entity ("VIE") if the Company is the primary beneficiary of the VIE and
if risks are not effectively dispersed among the owners of the VIE. The Company
is considered to be the primary beneficiary of the VIE if the Company absorbs
the majority of the losses of the VIE. FIN 46 is effective for VIEs created
after January 31, 2003. For any VIE in which the Company held an interest that
it acquired before February 1, 2003, FIN 46 is effective for the first interim
reporting period after June 15, 2003. The Company is currently reviewing the
impact of FIN 46 on the tax credit syndication funds that a wholly owned
subsidiary of the Company sponsors and asset manages. The Company will continue
to review new investments in order to determine if they should be accounted for
in accordance with FIN 46.
Use of Estimates
The use of estimates is inherent in the preparation of all financial
statements, but is especially important in the case of the Company, which is
required under FAS 115 to carry a substantial portion of its assets at fair
value even though only a limited market exists for them. Because only a limited
market exists for most of the Company's investments, fair value is estimated by
the Company in accordance with the Company's valuation procedures discussed
above. These estimates involve uncertainties and matters of judgment and
therefore cannot be determined with precision. The assumptions and methodologies
selected by the Company were intended to estimate the amounts at which the
investments could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Changes in assumptions and market
conditions could significantly affect these estimates. These estimated values
may differ significantly from the values that would have been used had a ready
market for the investments existed, and the differences could be material.
NOTE 2 - INVESTMENT IN TAX-EXEMPT BONDS
As of December 31, 2002 and 2001, the Company held $770.3 million and
$616.5 million of tax-exempt bonds, respectively. The following table summarizes
tax-exempt bonds by type.
December 31, 2002
-----------------------------------------------------------
Face Amortized Unrealized Fair
(000s) Amount Cost Gain (Loss) Value
------------- ------------ ------------ ------------
Non-participating bonds $ 651,737 $ 621,594 $ (4,692) $ 616,902
Participating bonds 82,852 81,956 1,893 83,849
Subordinate non-participating bonds 19,039 17,700 106 17,806
Subordinate participating bonds 58,890 35,799 15,989 51,788
------------- ------------ ------------ ------------
Total $ 812,518 $ 757,049 $ 13,296 $ 770,345
============= ============ ============ ============
December 31, 2001
-----------------------------------------------------------
Face Amortized Unrealized Fair
(000s) Amount Cost Gain (Loss) Value
------------- ------------ ------------ ------------
Non-participating bonds $ 489,081 $ 457,625 $ 2,327 $ 459,952
Participating bonds 83,078 82,190 1,388 83,578
Subordinate non-participating bonds 18,407 17,215 33 17,248
Subordinate participating bonds 60,379 35,799 19,883 55,682
------------- ------------ ------------ ------------
Total $ 650,945 $ 592,829 $ 23,631 $ 616,460
============= ============ ============ ============
Annual maturities of investment in tax-exempt bonds that mature on a single
maturity date are as follows:
(000s) Face Amount Fair Value
------------------ -------------------
Due in less than one year $ 900 $ 873
Due between one and five years 56,013 54,297
Due after five years 74,845 67,906
------------------ -------------------
$ 131,758 $ 123,076
================== ===================
The Company has 96 tax-exempt bonds that pay principal monthly,
semi-annually or annually with final maturity dates ranging from July 2007 to
July 2045.
2002 Transactions
During 2002, the Company invested in tax-exempt bonds with a face amount of
$192.0 million for $190.0 million. Of the total face amount of $192.0 million,
$17.3 million represents the Company's new primary investments (bonds which the
Company originated), $18.3 million reflects new secondary market investments
(previously issued bonds purchased from third parties) and the remaining $156.4
million reflects the repurchase of bonds that the Company had previously
securitized. From time to time the Company may purchase or sell in the open
market interests in bonds that it has securitized depending on the Company's
capital position and needs. The following table summarizes the new primary and
secondary market investment activity for 2002:
Face Purchase
(000s) Amount Amount
------------ ------------
Non-participating bonds (1) $ 34,897 $ 33,832
Subordinate non-participating bonds 653 606
------------ ------------
Total $ 35,550 $ 34,438
============ ============
(1) Of this amount, $7.5 million was an initial funding of 19 bonds; the
remaining balance of the bonds, which totals approximately $98.9 million,
is expected to be funded by the Company through 2003 and 2004.
In 2002, a tax-exempt bond with a $10.3 million face amount was repaid;
because the Company had previously recorded impairment with respect to this
bond, the repayment at face resulted in a $2.2 million gain. In addition, the
Company sold its investment in a tax-exempt bond with a face amount of $9.6
million, resulting in a gain of $0.4 million.
2001 Transactions
During 2001, the Company invested in tax-exempt bonds with a face amount of
$161.0 million for $156.7 million. Of the total face amount of $161.0 million,
$18.2 million represents the Company's new primary investments (bonds which the
Company originated), $82.5 million reflects new secondary market investments
(previously issued bonds purchased from third parties) and the remaining $60.3
million reflects the repurchase of bonds that the Company had previously
securitized. The following table summarizes the new investment activity for
2001:
Face Purchase
(000s) Amount Amount
------------ ------------
Non-participating bonds (1) $ 94,474 $ 90,648
Subordinate non-participating bonds 6,220 6,043
------------ ------------
Total $ 100,694 $ 96,691
============ ============
(1) Of this amount, $2.4 million was additional funding of a bond initially
funded in 1998. The total amount of the draw down bond funded was $11.0
million.
In 2001, a tax-exempt bond with a $10.1 million face amount was repaid;
because the Company had previously recorded impairment with respect to this
bond, the repayment at face resulted in a $2.2 million gain.
Other-than-Temporary Impairments
In 2002, the Company recorded other-than-temporary impairments totaling
$0.4 million on four bonds.
In 2001, the Company assumed the obligation to purchase two bonds for their
face amount ($21.5 million). In consideration for assuming this obligation, the
Company received $1.9 million in cash and a $2.0 million (face amount) taxable
note with a fair value of $1.4 million. The Company recognized a $3.3 million
other-than-temporary impairment upon the assumption of this obligation. This
amount represented the difference between the fair value of the bonds and the
face amount of the bonds at the time the Company assumed the purchase
obligation. Upon the purchase of the bonds, the Company recognized $3.3 million
in income that represented the value of the cash and taxable loan consideration
received.
The Company recorded an other-than-temporary impairment totaling $1.0
million on one bond in 2000.
Investments on Non-Accrual Status
In accordance with the Company's policy discussed in Note 1, the Company
places delinquent bonds on non-accrual status for financial reporting purposes
when collection of interest is in doubt, which is generally considered to be
after 90 days of non-payment. At December 31, 2002, 2001, and 2000, there were
$163.3 million, $132.1 million and $149.4 million (face value) of tax-exempt
bonds on non-accrual status. Interest income recognized on these bonds was $12.7
million, $10.2 million and $11.0 million for the years ended December 31, 2002,
2001, and 2000, respectively. Additional interest income that would have been
recognized by the Company had these bonds not been placed on non-accrual status
was approximately $1.0 million, $1.2 million and $0.5 million for the years
ended December 31, 2002, 2001 and 2000, respectively.
Tax-Exempt Bonds Pledged
In order to facilitate the securitization of certain assets at higher
leverage ratios than otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional bonds to a pool that
acts as collateral for senior interests in certain securitization trusts. From
time to time, the Company also pledges bonds as collateral for letters of
credit, lines of credit, and other derivative agreements. At December 31, 2002
and 2001, the total carrying amount of the tax-exempt bonds pledged as
collateral was $372.9 million and $358.4 million, respectively.
NOTE 3 - LOANS RECEIVABLE
The Company's loans receivable consist primarily of construction loans,
permanent loans, supplemental loans and other taxable loans. The following table
summarizes loans receivable by loan type at December 31, 2002 and 2001.
(000s) December 31, 2002 December 31, 2001
----------------------- -----------------------
Loan Type:
Construction loans $ 300,266 $ 268,775
Taxable permanent loans 44,665 86,182
Supplemental loans 80,459 49,885
Other taxable loans 37,130 35,964
----------------------- -----------------------
462,520 440,806
Allowance for loan losses (1,072) (775)
----------------------- -----------------------
Total $ 461,448 $ 440,031
======================= =======================
Allowance for Loan Losses
The Company's allowance for loan losses is based on the Company's
continuing evaluation of the loans receivable and is intended to maintain an
allowance adequate to absorb probable losses on these loans. The Company
assesses individual loans for impairment based on the Company's policy on
other-than-temporary impairments (see Note 1). Adjustments to the allowance due
to changes in measurement of impaired loans are recorded in the provision for
loan loss. The allowance for loan losses was $1.1 million and $0.8 million at
December 31, 2002 and 2001, respectively.
Loans on Non-Accrual Status
In accordance with the Company's policy discussed in Note 1, the Company
places delinquent loans on non-accrual status for financial reporting purposes
when collection of interest is in doubt, which is generally considered to be
after 90 days of non-payment. At December 31, 2002, 2001, and 2000, there were
$12.6 million, $3.3 million and $3.3 million (face value) of loans on
non-accrual status. Interest income recognized on these loans was $1.3 million,
$0.2 million and $0.1 million for the years ended December 31, 2002, 2001, and
2000, respectively. Additional interest income that would have been recognized
by the Company had these loans not been placed on non-accrual status was
approximately $248,000, $56,000 and $37,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
Loans Receivable Pledged
The Company pledges its construction loans and permanent loans as
collateral for the Company's notes payable and line of credit borrowings. In
addition, in order to facilitate the securitization of certain assets at higher
leverage ratios than otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional taxable loans to a
pool that acts as collateral for senior interests in certain securitization
trusts and credit enhancement facilities. At December 31, 2002 and 2001, the
total carrying amount of the loans receivable pledged as collateral was $417.1
million and $406.3 million, respectively.
NOTE 4 - INVESTMENTS IN PARTNERSHIPS
The Company's investments in partnerships consist of equity interests in
real estate operating partnerships. The Company's investments in partnerships
are accounted for using the equity method and are recorded as "Investments in
partnerships" on the Balance Sheet.
Investment in CAPREIT
The Company makes equity investments in income-producing real estate
operating partnerships. To date, the Company's equity investments have been made
in partnership with CAPREIT. In 2001, the Company made a $3.4 million equity
investment in 12 property partnerships (the "CAPREIT Tera" investment). As a
result of the CAPREIT Tera investment, the Company owns a 35% general
partnership interest in the 12 property partnerships.
At December 31, 2002 and 2001, the Company's investment in CAPREIT Tera
totaled ($1.3) million and $1.7 million, respectively.
In 2002, the Company invested $70.7 million to acquire a 35% general
partnership interest in 20 CAPREIT property partnerships and 4 related swap
partnerships (the "CAPREIT 3M" investment). The Company's liquidation percentage
in CAPREIT 3M is 30%.
At December 31, 2002, the Company's investment in CAPREIT 3M totaled $70.6
million.
Tax Credit Equity Funds: Limited Partner Investments in Real Estate Operating
Partnerships
The Company's limited partner investments typically represent a 99%
interest in the partnership. The 1% general partner interest is owned by the
developer of the property (see further discussion in Note 1).
At December 31, 2002 and 2001, the Company's limited partner investments in
real estate operating partnerships totaled $30.8 million and $3.8 million,
respectively.
Tax Credit Equity Funds: General Partner Interests
The Company is also the general partner in the syndicated low-income
housing tax credit funds which it originates. The Company's general partner
interests represent a one percent or less interest in each such fund.
At December 31, 2002 and 2001, the Company's general partner interests in
syndicated low-income housing tax credit funds totaled ($0.1) million.
NOTE 5 - RESIDUAL INTERESTS IN BOND SECURITIZATIONS
At December 31, 2002 and 2001, the Company's residual interests in bond
securitizations are investments in Residual Interest Tax-Exempt Securities
Receipts ("RITESSM"). The following table provides certain information with
respect to the residual interests in bond securitizations held by the Company at
December 31, 2002 and 2001.
(000s) December 31, 2002
---------------------------------------------------------------------------------------
Fair Value (1)
Face Amortized Unrealized -------------------------------------------
Amount Cost Gain (Loss) Assets Liabilities (2) Net
------------ ----------- ------------ ------------- ------------- ------------
Total RITESSM(3) $ 334 $ 3,639 $ 5,953 $ 11,039 $ (1,447) $ 9,592
============ =========== ============ ============= ============= ============
December 31, 2001
---------------------------------------------------------------------------------------
Fair Value (1)
Face Amortized Unrealized -------------------------------------------
Amount Cost Gain (Loss) Assets Liabilities (2) Net
------------ ----------- ------------ ------------- ----------------------------
Total RITESSM(3) $ 5,700 $ 6,347 $ (1,031) $ 13,295 $ (7,979) $ 5,316
============ =========== ============ ============= ============= ============
(1) The amounts disclosed represent the fair values of all the Company's
investments in residual interests in bond securitizations at the reporting
date.
(2) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of
these investments is considered temporary and is not indicative of the
future earnings on these investments.
(3) The amount of outstanding P-FloatsSM, which are senior to the Company's
RITESSM investments and which are not reflected in the Company's balance
sheet, was $177.8 million and $334.2 million at December 31, 2002 and 2001,
respectively.
In 2002, the Company structured three transactions whereby Merrill Lynch
bought bonds from third parties with a face amount of $25.3 million. The Company
purchased RITESSM interests with a face value of $15,000 for $1.6 million in
2002 related to these transactions. The Company did not recognize any
origination fees on these structured transactions. The Company sold a $1.3
million and a $3.2 million RITESSM interest for gains totaling $2.0 million.
In 2001, the Company structured five transactions whereby Merrill Lynch
bought bonds from third parties with a face amount of $79.2 million. The Company
purchased RITESSM interests with a face value of $1.3 million for $0.2 million
in 2001 related to these transactions. The Company recognized $0.7 million in
origination fees on these structured transactions. There were no sales of
RITESSM in 2001 that resulted in significant capital gains or losses.
RITESSM Valuation Analysis
The fair value of a RITESSM investment is derived from the quote on the
underlying bond reduced by the outstanding corresponding P-FLOATsSM face amount.
The Company bases the fair value of the underlying bond, which has a limited
market, on quotes from external sources, such as brokers, for these or similar
bonds. The fair value of the underlying bond includes a prepayment risk factor.
The prepayment risk factor is reflected in the fair value of the bond by
assuming the bond will prepay at the most adverse time to the Company given
current market rates and estimates of future market rates. Based on this, an
adverse change in prepayment risk would not have an effect on the fair value of
the Company's RITESSM investments. In addition, the RITESSM investments are not
subject to prepayment risk as the term of the securitization trusts is only for
a period during which the underlying bond cannot be prepaid. Based on historical
information, credit losses were estimated to be zero.
At December 31, 2002 and 2001, a 10% and 20% adverse change in key
assumptions used to estimate the fair value of the Company's RITESSM would have
the following impact:
(In thousands) 2002 2001
-------------- ---- ----
Fair value of retained interests, net $9,592 $5,316
Residual cash flows discount rate (annual rate) 3.8% - 8.1% 4.5%- 12.9%
Impact on fair value of 10% adverse change $9,108 $22,821
Impact on fair value of 20% adverse change $17,444 $43,783
The sensitivity analysis presented above is hypothetical in nature and
presented for information purposes only. The analysis shows the effect on fair
value of a variation in one assumption and is calculated without considering the
effect of changes in any other assumption. In reality, changes in one assumption
may affect the others, which may magnify or offset the sensitivities.
NOTE 6 - INVESTMENT IN DERIVATIVE FINANCIAL INSTRUMENTS
The following table provides certain information with respect to the
derivative financial instruments held by the Company at December 31, 2002 and
2001.
December 31, 2002 December 31, 2001
-------------------------------------------- ---------------------------------------------
Notional Fair Value (2) Notional Fair Value (2)
Amount (1) Assets Liabilities(3) Amount (1) Assets Liabilities (3)
-------------- ------------- ------------- -------------- -------------- --------------
Interest rate swap agreements $ 349,810 $ 18,762 $ (49,359) $ 422,230 $ 2,912 $ (18,646)
Put option agreements 98,539 - - 107,275 - -
------------- ------------- -------------- --------------
Total investment in derivative financial instruments $ 18,762 $ (49,359) $ 2,912 $ (18,646)
============= ============= ============== ==============
(1) For the interest rate swap agreements, notional amount represents total
amount of the Company's interest rate swap contracts ($598,415 and $650,335
as of December 31, 2002 and December 31, 2001, respectively) less the total
amount of the Company's reverse interest rate swap contracts ($248,605 and
$228,105 as of December 31, 2002 and December 31, 2001, respectively). For
put option agreements, the notional amount represents the Company's
aggregate obligation under the put option agreements.
(2) The amounts disclosed represent the net fair values of all the Company's
derivatives at the reporting date.
(3) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of
these investments is considered temporary and is not indicative of the
future earnings on these investments.
Interest rate swaps
The Company enters into interest rate swap agreements to reduce its
exposure to interest rate risk as more fully discussed in Note 1. From time to
time, the Company may terminate interest rate swap agreements or enter into
interest rate swap contracts that offset certain of the Company's existing swaps
("reverse interest rate swaps"). The Company may do this for a number of
reasons, including in conjunction with converting portions of the Company's
short-term floating rate debt to longer-term, fixed-rate facilities.
Under the interest rate swap agreements, the Company is obligated to pay
the counterparty a fixed rate. In return, the counterparty will pay the Company
a floating rate equivalent to the BMA Municipal Swap Index, an index of weekly
tax-exempt variable rate issues. Under the reverse interest rate swap
agreements, the counterparty is obligated to pay the Company a fixed rate. In
return, the Company will pay the counterparty a floating rate equivalent to the
BMA Municipal Swap Index. Net swap payments received, if any, are taxable
income, even though the investment being hedged pays tax-exempt interest. The
Company recognizes taxable capital gains or losses upon the termination of an
interest rate swap contract. The average BMA rate for 2002, 2001 and 2000 was
approximately 1.38%, 2.63% and 4.14%, respectively.
Put Options
The Company has occasionally entered into put option agreements with
counterparties whereby the counterparty has the right to sell to the Company,
and the Company has the obligation to buy, an underlying investment at a
specified price. Under the put options, the Company may receive an annual
payment for assuming the purchase obligation and providing asset management
services on the underlying investments. The purchase price can be reduced in the
event of a material adverse change (as defined in the put agreements). The
Company had six and four put options with a fair value of zero at December 31,
2002 and 2001, respectively. The Company's aggregate obligation under these put
options was $98.5 million and $107.3 million at December 31, 2002 and 2001,
respectively. The Company received $0.9 million, $1.0 million, and $1.2 million
in income from put options in 2002, 2001 and 2000, respectively.
NOTE 7 - RESTRICTED ASSETS
Under the terms of the Company's interest rate swap agreements with
counterparties, the Company is required to maintain cash deposits ("margin call
deposits"). The margin call deposit requirements are specific to each
counterparty. The Company must make margin call deposits when the total fair
value of the Company's outstanding swap obligations to any one counterparty is
greater than $1.0 million. In certain cases, the Company is also required to
post up-front collateral on the swap contracts. At December 31, 2002 and 2001,
the balances in the Company's margin call deposit accounts were $26.0 million
and $15.1 million, respectively.
Under the terms of the Company's investment in CAPREIT (see Note 4), the
Company is required to post either bond collateral or cash collateral for the
CAPREIT total return swaps. At December 31, 2002, the Company had posted $4.0
million in cash collateral.
As discussed in Notes 1 and 2, in order to facilitate the securitization of
certain assets at higher leverage ratios than otherwise available to the Company
without the posting of additional collateral, the Company has pledged additional
bonds to a pool that acts as collateral for senior interests in certain
securitization trusts. From time to time, the Company may also post cash
collateral to this pool. At December 31, 2002, the Company had posted $8.7
million in cash collateral. The Company did not have any cash posted to the pool
at December 31, 2001.
In conjunction with a guarantee provided by the Company related to the sale
of certain taxable notes in December 1998 and March 1999, the Company deposited
$1.3 million in cash in an account with a counterparty. This money serves as
collateral for the Company's obligation under the guarantee; however, the
Company's obligation under the guarantee is not limited to this deposit. In the
event that any of the properties cannot fund their payments on the loan, the
money in this account can be used to fund any shortfalls. The Company does not
believe that any loss is likely. These funds will not be released to the Company
until the interest and principal obligations on all the loans are fulfilled. The
Company does not believe it will have to perform under the guarantee. As of
December 31, 2002 and 2001, the balance of this cash, including interest earned,
was $1.4 million.
NOTE 8 - MORTGAGE SERVICING RIGHTS
At December 31, 2002 and 2001, the Company had capitalized mortgage
servicing rights with a carrying value of $10.9 million and $9.0 million,
respectively, net of accumulated amortization of $3.0 million and $1.7 million,
respectively. The December 31, 2002 balance of $10.9 million represents $11.0
million in mortgage servicing right assets offset by $0.1 million in mortgage
servicing rights liabilities (included in other liabilities). The December 31,
2001 balance of $9.0 million represents $9.2 million in mortgage servicing right
assets offset by $0.2 million in mortgage servicing rights liabilities. The
following table shows the activity for the years ended December 31, 2002 and
2001.
(In thousands)
Balance, December 31, 2000 $6,776
Capitalized mortgage servicing rights 3,168
Amortization (936)
Valuation allowance -
----------
Balance, December 31, 2001 $9,008
Capitalized mortgage servicing rights 3,167
Amortization (1,314)
Valuation allowance -
----------
Balance, December 31, 2002 $10,861
==========
At December 31, 2002 and 2001, the fair value of the mortgage servicing
rights approximated the carrying amount. The fair value of the mortgage
servicing rights was estimated by discounting estimated net servicing income
over the future life of the related loan using a market discount rate. The
market discount rate was estimated to be 12% at December 31, 2002 and 2001,
respectively. The estimated lives of the loans were determined by considering
yield maintenance periods and contractual prepayment penalties, if any. Credit
losses were estimated to be zero based on historical performance of the
underlying loans.
NOTE 9 - NOTES PAYABLE AND DEBT
The Company's notes payable consist primarily of notes payable and advances
under line of credit arrangements, which are used to: (1) finance construction
lending needs; (2) finance working capital needs; (3) warehouse real estate
operating partnerships before they are placed into tax credit equity funds; and
(4) warehouse permanent loans before they are purchased by Fannie Mae. The
Company's short and long-term debt relates to securitization transactions that
the Company has recorded as borrowings. The following table summarizes notes
payable and debt at December 31, 2002 and 2001.
December 31,
------------------------------------
(000s) Total of Facilities 2002 2001
Short-term notes payable N/A $ 126,410 $ 159,390
Lines of credit - unaffiliated entities $ 154,000 110,821 111,554
Lines of credit - affiliated entities $ 240,000 89,053 72,777
Short-term debt N/A 219,945 78,560
Other N/A - 312
------------------------------------
Total short-term notes payable and debt 546,229 422,593
------------------------------------
Long-term notes payable N/A 124,640 76,030
Long-term debt N/A 147,357 134,881
------------------------------------
Total long-term notes payable and debt 271,997 210,911
------------------------------------
Total notes payable and debt $ 818,226 $ 633,504
====================================
Long-term notes payable consists of amounts borrowed to finance
construction lending activities. These amounts mature at various times through
2005. Interest rates on long-term notes payable range from 4.50% to 6.96%.
Long-term debt consists of amounts related to securitization transactions
recorded as borrowings. These amounts mature at various times through 2042.
Interest rates on long-term debt range from 4.35% to 12.00%.
Annual maturities of notes payable and debt are as follows:
(000s)
2003 $ 546,229
2004 99,206
2005 37,673
2006 68,924
2007 868
Thereafter 65,326
--------------
Total $ 818,226
==============
The weighted average interest rate on notes payable and debt due in one
year was 3.90% and 5.45% at December 31, 2002 and 2001, respectively.
Covenant Compliance
Under the terms of the various credit facilities, the Company is required
to comply with covenants including net worth, interest coverage, collateral and
other terms and conditions. The Company is in compliance with its debt covenants
at December 31, 2002.
NOTE 10 - INCOME TAXES
Certain subsidiaries of MuniMae are corporations and are therefore subject
to federal and state income taxes. The following table summarizes the provision
for income taxes at December 31, 2002, 2001 and 2000:
(000s)
Federal income tax expense: 2002 2001 2000
-------- -------- --------
Current $ 422 $ 862 $ 1,177
Deferred 625 175 536
State income tax expense:
Current 305 250 201
Deferred 132 96 92
-------- -------- --------
Total $1,484 $1,383 $ 2,006
======== ======== ========
During 2002, 2001, and 2000 the Company recognized approximately $583,000,
$367,000 and zero, respectively, of benefits for deductions associated with the
exercise of employee stock options and vesting of deferred shares. These
benefits were added directly to capital surplus, and are not reflected in income
tax expense on the income statement.
The of the difference between the effective income tax rate
and the statutory federal income tax rate, as applied to the income of the
Company's subsidiaries, which are subject to federal and state taxes, is as
follows for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
-------- -------- --------
Provision for income taxes computed using the
statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax effect 9.2 7.9 6.5
Goodwill amortization (2.4) 16.4 9.3
Difference in deferred share expense - - (1.1)
Minority interest 1.3 2.9 -
Tax credits (3.7) (21.9) -
Other (1.0) 2.3 0.7
-------- -------- --------
Provision for income taxes 37.4% 41.6 % 49.4%
======== ======== ========
Components of the Company's deferred tax assets and liabilities, included
in other assets and liabilities, are as follows at December 31, 2002 and 2001:
(000s) 2002 2001
-------- --------
Deferred tax assets:
Tax credit carryover $ 529 $ 383
Rental expenses 52 68
Mortgage servicing rights 56 58
Equity investment market value adjustment 546 -
Deferred origination fees 155 -
Other 110 140
-------- --------
Total deferred tax assets $ 1,448 $ 649
======== ========
Deferred tax liabilities:
Depreciable assets $ 939 $ 35
Mortgage servicing rights 4,143 3,448
Deferred loan fees 42 85
Other 90 90
-------- --------
Total deferred tax liabilities $ 5,214 $ 3,658
======== ========
At December 31, 2002 and 2001, the Company had an unused low-income housing
tax credit carryforward for federal income tax purposes of approximately
$529,000 and $383,000, respectively, which expires in 2016. This credit is
subject to recapture based upon a qualifying disposition. The Company has a
qualified disposition bond to avoid the recapture provisions. Additionally, at
December 31, 2002 and 2001, a component of other deferred tax assets is a
charitable contribution carryforward of approximately $422,000 and $328,000,
respectively, which expires in 2006.
NOTE 11 - GUARANTEES, COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has entered into non-cancelable operating leases for office
space and equipment, as well as software hosting agreements for various
information systems initiatives. These leases expire on various dates through
2009. Rental expense was approximately $2.1 million, $1.4 million, and $1.0
million for the years ended December 31, 2002, 2001 and 2000, respectively. At
December 31, 2002, the minimum aggregate rental commitments are as follows:
(000s) Operating Leases
---------------------
2003 $ 2,241
2004 1,458
2005 1,201
2006 267
2007 28
Thereafter 52
---------------------
Total $ 5,247
=====================
Unfunded Loan Commitments
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. At
December 31, 2002 and 2001, the aggregate unfunded commitments totaled
approximately $293.4 million and $137.6 million, respectively. The Company has
unfunded commitments from investors in a like amount. The commitments are not
reflected in the financial statements. The Company uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. There are no significant concentrations of credit risk with
any individual counterparty to originate loans.
Unfunded Equity Commitments
As the limited partner in real estate operating partnerships, the Company
has committed to extend equity to real estate operating partnerships in
accordance with the partnership documents. At December 31, 2002 and 2001, the
aggregate unfunded commitments totaled approximately $74.5 million and zero,
respectively. The Company typically owns these partnership interests for three
to nine months before they are transferred to a syndicated low-income housing
tax credit fund.
Fannie Mae Participation Strips
As of December 31, 2002 and 2001, the Company owned interest-only
securities resulting from participations in a percentage of interest received on
mortgage loans sold to Fannie Mae with a fair value of $5.8 million and $5.5
million, respectively. The Company has entered into an agreement to pay the
income received from these assets to the Group Trust; therefore, a corresponding
liability is reflected on the balance sheet in other liabilities.
Guarantees
The Company's maximum exposure under its guarantee obligations is not
indicative of the likelihood of the expected loss under the guarantees. The
Company recognizes contingent liabilities on guarantees when the losses are
probable and can be reasonably estimated.
The following table summarizes the Company's guarantees by type at December
31, 2002.
(in millions) December 31, 2002
-------------------------------------------------------------------------------------
Maximum Carrying
Guarantee Note Exposure Amount Supporting Collateral
---------------------------------- ------- ----------- ---------- ----------------------------------------------------------
Loss-Sharing Agreements with
Fannie Mae and GNMA (1) $ 162.1 $ - $4.9 million Letter of Credit pledged
Bank Line of Credit Guarantees (2) 182.0 - Investment in partnership and loans totaling $153.6 million
Tax Credit Related Guarantees (3) 42.8 0.1 None
Other Financial/Payment Guarantees (4) 414.3 1.8 None
Put Options (5) 101.6 - $30 million of loans and tax exempt bonds
Letter of Credit Guarantees (6) 25.9 - None
Indemnification Contracts (7) 12.7 - None
----------- ----------
$ 941.4 $ 1.9
=========== ==========
Notes:
(1) As a Fannie Mae DUS lender and GNMA loan servicer, MFH may share in losses
relating to under performing real estate mortgage loans delivered to Fannie
Mae and GNMA. More specifically, if the borrower fails to make a payment on
a DUS loan originated by MFH and sold to Fannie Mae, of principal,
interest, taxes or insurance premiums, MFH may be required to make
servicing advances to Fannie Mae. Also, MFH may participate in a deficiency
after foreclosure on DUS and GNMA loans. As a DUS lender, MFH must maintain
a minimum net worth and collateral with a custodian. The term of the loss
sharing agreement is based on the contractual requirements of the
underlying loans delivered to Fannie Mae and GNMA, which varies to a
maximum of 30 years.
(2) The Company, or its subsidiaries, provides payment or performance
guarantees for certain borrowings under line of credit facilities with a
term of 1 year or less.
(3) The Company acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. In conjunction with the sale
of these partnership interests, the Company may provide performance
guarantees on the underlying properties owned by the partnerships or
guarantees to the fund investors. These guarantees have various expirations
to a maximum term of 18 years.
(4) The Company, or its subsidiaries, has entered into arrangements that
require the Company to make payment in the event a specified third party
fails to perform on its financial obligation. The Company typically
provides these guarantees in conjunction with the sale of an asset to a
third party or the Company's investment in equity ventures. The term of the
guarantee varies based on loan payoff schedules or Company divestitures.
(5) The Company has entered into put option agreements with counterparties
whereby the counterparty has the right to sell to the Company, and the
Company has the obligation to buy, an underlying investment at a specified
price. These put option agreements expire at various dates between February
26, 2003 and April 1, 2007.
(6) The Company, or its subsidiaries, provide a guarantee of the repayment on
losses incurred under letters of credit issued by third parties or provide
a guarantee to provide substitute letters of credits at a predetermined
future date. In addition, the Company may provide a payment guarantee for
certain assets in securitization programs. These guarantees expire at
various dates between March 1, 2003 and September 1, 2017.
(7) The Company has entered into indemnification contracts, which require the
guarantor to make payments to the guaranteed party based on changes in an
underlying investment that is related to an asset or liability of the
guaranteed party. These agreements typically require the Company to
reimburse the guaranteed party for legal and other costs in the event of an
adverse judgment in a lawsuit or the imposition of additional taxes due to
a change in the tax law or an adverse interpretation of the tax law. The
term of the indemnification varies based on the underlying program life,
loan payoffs, or Company divestitures. Based on the terms of the underlying
contracts, the maximum exposure amount only includes amounts that can be
reasonably estimated at this time; the actual exposure amount could vary
significantly.
NOTE 12 - PREFERRED SHAREHOLDERS' EQUITY IN A SUBSIDIARY COMPANY
In 1999, the Company placed a substantial portion of its tax-exempt bonds
and residual interests in bond securitizations in an indirect subsidiary of the
Company, MuniMae TE Bond Subsidiary, LLC ("TE Bond Sub"). TE Bond Sub sold
Series A, Series B and Series A-1 and Series B-1 Cumulative Preferred Shares
(collectively, the "TE Bond Sub Preferred Shares") to institutional investors in
May 1999, June 2000 and October 2001, respectively. The TE Bond Sub Preferred
Shares have a senior claim to the income derived from the investments owned by
TE Bond Sub. Any income from TE Bond Sub available after payment of the
cumulative distributions of the TE Bond Sub Preferred Shares is allocated to the
Company, which holds all of the common equity interests. As a result, the assets
of TE Bond Sub and its subsidiaries, while indirectly controlled by MuniMae and
thus included in the consolidated financial statements of the Company, are
legally owned by TE Bond Sub and are not available to the creditors of the
Company. The Company's common equity interest in TE Bond Sub was $271.4 million
and $268.4 million at December 31, 2002 and 2001, respectively. The common
equity interest in TE Bond Sub held by MuniMae is subject to the claims of the
creditors of MuniMae and in certain circumstances could be foreclosed.
The Series A and A-1 Preferred Shares bear interest at 6.875% and 6.30% per
annum, respectively, or, if lower, the aggregate net income of the issuing
company, TE Bond Sub. The Series A and A-1 Preferred Shares have a senior claim
to the income derived from the investments owned by TE Bond Sub. The Series A-1
Shares are equal in priority of payment to the Series A Preferred Shares. The
Series B and B-1 Preferred Shares bear interest at 7.75% and 6.80% per annum,
respectively, or, if lower, the aggregate net income of the issuing company, TE
Bond Sub, after payment of distributions to the Series A and Series A-1
Preferred Shares. The Series B-1 Shares are equal in priority of payment to the
Series B Preferred Shares. Any income from TE Bond Sub available after payment
of the cumulative distributions of the TE Bond Sub Preferred Shares is allocated
to the Company. Cash distributions on the TE Bond Sub Preferred Shares are paid
quarterly on each January 31, April 30, July 31 and October 31. The TE Bond Sub
Preferred Shares are subject to remarketing on specified dates as indicated in
the table below. On the remarketing date, the remarketing agent will seek to
remarket the shares at the lowest distribution rate that would result in a
resale of the TE Bond Sub Preferred Shares at a price equal to par plus all
accrued but unpaid distributions. The TE Bond Sub Preferred Shares will be
subject to mandatory tender on specified dates, as indicated below, and on all
subsequent remarketing dates at a price equal to par plus all accrued but unpaid
distributions. The following table provides a summary of certain terms of the TE
Bond Sub Preferred Shares.
Series A Series A-1 Series B Series B-1
Preferred Shares Preferred Shares Preferred Shares Preferred Shares
---------------- ---------------- ---------------- ----------------
Issue date May 27, 1999 October 9, 2001 June 2, 2000 October 9, 2001
Number of shares 42 8 30 4
Par amount per share $2,000,000 $2,000,000 $2,000,000 $2,000,000
Dividend rate 6.875% 6.30% 7.75% 6.80%
First remarketing date June 30, 2009 June 30, 2009 November 1, 2010 November 1, 2010
Mandatory tender date June 30, 2009 June 30, 2009 November 1, 2010 November 1, 2010
Redemption date June 30, 2049 June 30, 2049 June 30, 2050 June 30, 2050
The following table reflects the composition of the TE Bond Sub Preferred
Shareholders' equity in TE Bond Sub.
(000s) Series A Series A-1 Series B Series B-1 Total
------------- ------------- ------------- ------------ --------------
Balance, January 1, 2000 $ 80,159 $ - $ - $ - $ 80,159
Issuance of preferred shares - - 57,604 - 57,604
Income allocable to preferred shares 5,775 - 2,700 - 8,475
Distributions (5,874) - (2,700) - (8,574)
------------- ------------- ------------- ------------ --------------
Balance, December 31, 2000 80,060 - 57,604 - 137,664
Offering costs adjustment - - (9) - (9)
Issuance of preferred shares - 15,206 - 7,604 22,810
Income allocable to preferred shares 5,775 230 4,650 124 10,779
Distributions (5,775) (230) (4,650) (124) (10,779)
------------- ------------- ------------- ------------ --------------
Balance, December 31, 2001 80,060 15,206 57,595 7,604 160,465
Income allocable to preferred shares 5,775 1,008 4,650 544 11,977
Distributions (5,775) (1,008) (4,650) (544) (11,977)
------------- ------------- ------------- ------------ --------------
Balance, December 31, 2002 $ 80,060 $ 15,206 $ 57,595 $ 7,604 $ 160,465
============= ============= ============= ============ ==============
NOTE 13 - SHAREHOLDERS' EQUITY
Prior to March 2002, the Company had four types of shares: preferred
shares, preferred capital distribution shares ("preferred cd shares"), term
growth shares and common shares. The Company's preferred shares, preferred cd
shares, term growth shares and common shares differed principally with respect
to allocation of income and cash distributions, as provided by the terms of the
Company's Operating Agreement. The Company was required to distribute to the
holders of preferred shares and preferred cd shares cash flow attributable to
such shares as defined in the Company's Operating Agreement. The Company was
required to distribute to the holders of term growth shares 2.0% of the net cash
flow after payment of distributions to holders of preferred shares and preferred
cd shares. The balance of the Company's cash flow was available for distribution
to holders of common shares.
The Company's Operating Agreement provided that the preferred shares and
the preferred cd shares were subject to partial redemption when any bond
attributable to the shares was sold, or beginning in the year 2000, when any
bond attributable to the shares reached par value based on an appraisal. The
Company was required to redeem the preferred shares and preferred cd shares
within six months of the occurrence of a redemption event.
A portion of the bonds attributable to preferred shares and preferred cd
shares reached par value in December 2000. As a result, in June 2001, the
Company redeemed a portion of the preferred and preferred cd shares. The
remaining bonds attributable to the preferred shares and preferred cd shares
were either paid off, sold and/or reached par value from September 2001 through
January 2002. As a result, in March 2002, the Company redeemed the remaining
preferred shares and preferred cd shares. The Operating Agreement required that
the term growth shares be redeemed after the last preferred share is redeemed.
As a result, the term growth shares, which had no residual value, were also
redeemed in 2002.
Subsequent to March 2002, the common shares are the Company's only
outstanding shares. As of December 31, 2002, it is the Company's policy to
distribute to the holders of the common shares at least 80% of cash available
for distribution. The common shares have no par value. At December 31, 2002,
29,083,599 common shares were authorized.
On February 8, 2002, the Company sold to the public 3.0 million common
shares at a price of $24.70 per share and granted the underwriters an option to
purchase up to an aggregate of 450,000 common shares to cover over-allotments at
the same price. Net proceeds on the 3.0 million shares approximated $70.5
million. On February 15, 2002, the underwriters exercised their option to
purchase 300,000 common shares generating net proceeds of approximately $7.1
million. The net proceeds from this offering were used for general corporate
purposes, including funding of new investments, paying down debt and working
capital.
Earnings per Share
A single presentation of basic earnings per share ("EPS") is presented for
preferred shares and preferred cd shares because there were no potentially
dilutive shares outstanding during the periods presented. EPS for preferred
shares and preferred cd shares is calculated by dividing net income allocable to
the shares by the weighted average number of shares outstanding.
A dual presentation of basic and diluted EPS is presented for common
shares. Basic EPS is calculated by dividing net income allocable to common
shares by the weighted average number of common shares outstanding. The
calculation of diluted EPS is similar to that of basic EPS except that the
denominator is increased to include the number of additional shares that would
have been outstanding if the deferred shares had vested, options granted had
been exercised and the preferred shares and preferred cd shares had been
converted to common shares. Accordingly, the numerator is adjusted to add back
the income allocable to the preferred, preferred cd, and term growth shares,
which would have been allocated to common shares as a result of the conversion
of these shares. The diluted EPS calculation does not assume conversion if the
conversion would have an anti-dilutive effect on EPS. The tables at the end of
this note reconcile the numerators and denominators in the basic and diluted EPS
calculations for 2002, 2001 and 2000.
At December 31, 2000 options to purchase 12,500 common shares were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average price of the common shares for the period.
Municipal Mortgage & Equity, LLC
Reconciliation of Basic and Diluted EPS
For the year ended December 31, 2002 For the year ended December 31, 2001
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ----------
(In thousands, except share and per share data)
Basic EPS
Income allocable to
common shares $ 28,796 24,904,437 $ 1.16 $ 23,847 21,204,209 $ 1.12
========= ==========
Effect of Dilutive Securities
Options and deferred shares - 447,594 - 496,450
Earnings contingency - 121,784 - 69,266
Convertible preferred shares
to the extent dilutive - - 3 34,261
---------- ------------- ----------- -------------
Diluted EPS
Income allocable to common
shares plus assumed conversions $ 28,796 25,473,815 $ 1.13 $ 23,850 21,804,186 $ 1.09
========== ============= ========= =========== ============= ==========
Municipal Mortgage & Equity, LLC
Reconciliation of Basic and Diluted EPS
For the year ended December 31, 2000
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(In thousands, except share and per share data)
Basic EPS
Income allocable to
common shares $ 29,076 17,459,829 $ 1.67
=========
Effect of Dilutive Securities
Options and deferred shares - 408,560
Earnings contingency - 39,216
Convertible preferred shares
to the extent dilutive 309 180,761
---------- -------------
Diluted EPS
Income allocable to common
shares plus assumed conversions $ 29,385 18,088,366 $ 1.62
========== ============= =========
NOTE 14 - RELATED PARTY TRANSACTIONS
Pension Fund Advisory Business
The Company has established relationships with pension funds through the
Group Trust and MMER. The Group Trust was established by a group of pension
funds for the purpose of investing in income-producing real estate investments.
The Group Trust provides loans and lines of credit to finance a variety of the
Company's loan products. MMER is a Maryland real estate investment trust
established by the same pension funds that participate in the Group Trust, plus
one other pension fund. MMER provides the Company short-term lines of credit to
finance the Company's lending activities, in addition to investing in
income-producing real estate partnerships. MFH is the investment manager for the
Group Trust and MMER and receives advisory fees for these services. Furthermore,
MFH earns origination fees on the placement of permanent loans with the Group
Trust. MFH also earns origination fees on the placement of equity interests in
real estate partnerships with MMER. The Company's fees earned from the Group
Trust for the years ended December 31, 2002, 2001, and 2000 were $2.5 million,
$2.0 million and $1.0 million, respectively. The Company's fees earned from MMER
for the years ended December 31, 2002, 2001 and 2000 were $1.6 million, $1.4
million and zero, respectively.
As of December 31, 2002, the Company had $89.1 million outstanding on its
credit lines with the Group Trust and MMER. The Group Trust loans outstanding to
various subsidiaries of the Company totaled $128.2 million. For the years ended
December 31, 2002, 2001 and 2000, the Company recorded interest expense on these
borrowing arrangements of $12.0 million, $11.3 million, and $13.0 million,
respectively.
The Group Trust and MMER engage in business transactions exclusively with
the Company. Four of the five trustees of the Group Trust (Mr. Michael L.
Falcone, the Company's President and Chief Operating Officer, Mr. Robert J.
Banks, the Company's Vice Chairman, Mr. Keith J. Gloeckl, the Company's Chief
Investment Officer, and Mr. Gary A. Mentesana, the Company's Chief Capital
Officer) are officers of the Company. In addition, three of the six trustees of
MMER (Messrs. Falcone, Banks and Gloeckl) are Company officers. These officers
are not paid for Group Trust or MMER service. The Group Trust and MMER are
deemed to be affiliates of the Company.
The Shelter Group
Mr. Mark K. Joseph, the Company's Chief Executive Officer and Chairman of
its Board of Directors, controls and is an officer of Shelter Development
Holdings, Inc. ("Shelter Holdings"), which owns a minority interest in Shelter
Development, LLC and Shelter Properties, LLC (collectively, the "Shelter
Group"), engages in real estate development and provides property management
services to a wide variety of commercial and residential properties. One of the
Shelter Group companies provides property management functions for a number of
properties that serve as collateral for the Company's bond investments. Mr.
Falcone had an ownership interest in and was a board member of this entity until
he relinquished these positions in 2000.
The Shelter Group receives fees pursuant to management contracts for
properties which it manages. During 2002, 2001 and 2000, the Shelter Group had
10, 10, and 12, respectively, property management contracts for properties that
collateralize the Company's investments with fees at or below market rates.
During the years ended December 31, 2002, 2001 and 2000, these fees approximated
$1.1 million, $1.1 million, and $1.3 million, respectively. In addition, the
Shelter Group is the general partner in a real estate operating partnership that
the Company held a limited partner interest in at December 31, 2002. As of
December 31, 2002, the Company had invested $1.0 million in the property, and
the Shelter Group had received $58,063 in developer fees.
Each affiliate property management contract is presented to the independent
members of the Company's Board of Directors for approval with information
documenting the comparability of the proposed fees to those in the market area
of the property. Mr. Joseph has agreed to abstain from any involvement, as a
partner in the Shelter Group, in the structuring or review of any contracts or
transactions between the Shelter Group and the Company. He has likewise agreed
to excuse himself from review or involvement, as an officer or director of the
Company, in contracts and transactions involving the Shelter Group. The
Company's Board of Directors has approved all contracts and transactions
involving the Shelter Group and conducts an annual review of all property
management contracts between the Shelter Group and any properties that
collateralize the Company's investments.
Management of Defaulted Assets
In certain circumstances involving the Company's tax-exempt bonds,
borrowers have defaulted on their debt obligations to the Company. In such
circumstances the Company has, after evaluating its options, chosen not to
foreclose on the property. Instead, the Company has negotiated the transfer of a
property's deed in lieu of foreclosure to, or replaced the general partner of a
property with, an entity affiliated with the Company. The Company has done so in
order to preserve the original tax-exempt bond obligations and its participation
in cash flow from the property, consistent with its overall goal of providing
tax-exempt income to its shareholders.
Following the transfer of the property's deed to an affiliated entity, that
entity controls the collateral for certain investments held by the Company.
These affiliated entities are controlled by or are managed by certain officers
of the Company. The following table outlines these affiliate relationships at
December 31, 2002:
Number of Properties Owned Carrying Value of Company's
Affiliate Entity (directly or indirectly) Investment at December 31, 2002
---------------- ------------------------ -------------------------------
SCA Successor, Inc. (1) 4 $ 53,563,000
SCA Successor II, Inc. (1) 12 51,788,000
MMA Affordable Housing Corporation (2) 2 47,734,000
MuniMae Foundation, Inc. (3) /
MMA Successor I, Inc. (1) 3 12,035,000
--- ------------
Total 21 $165,120,000
=== ============
(1) These corporations are general partners of the operating partnerships whose
property collateralizes the Company's investments. Mr. Joseph controls the
general partners of these operating partnerships and is a limited partner
in eight of these partnerships. Mr. Falcone and Mr. William S. Harrison,
the Company's Chief Financial Officer and Senior Vice President, serve as
officers and directors of one such general partner. Ms. Angela A. Barone,
the Company's Vice President of Finance and Budgeting, serves as a director
in one such general partner.
(2) MMA Affordable Housing Corporation ("MMAHC") is a 501(c)(3) non-profit
entity organized to provide charitable donations on behalf of the Company.
Mr. Joseph is the Chairman and one of five directors of the MMAHC. Mr.
Falcone, Mr. Harrison, Mr. Gary A. Mentesana, the Company's Chief Capital
Officer, and Mr. Earl W. Cole, III, Senior Vice President of the Company,
are also officers and directors of MMAHC.
(3) MuniMae Foundation Inc., is a private non-profit entity organized to
provide charitable donations on behalf of the Company. Mr. Joseph is the
Chairman and one of four directors of the MuniMae Foundation. Mr. Falcone
and Mr. Mentesana are also officers and directors of the MuniMae
Foundation.
The officers of the Company who serve as directors or officers of the
affiliated entities listed above are neither compensated for their services as
officer or director thereof, nor derive any other economic benefit from those
entities except for Mr. Joseph, who controls SCA Successor I, Inc., SCA
Successor II, Inc. and MMA Successor I, Inc.
Such entities could have interests that do not fully coincide with, or even
are adverse to, the interests of the Company. Such entities could choose to act
in accordance with their own interests, which could adversely affect the
Company. Among the actions such entities could take might be selling a property,
thereby causing a redemption event, at a time and under circumstances that would
not be advantageous to the Company.
Other Relationships
The Company leases office space from an affiliate. Mr. Joseph and a member
of the Company's Board of Directors have ownership interests in the partnership
that leases the office space to the Company. For the years ended December 31,
2002, 2001 and 2000, the Company paid $230,000, $208,000 and $178,000,
respectively, in rental lease payments under the related lease agreements. These
lease agreements with an affiliate were negotiated at market rate.
Mr. Banks and Mr. Gloeckl hold limited partnership interests in various
limited partnerships that function as the general partner of certain syndicated
low-income housing tax credit funds. The Company is the general partner in these
limited partnerships. The limited partnerships are as follows: Midland Equity IV
LP, Midland Equity V LP, Midland Equity VI LP, Midland Equity VII LP, Midland
Equity VIII LP, Midland Equity IX LP and Midland Equity X LP. Mr. Banks and Mr.
Gloeckl are also invested in Midland Tax Credit Investors Partnership, which is
a general partnership that invests as a limited partner in certain syndicated
low-income tax credit funds.
Mr. Banks and Mr. Gloeckl own shares in three corporations that are
invested in real estate operating partnerships as the general partner. In
addition, Mr. Banks and Mr. Gloeckl are directly invested in a real estate
operating partnership as the general partner with Mr. Gloeckl acting as the
managing general partner. All four of the real estate operating partnerships are
involved in equity transactions with certain of the Company's low-income housing
tax credit funds.
Until 2002, the Company owned a 75% interest in Whitehawk Capital, LLC and
Whitehawk Capital IV, LLC (collectively, "Whitehawk"). Mr. Charles M. Pinckney
and Mr. Mark S. Begeny, employees of Whitehawk, owned the remaining 25%. During
2002, the Company purchased the remaining 25% interest in Whitehawk from Mr.
Pinckney and Mr. Begeny for a total purchase price of $1.2 million ($1.1 million
in cash and $0.1 million in common shares of the Company). Subsequent to the
purchase of the 25% interest in Whitehawk, Mr. Pinckney and Mr. Begeny became
employees of the Company. In addition, each of Mr. Pinckney and Mr. Begeny
receives $32,500 per year through 2010 from the Company for deferred consulting
fees earned prior to becoming employees of the Company.
In conjunction with the sale of certain taxable notes in 1998 and 1999, the
Company provided a guarantee on behalf of 11 operating partnerships for the full
and punctual payment of interest and principal due under the taxable notes.
These taxable notes have a face amount of $16.2 million at December 31, 2002.
Mr. Joseph controls the general partners of these operating partnerships. The
Company's obligation under this guarantee is included in the summary of the
Company's guarantees in Note 11.
Shelter Development Holdings, Inc. (the "Special Shareholder") is
personally liable for the obligations and liabilities of the Company. Mr. Joseph
controls and is an officer of the Special Shareholder. In the event that a
business combination or change in control occurs, and the Special Shareholder
does not approve of such transaction, the Special Shareholder has the right to
terminate its status as the Special Shareholder. In the event of such
termination, the Company would be obligated to pay the Special Shareholder $1.0
million.
In 2000 and 2001, prior to his employment with the Company, Mr. William S.
Harrison, Senior Vice President and Chief Financial Officer of the Company,
provided consulting services to the Company through a corporation wholly owned
by Mr. Harrison. The Company paid approximately $31,000 and $79,000 in 2001 and
2000, respectively, for these services.
A member of the Company's Board of Directors is the managing general
partner of the law firm of Gallagher, Evelius and Jones LLP ("GEJ"), which
provides corporate and real estate legal services to the Company. For the year
ended December 31, 2002, $1.2 million in legal fees to GEJ was generated by
transactions structured by the Company, of which $0.8 million was directly
incurred by the Company. The total amount of $1.2 million represented 8% of
GEJ's total revenues for 2002. For the year ended December 31, 2001, $1.6
million in legal fees to GEJ was generated by transactions structured by the
Company, of which $1.0 million was directly incurred by the Company. The total
amount of $1.6 million represented 12.6% of GEJ's total revenues for 2001.
Until the redemption of the term growth shares in 2002 (see Note 13), an
affiliate of Merrill Lynch owned 1,250 term growth shares of the Company. The
Company may from time to time enter into various investment banking, financial
advisory and other commercial services with Merrill Lynch for which Merrill
Lynch receives and will receive customary compensation. The Company also enters
into various RITESSM and interest rate swap transactions with Merrill Lynch on
terms generally available in the marketplace.
The Company is the general partner in various partnerships that provide
low-income tax credits for investors. The Company sells the limited partner
interests in these partnerships to third party investors. In addition, the
Company may provide certain performance guarantees on the underlying properties
owned by the partnerships (see Note 11). The Company receives asset management
fees from these partnerships. For the year ended December 31, 2002, 2001, and
2000, the Company earned $3.0 million, $2.4 million and $1.9 million in asset
management fees, respectively.
For the year ended December 31, 2001, the Company made a $600,000
charitable contribution to MMA Affordable Housing Corporation.
NOTE 15 - NON-EMPLOYEE DIRECTORS' SHARE PLANS AND EMPLOYEE SHARE INCENTIVE PLANS
Non-Employee Directors' Share Plans
At December 31, 2002, the total number of shares authorized to be granted
under the non-employee directors' share plans was 250,000 shares. The
non-employee directors' plans provide a means to attract and retain highly
qualified persons to serve as non-employee directors of the Company. Under the
directors' plans, an option to purchase 7,000 Common Shares is granted to each
director when first elected or appointed to the Board of Directors and an option
to purchase 5,000 common shares on the date of each annual meeting of
shareholders. The exercise price of such options will be equal to 100% of the
fair market value of the Common Shares on the date of grant. Options expire at
the earlier of ten years after the date of grant or one year after the date a
director ceases to serve as such. The options become exercisable in full on the
first anniversary of the date of grant. At December 31, 2002, 136,000 options
were outstanding under the directors' plans with exercise prices of $14.875 to
$24.74. The weighted average remaining contractual life for these outstanding
options was 7.3 years at December 31, 2002. The following table summarizes the
activity relating to options issued under the directors' plans for the years
ended December 31, 2002, 2001 and 2000:
Number of Weighted Average
Shares Exercise Price
-------------- ---------------------
Options outstanding at January 1, 2000 47,500 $ 18.47
Granted 30,000 $ 19.75
Exercised - -
Expired - -
--------------
Options outstanding at December 31, 2000 77,500 $ 19.03
==============
Granted 30,000 $ 23.51
Exercised - -
Expired - -
--------------
Options outstanding at December 31, 2001 107,500 $ 20.28
==============
Granted 30,000 $ 24.74
Exercised (1,500) $ 19.38
Expired - -
--------------
Options outstanding at December 31, 2002 136,000 $ 21.28
==============
Options exercisable at:
December 31, 2000 47,500 $ 18.58
December 31, 2001 77,500 $ 19.03
December 31, 2002 106,000 $ 20.29
The directors' plans also entitle each director to elect to receive payment
of director's fees in the form of Common Shares, based on their fair market
value on the date of payment, in lieu of cash payment of such fees. Such shares
may also be paid on a deferred basis, whereby the shares payable are credited to
the account of the director, and future distributions payable with respect
thereto are paid in the form of additional share credits based upon the fair
market value of the Common Shares on the record date of the distribution
payment. As of December 31, 2002, 6,408 Common Shares and 30,045 deferred shares
had been issued to directors in lieu of cash payments for director fees. As of
December 31, 2002, there were 71,047 shares available under the directors'
plans.
Employee Share Incentive Plans
At December 31, 2002, 2,622,033 shares were authorized to be issued under
the share incentive plans. The Company's share incentive plans provide a means
to attract, retain and reward executive officers and other key employees of the
Company, to link employee compensation to measures of the Company's performance
and to promote ownership of a greater proprietary interest in the Company. The
plans authorize grants of a broad variety of awards, including non-qualified
stock options, share appreciation rights, restricted shares, deferred shares and
shares granted as a bonus or in lieu of other awards. Shares issued as
restricted shares and as awards, other than options (including restricted
shares), may not exceed 20% and 40% of the total reserved under the plans. As of
December 31, 2002, there were 967,485 shares available under the plans.
Common Share Options
--------------------
The exercise price of Common Share options granted under the plans is equal
to 100% of the fair market value of the Common Shares on the date of grant. The
options vest over three years. In the event of a change in control of the
Company (as defined in the plans), the options shall become immediately and
fully exercisable. In addition, the Company may, at any time, accelerate the
exercisability of all or a specified portion of the options. Generally, the
options expire ten years from the date of grant. However, options will expire
immediately upon the termination of employment for cause and three months after
termination of employment for reasons other than death, disability or normal or
early retirement. In the event of death, disability or retirement, the options
will expire one year after the date of such event. At December 31, 2002, 796,439
options were outstanding under the plans with exercise prices of $16.875 to
$22.55. The weighted average remaining contractual life for these outstanding
options was 5.8 years at December 31, 2002. The following table summarizes the
activity relating to options issued under the plans for the years ended December
31, 2002, 2001 and 2000:
Number of Weighted Average
Shares Exercise Price
-------------- --------------------
Options outstanding at January 1, 2000 709,304 $ 17.24
Granted 420,000 $ 18.75
Exercised (52,034) $ 17.20
Expired/Forfeited (5,000) $ 19.00
--------------
Options outstanding at December 31, 2000 1,072,270 $ 17.82
==============
Granted 75,000 $ 22.35
Exercised (147,800) $ 17.28
Expired/Forfeited (2,500) $ 17.38
--------------
Options outstanding at December 31, 2001 996,970 $ 18.25
==============
Granted - -
Exercised (190,531) $ 18.44
Expired/Forfeited (10,000) $ 18.75
--------------
Options outstanding at December 31, 2002 796,439 $ 18.19
==============
Options exercisable at:
December 31, 2000 615,103 $ 17.16
December 31, 2001 637,970 $ 17.68
December 31, 2002 622,389 $ 17.91
Common Share Appreciation Rights
--------------------------------
On November 11, 1997, 3,000 Common Share appreciation rights ("SARs") were
awarded to certain employees under the plans. The exercise price of the SARs was
equal to 100% of the fair market value of the Common Shares ($19 per share) on
the date of grant and are exercisable for cash only. The SARs vest over three
years and generally expire ten years from the date of grant. In the event of a
change in control of the Company (as defined in the plans), the SARs shall
become immediately and fully exercisable. In addition, the Company may, at any
time, accelerate the exercisability of all or a specified portion of the SARs.
However, the SARs will expire immediately upon the termination of employment for
cause and three months after termination of employment for reasons other than
death, disability or normal or early retirement. In the event of death,
disability or retirement, the SARs will expire one year after such event. As of
December 31, 2002, 3,000 SARs had vested.
Deferred Shares
---------------
The Company granted 32,870, 63,050 and 93,500 deferred share awards with a
total fair value of $0.8 million, $1.4 million and $1.8 million for the years
ended December 31, 2002, 2001 and 2000, respectively. The deferred shares vest
over two to ten years, as outlined in the individual award agreements. The
deferred share awards also provide for acceleration of vesting on a
discretionary basis, upon a change in control and death or disability. As of
December 31, 2002, 276,922 deferred shares had vested. The Company recorded
unearned compensation equal to the fair market value of the awards, which is
shown as a separate component of shareholders' equity. Unearned compensation is
being amortized into expense over the vesting period. For the years ended
December 31, 2002, 2001 and 2000, the Company recognized compensation expense of
$1.7 million, $1.4 million and $1.1 million, respectively, relating to the
deferred shares.
NOTE 16 - SERVICING PORTFOLIO
Trust and Escrow Funds
The Company maintains certain escrow accounts and trust accounts related to
principal and interest payments and to escrow funds received but not yet
remitted to investors or others on loans serviced by the Company. These accounts
are segregated into special accounts and are excluded from the Company's assets
and liabilities.
Loans and Bonds Serviced
The Company serviced loans and bonds totaling $2.5 billion, $2.2 billion
and $1.9 billion in outstanding principal at December 31, 2002, 2001 and 2000,
respectively. The fees earned by the Company for servicing these loans are based
on a percentage of the unpaid principal balance of the loans. These loans
include approximately $752.6 million and $584.6 million in loans where the
Company has a risk-sharing agreement with certain lenders at December 31, 2002
and 2001, respectively. Under the risk-sharing agreement, the Company is
responsible for up to 20% of the loan loss on all the loans covered by the
agreement. The Company monitors the loans in the servicing portfolio for
potential losses. If the Company determines a loss is probable and can be
reasonably estimated, a loss reserve is recorded through a charge to the income
statement. At December 31, 2002 and 2001, management determined that no
allowance for possible loan losses on the servicing portfolio was necessary. The
Company will continue to evaluate the need for allowance for loan losses in the
future as circumstances dictate.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are
included in the table at the end of this note.
The carrying amounts in the table correspond to amounts included in the
accompanying balance sheets. The following methods or assumptions were used by
the Company in estimating the fair values of financial statement instruments:
Cash and cash equivalents, investment in tax-exempt bonds and residual interests
in bond securitizations - The carrying amounts reported in the balance sheet
approximate the assets' fair value.
Loans receivable - The fair value of the Company's fixed rate loans was
calculated by discounting the expected cash flows. The discount rates are based
on the interest rate charged to current customers for comparable loans. The
Company's adjustable rate loans reprice frequently at current market rates.
Therefore, the fair value of these loans has been estimated to approximate their
carrying value.
Other investments - The estimated fair value of other investments was calculated
by discounting contractual cash flows adjusted for current prepayment estimates
using a market discount rate.
Notes payable - The estimated fair value of the Company's fixed rate notes
payable was calculated by discounting contractual cash flows. The discount rates
were based on the interest rates paid to current lenders for comparable notes
payable. The Company's adjustable rate notes payable reprice frequently at
current market rates. Therefore, the fair value of these notes payable has been
estimated to approximate their carrying value.
Commitments to extend credit - Fair value of commitments to extend credit are
based on interest rates currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing.
Unfunded equity commitments - Fair value of unfunded equity commitments is equal
to the total amount committed less the amount funded at the balance sheet date.
Put options written - Fair value is based on quoted market price of financial
instruments with similar terms adjusted for differences in risk characteristics.
Interest rate swap agreements - Fair value is based on the estimated amount that
the Company would pay or receive to terminate the swap agreement at the balance
sheet date.
Total return swaps - Fair value is based on the estimated amount that the
Company would pay or receive to terminate the swap agreement at the balance
sheet date.
Limitations
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instrument.
Because no or limited markets exist for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. In addition, the fair
value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
Summary of Fair Values
(000s) December 31, 2002 December 31, 2001
------------------------ -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ---------- ----------- ----------
Assets:
-------
Investment in tax-exempt bonds, net $ 770,345 $ 770,345 $ 616,460 $ 616,460
Loans receivable, net - fixed 409,765 408,777 417,281 415,943
Loans receivable, net - adjustable 51,683 48,207 22,750 22,750
Residual interests in bond securitizations 11,039 11,039 13,295 13,295
Investment in derivative financial instruments 18,762 18,762 2,912 2,912
Put options - - - -
Cash and cash equivalents 43,745 43,745 97,373 97,373
Restricted assets 40,318 40,318 16,710 16,710
Other investments 5,757 5,757 5,488 5,488
Mortgage servicing rights, net 11,009 11,009 9,161 9,161
Liabilities:
------------
Notes payable - fixed 315,975 315,573 320,720 321,857
Notes payable - adjustable 134,949 134,949 99,343 99,343
Residual interests in bond securitizations 1,447 1,447 7,979 7,979
Investment in derivative financial instruments 49,359 49,359 18,646 18,646
Off-Balance Sheet:
------------------
Commitments to extend credit - 290,132 - 146,970
Unfunded equity commitments - 74,516 - -
NOTE 18 - BUSINESS SEGMENT REPORTING
In the fourth quarter of 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes standards for reporting information
about a company's operating segments. In October 1999, as a result of the MFH
acquisition, the Company restructured its operations into two business segments:
(1) an operating segment consisting of MFH and other subsidiaries that primarily
generate taxable fee income by providing loan servicing, loan origination and
other related services and (2) an investing segment consisting primarily of
subsidiaries holding investments producing tax-exempt interest income. The
accounting policies of the segments are the same as those described in Note 1.
The revenues associated with the investing segment consist primarily of
interest earned on tax-exempt bonds, residual interests in bond securitizations,
taxable loans and derivative financial instruments. The revenues associated with
the operating segment consist primarily of loan servicing fees, loan origination
fees, syndication fees, asset management fees, and advisory fees. Segment
results include all direct revenues and expenses of each segment and allocations
of indirect expenses based on specific methodologies. The Company's reportable
segments are strategic business units that primarily generate different income
streams and are managed separately.
Municipal Mortgage & Equity, LLC
Segment Reporting
(in thousands)
2002 2001
-------------------------------------------------------- ----------------------------------
Total Total
Investing Operating Adjustments Consolidated Investing Operating Adjustments Consolidated
--------- --------- ----------- ------------ --------- --------- ----------- ------------
INCOME:
Interest on bonds and residual
interests in bond securitizations $ 57,322 $ 2,601 $ - $ 59,923 $ 50,732 $ 2,711 $ - $ 53,443
Interest on loans 3,326 31,569 - 34,895 2,798 30,542 - 33,340
Interest on short-term investments 1,030 225 - 1,255 2,045 1,036 - 3,081
Syndication fees - 7,221 - 7,221 - 5,480 - 5,480
Origination fees 750 8,976 (3,095) 6,631 - 7,271 (820) 6,451
Loan servicing fees - 6,823 - 6,823 - 6,982 - 6,982
Asset management and advisory fees - 3,887 - 3,887 - 2,961 - 2,961
Other income 1,364 3,071 - 4,435 - 7,082 - 7,082
Net gain on sales 1,537 7,021 - 8,558 2,339 5,883 - 8,222
--------- --------- ----------- ------------ --------- --------- ----------- ------------
Total income 65,329 71,394 (3,095) 133,628 57,914 69,948 (820) 127,042
--------- --------- ----------- ------------ --------- --------- ----------- ------------
EXPENSES:
Interest expense 9,106 27,490 - 36,596 6,053 24,643 - 30,696
Salaries and benefits 2,082 20,596 - 22,678 1,996 19,385 - 21,381
General and administrative 1,802 5,218 - 7,020 831 5,696 - 6,527
Professional fees 1,367 3,593 - 4,960 1,094 4,407 - 5,501
Amortization of goodwill and
mortgage servicing rights - 1,314 - 1,314 - 2,509 - 2,509
--------- --------- ----------- ------------ --------- --------- ----------- ------------
Total expenses 14,357 58,211 - 72,568 9,974 56,640 - 66,614
Net holding losses on derivatives (14,863) - - (14,863) (5,572) - - (5,572)
Impairments and valuation
allowances related to investments
(Notes 2 and 3) (730) - - (730) - (3,256) - (3,256)
Losses from equity investments in
partnerships - (3,057) - (3,057) - (1,279) - (1,279)
--------- --------- ----------- ------------ --------- --------- ----------- ------------
Net income before income taxes,
income allocated to preferred
shareholders in a subsidiary
company, and cumulative effect of
accounting change 35,379 10,126 (3,095) 42,410 42,368 8,773 (820) 50,321
Income tax expense - 1,484 - 1,484 - 1,383 - 1,383
--------- --------- ----------- ------------ --------- --------- ----------- ------------
Net income before income
allocated to preferred
shareholders in a subsidiary
company and cumulative effect of
accounting change 35,379 8,642 (3,095) 40,926 42,368 7,390 (820) 48,938
Income allocable to preferred
shareholders in a subsidiary
company (Note 12) 11,977 - - 11,977 10,779 - - 10,779
--------- --------- ----------- ------------ --------- --------- ----------- ------------
Net income before cumulative
effect of accounting change 23,402 8,642 (3,095) 28,949 31,589 7,390 (820) 38,159
Cumulative effect on prior years of
change in accounting for derivatives - - - - 12,277 - - 12,277
---------- --------- ----------- ------------ --------- --------- ----------- ------------
Net income $ 23,402 $ 8,642 $ (3,095) $ 28,949 $ 19,312 $ 7,390 $ (820) $ 25,882
========= ========= =========== ============ ========= ========= =========== ============
Municipal Mortgage & Equity, LLC
Segment Reporting
(in thousands)
2000
----------------------------------------------
Total
Investing Operating Adjustments Consolidated
--------- --------- ----------- ------------
INCOME:
Interest on bonds and residual
interests in bond securitizations $ 41,316 $ 1,761 $ - $ 43,077
Interest on loans 1,451 30,306 - 31,757
Interest on short-term investments 3,106 1,285 - 4,391
Syndication fees - 4,410 - 4,410
Origination fees - 5,082 (1,545) 3,537
Loan servicing fees - 5,621 - 5,621
Asset management and advisory fees - 2,426 - 2,426
Other income - 3,314 - 3,314
Net gain on sales 191 2,128 - 2,319
--------- --------- ----------- ------------
Total income 46,064 56,333 (1,545) 100,852
--------- --------- ----------- ------------
EXPENSES:
Interest expense 4,095 27,057 - 31,152
Salaries and benefits 1,533 13,767 - 15,300
General and administrative 497 4,146 - 4,643
Professional fees 820 3,486 - 4,306
Amortization of goodwill and
mortgage servicing rights - 1,887 - 1,887
--------- --------- ----------- ------------
Total expenses 6,945 50,343 - 57,288
Net holding losses on derivatives - - - -
Impairments and valuation
allowances related to investments
(Notes 2 and 3) (1,508) - - (1,508)
Losses from equity investments in
partnerships - - - -
--------- --------- ----------- ------------
Net income before income taxes,
income allocated to preferred
shareholders in a subsidiary
company, and cumulative effect of
accounting change 37,611 5,990 (1,545) 42,056
Income tax expense - 2,006 - 2,006
--------- --------- ----------- ------------
Net income before income
allocated to preferred
shareholders in a subsidiary
company and cumulative effect of
accounting change 37,611 3,984 (1,545) 40,050
Income allocable to preferred
shareholders in a subsidiary
company (Note 12) 8,475 - - 8,475
--------- --------- ----------- ------------
Net income before cumulative
effect of accounting change 29,136 3,984 (1,545) 31,575
Cumulative effect on prior years of
change in accounting for derivatives - - - -
---------- --------- ----------- ------------
Net income $ 29,136 $ 3,984 $ (1,545) $ 31,575
========= ========= =========== ============
NOTE 19 - SUBSEQUENT EVENTS
February 2003 Common Share Offering
In February 2003, the Company sold to the public 2.8 million common shares
at a price of $23.60 per share and granted the underwriters an option to
purchase up to an aggregate of 420,000 common shares to cover over-allotments at
the same price. Net proceeds on the 2.8 million shares approximated $62.8
million. On February 11, 2003, the underwriters exercised their option to
purchase 420,000 common shares, generating net proceeds of approximately $9.4
million. The net proceeds from this offering will be used for general corporate
purposes, including funding of new investments, paying down debt and working
capital.
NOTE 20 - QUARTERLY RESULTS (unaudited)
(in thousands, except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------
Year ended December 31, 2002:
INCOME:
Interest income $ 24,079 $ 24,237 $ 24,345 $ 23,412
Fee income 6,627 7,844 6,193 8,333
Net gain on sales 2,166 703 657 5,032
----------- ------------ ----------- -----------
Total income 32,872 32,784 31,195 36,777
----------- ------------ ----------- -----------
EXPENSES:
Interest expense 8,972 8,487 8,771 10,366
General and administrative 7,190 9,594 8,086 9,788
Amortization of goodwill and mortgage servicing rights 318 333 334 329
----------- ------------ ----------- -----------
Total expenses 16,480 18,414 17,191 20,483
----------- ------------ ----------- -----------
Net holding gains (losses) on derivatives 3,112 (7,721) (9,921) (333)
Impairments and valuations allowances related to investments (110) - - (620)
Net gains (losses) from equity investments in partnerships (323) 94 (1,487) (1,341)
----------- ------------ ----------- -----------
Net income before income taxes, income allocated to
preferred shareholders in a subsidiary company,
and cumulative effect of accounting change 19,071 6,743 2,596 14,000
Income tax expense (benefit) 1,031 828 (635) 260
----------- ------------ ----------- -----------
Net income before income allocated to preferred shareholders
in a subsidiary company and cumulative effect of
accounting change 18,040 5,915 3,231 13,740
Income allocable to preferred shareholders in a subsidiary company 2,994 2,995 2,994 2,994
----------- ------------ ----------- -----------
Net income before cumulative effect of accounting change 15,046 2,920 237 10,746
Cumulative effect on prior years of change in
accounting for derivatives - - - -
----------- ------------ ----------- -----------
Net income $ 15,046 $ 2,920 $ 237 $ 10,746
=========== ============ =========== ===========
Net income allocated to:
Common shares:
Basic $ 0.63 $ 0.12 $ 0.01 $ 0.42
=========== ============ =========== ===========
Diluted $ 0.62 $ 0.11 $ 0.01 $ 0.41
=========== ============ =========== ===========
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- -------------- ------------- --------------
Year ended December 31, 2001:
INCOME:
Interest income $ 20,953 $ 21,670 $ 21,101 $ 26,140
Fee income 8,509 6,662 6,741 7,044
Net gain on sales 166 1,969 4,760 1,327
------------- -------------- ------------- --------------
Total income 29,628 30,301 32,602 34,511
------------- -------------- ------------- --------------
EXPENSES:
Interest expense 7,826 7,769 7,873 7,228
General and adminstrative 6,667 8,093 8,522 10,127
Amortization of goodwill and mortgage servicing rights 693 628 694 494
------------- -------------- ------------- --------------
Total expenses 15,186 16,490 17,089 17,849
------------- -------------- ------------- --------------
Net holding gains (losses) on derivatives (4,865) 1,272 (4,670) 2,691
Impairments and valuations allowances related to investments (3,256) - - -
Net gains (losses) from equity investments in partnerships - 73 (313) (1,039)
------------- -------------- ------------- --------------
Net income before income taxes, income allocated to
preferred shareholders in a subsidiary company,
and cumulative effect of accounting change 6,321 15,156 10,530 18,314
Income tax expense 3 224 805 351
------------- -------------- ------------- --------------
Net income before income allocated to preferred shareholders
in a subsidiary company and cumulative effect of
accounting change 6,318 14,932 9,725 17,963
Income allocable to preferred shareholders in a subsidiary company 2,606 2,606 2,606 2,961
------------- -------------- ------------- --------------
Net income before cumulative effect of accounting change 3,712 12,326 7,119 15,002
Cumulative effect on prior years of change in
accounting for derivatives (12,277) - - -
------------- -------------- ------------- --------------
Net income (loss) $ (8,565) $ 12,326 $ 7,119 $ 15,002
============= ============== ============= ==============
Net income allocated to:
Common shares:
Basic $ (0.45) $ 0.55 $ 0.30 $ 0.67
============= ============== ============= ==============
Diluted $ (0.44) $ 0.54 $ 0.29 $ 0.65
============= ============== ============= ==============
INDEX TO EXHIBITS
-----------------
Exhibit
Number Document
-------- --------
3.1 Amended and Restated Operating Agreement
3.4 Amended and Restated Bylaws
21 Subsidiaries of the Registrant
23 Consent of PricewaterhouseCoopers LLP
99 Officers' Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF FORMATION AND OPERATING AGREEMENT
OF
MUNICIPAL MORTGAGE & EQUITY, LLC
(a Delaware limited liability company)
THIS AMENDED AND RESTATED CERTIFICATE OF FORMATION AND OPERATING AGREEMENT
(the "Agreement") of Municipal Mortgage & Equity, LLC, a Delaware limited
liability company (the "Company"), dated as of May 9 , 2002, is entered into by
and among the Shareholders (as defined herein) of the Company and any Person (as
defined herein) who becomes a Shareholder pursuant to the terms of this
Agreement.
The Company's Certificate of Formation filed with the Delaware Secretary of
State on July 6, 1995, is hereby amended to amend and restate all of the
provisions thereof so that said Certificate, as amended and restated hereby,
reads in its entirety as follows; and the Company's Operating Agreement is
hereby amended so that said Operating Agreement reads in its entirety as
follows:
FIRST: The name of the limited liability company is Municipal Mortgage &
Equity, LLC.
SECOND: The address of the limited liability company's registered office in
the State of Delaware is Corporation Service Company, 2711 Centerville Road,
Suite 400, in the City of Wilmington, County of New Castle, 19808. The name of
its registered agent at such address is Corporation Service Company.
THIRD: The remainder of the Certificate of Formation and Operating
Agreement is as follows:
W I T N E S S E T H :
WHEREAS, the Shareholders of the Company have approved the amendment and
restatement of the Certificate (as defined herein) of the Company and the
Operating Agreement (as defined herein) of the Company to remove provisions and
references that are no longer operative; and
WHEREAS, this Agreement shall constitute the Certificate of the Company and
shall also constitute the Operating Agreement of the Company, and shall be
binding upon all Persons now or at any time hereafter who are Shareholders of
the Company.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
set forth in this Agreement, and of other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto, intending legally
to be bound, hereby agree as follows:
ARTICLE I
Definitions
Capitalized terms used in this Agreement shall have the meanings set forth
below or in the Section of this Agreement referred to below, except as otherwise
expressly indicated or limited by the context in which they appear in this
Agreement. All terms defined in this Article 1 or in the preamble to this
Agreement in the singular have the same meanings when used in the plural and
vice versa.
1.1 "Acquiring Person" shall have the meaning set forth in Section 13.1 of
this Agreement.
1.2 "Act" means the Delaware Limited Liability Company Act, Del. Code
Ann.ss.ss.18-101 et seq., as amended from time to time.
1.3 "Affiliate" means, with respect to any Person, any Relative of such
Person, any trust for the benefit of such Person or such Person's Relative, any
beneficiary of such a trust and any other Person that directly, or indirectly
through one or more intermediaries, controls (including without limitation all
officers and directors of such Person), is controlled by, or is under common
control with, such Person or a Relative of such Person. The term "control" (or
any form thereof), as used in the preceding sentence, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract, or otherwise.
1.4 "Agreement" means this Agreement, as may be amended, restated,
supplemented or otherwise modified from time to time as herein provided.
1.5 "Announcement Date" shall have the meaning set forth in Section 12.3 of
this Agreement.
1.6 "Associate" shall have the meaning set forth in Sections 12.1 and 13.1
of this Agreement.
1.7 "Beneficial Owner" shall have the meaning set forth in Section 12.1 of
this Agreement.
1.8 "Board of Directors" or "Board of Managers" means the board on which
all of the Company's Managers sit, in their capacities as Managers.
1.9 "Bond" means a mortgage revenue bond owned at a particular time by the
Company as part of the Property; and the term "Bond" shall include working
capital loans associated with such mortgage revenue bond.
1.10 "Book Gain" or "Book Loss" means the gain or loss recognized by the
Company for book purposes in any Fiscal Year by reason of any sale or
disposition with respect to any of the assets of the Company. Such Book Gain or
Book Loss shall be computed by reference to the Book Value of such property or
assets as of the date of such sale or disposition (determined in accordance with
Section 1.11 of this Agreement), rather than by reference to the tax basis of
such property or assets as of such date, and each and every reference herein to
"gain" or "loss" shall be deemed to refer to Book Gain or Book Loss, rather than
to tax gain or tax loss, unless the context manifestly otherwise requires.
1.11 "Book Value" of an asset means, as of any particular date, the value
at which the asset is properly reflected on the books and records of the Company
as of such date in accordance with Section 1.704-1(b)(2)(iv) of the Treasury
Regulations. The initial Book Value of each asset shall be its cost, unless such
asset was contributed to the Company by a Shareholder, in which case the initial
Book Value shall be the fair market value for such asset as reasonably
determined by the Board of Directors, and, in each case, such Book Value shall
thereafter be adjusted for cost recovery deductions to which the Company is
entitled for federal income tax purposes with respect thereto, in the amount
that bears the same relationship to the Book Value of such asset as the cost
recovery deduction computed for tax purposes bears to the adjusted tax basis of
such assets. The Book Values of all Company assets shall be adjusted to equal
their respective fair market values, as reasonably determined by the Board of
Directors under appropriate circumstances, which circumstances may include but
are not limited to the following: (a) the acquisition, by any new or existing
Shareholder, of any interest issued after August 1, 1996 by the Company; (b) the
distribution by the Company to a Shareholder of more than a de minimis amount of
Company assets, including money, if, as a result of such distribution, such
Shareholder's interest in the Company is reduced; and (c) the termination of the
Company for federal income tax purposes pursuant to Section 708(b)(1)(B) of the
Code.
1.12 "Business Combination" shall have the meaning set forth in Section
12.1 of this Agreement.
1.13 "By-laws" means the by-laws of the Company, as amended from time to
time, governing various aspects of the operation of the Company and the rights
and obligations of its Shareholders, Board of Directors, officers and agents.
All provisions of the By-laws not inconsistent with law or this Agreement shall
be valid and binding.
1.14 "Capital Account" shall have the meaning ascribed thereto in Section
3.3 of this Agreement.
1.15 "Capital Contributions" means the total amount of cash and other
property contributed to the Company by the Shareholders.
1.16 "Capital Transactions" means (a) any Repayment, Sale, or other sale,
exchange, taking by eminent domain, damage, destruction or other disposition of
all or any part of the assets of the Company, other than tangible personal
property disposed of in the ordinary course of business; or (b) any financing or
refinancing of any Company indebtedness; provided, that the receipt by the
Company of Capital Contributions shall not constitute Capital Transactions.
1.17 "Certificate" means this Agreement, in its function as a "certificate
of formation" as provided for pursuant to the Act, as originally filed with the
office of the Secretary of State of the State of Delaware, as amended, restated,
supplemented or otherwise modified from time to time as herein provided.
1.18 "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any subsequent federal law of similar import, and, to the extent
applicable, any Treasury Regulations promulgated thereunder.
1.19 "Common Shareholders" means the holders of Common Shares.
1.20 "Common Shares" shall have the meaning set forth in Section 3.1 of
this Agreement.
1.21 "Company" means the limited liability company hereby established in
accordance with this Agreement by the parties hereto, as such limited liability
company may from time to time be constituted.
1.22 "Company Interest" means an equity interest in the Company, and, if
the context so allows, the percentage of equity ownership interest in the
Company represented by the Capital Account attributable to such equity interest
as compared to all of the aggregate Capital Accounts of all Shareholders of the
Company (as such percentage may be changed from time to time to reflect
adjustments as provided for in this Agreement); it being understood and agreed
that this term shall not be deemed to apply to any debt incurred by the Company
(directly or indirectly), including but not limited to through custodial, trust
or similar or other arrangements.
1.23 "Consent" means either the consent given by vote at a duly called and
held meeting or the prior written consent, as the case may be, of a Person to do
the act or thing for which the consent is solicited, or the act of granting such
consent, as the context may require.
1.24 "Control Company Interest" shall have the meaning set forth in Section
13.1 of this Agreement.
1.25 "Depreciation" means, for each Fiscal Year, an amount equal to the
depreciation, amortization or other cost recovery deduction allowable with
respect to an asset for such year or other period; provided, that if the Book
Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of any such year or other period, Depreciation shall
be an amount that bears the same relationship to the Book Value of such asset as
the depreciation, amortization, or other cost recovery deduction computed for
tax purposes with respect to such asset for the applicable period bears to the
adjusted tax basis of such asset at the beginning of such period, or if such
asset has a zero adjusted tax basis, Depreciation shall be an amount determined
under any reasonable method selected by the Board of Directors.
1.26 "Determination Date" shall have the meaning set forth in Section 12.3
of this Agreement.
1.27 "Director" shall have the same meaning as "Manager."
1.28 "Dissolution Shareholder" means Shelter Development Holdings, Inc.,
for so long as such Person remains a Dissolution Shareholder under Section 6.4
of this Agreement, and shall also mean any other Person who agrees under Section
6.4 to be a Dissolution Shareholder.
1.29 "Entity" means any general partnership, limited partnership,
corporation, joint venture, trust, limited liability company, limited liability
partnership, business trust, cooperative, or association. An Entity may or may
not be an Affiliate of the Company or of a Company Affiliate.
1.30 "Financing" means the financing transaction which SCATEF consummated
on February 14, 1995 in which proceeds were raised through the offering of
$67,700,000 in aggregate principal amount of Multifamily Mortgage Revenue Bond
Receipts.
1.31 "Fiscal Year" means the fiscal year of the Company and shall be the
same as its taxable year, which shall be the calendar year unless otherwise
determined by the Board of Directors in accordance with the Code. Each Fiscal
Year shall commence on the day immediately following the last day of the
immediately preceding Fiscal Year.
1.32 "Five Year Tolling Period" shall have the meaning set forth in Section
12.2 of this Agreement.
1.33 "Future Shares" shall have the meaning set forth in Section 3.1 of
this Agreement.
1.34 "General Partners" means the general partners of SCATEF.
1.35 "Initial Capital Contribution" means any Capital Contribution made in
accordance with Section 3.2 hereof.
1.36 "Interested Company Interests" shall have the meaning set forth in
Section 13.1 of this Agreement.
1.37 "Interested Party" shall have the meaning set forth in Section 12.1 of
this Agreement.
1.38 "Managers" means those individuals serving on the Board of Directors
of the Company, including successor or additional Managers duly elected in
accordance with the terms of this Agreement.
1.39 "Market Value" shall have the meaning set forth in Section 12.1 of
this Agreement.
1.40 "Members" means the Shareholders, together with all Persons who become
Members as herein provided and who are listed as Members of the Company in the
books and records of the Company, in such Persons' capacity as Members of the
Company.
1.41 "Mortgage Loans" means the mortgage loans which have been assigned to
the Company to secure the repayment of a Bond.
1.42 "Operating Agreement" means this Agreement, in its function as an
"operating agreement" as provided for pursuant to the Act, as amended, restated,
supplemented or otherwise modified from time to time as herein provided.
1.43 "Original Shareholders" means MME I Corporation, a Delaware
corporation, and MME II Corporation, a Delaware corporation.
1.44 "Person" means any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such Person
where the context so admits.
1.45 "Profit" and "Loss" means, for each Fiscal Year or other period for
which allocations to Shareholders are made, an amount equal to the Company's
taxable income or loss for such year or period, determined in accordance with
Section 703(a) of the Code (provided, that for this purpose, all items of
income, gain, loss, or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be included in taxable income or loss), with
the following adjustments:
(a) Any income of the Company that is exempt from federal income tax and
not otherwise taken into account in computing Profit or Loss pursuant to this
provision shall be added to such taxable income or loss;
(b) Any expenditures of the Company described in Section 705(a)(2)(B) of
the Code or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations, and not otherwise
taken into account in computing Profit or Loss pursuant to this provision, shall
be subtracted from such taxable income or loss;
(c) Book Gain or Book Loss from a Capital Transaction shall be taken into
account in lieu of any tax gain or tax loss recognized by the Company by reason
of such Capital Transaction; and
(d) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account Depreciation for such Fiscal Year, computed as
provided in this Agreement.
If the Company's taxable income or loss for such Fiscal Year or other period, as
adjusted in the manner provided above, is a positive amount, such amount shall
be the Company's Profit for such Fiscal Year or other period; and if a negative
amount, such amount shall be the Company's Loss for such Fiscal Year or other
period.
1.46 "Property" means the land and the buildings thereon upon which the
Company holds a mortgage or other similar encumbrance at a particular time, and
the Bonds held by the Company at a particular time.
1.47 "Relative" means, with respect to any Person, any parent, spouse,
brother, sister, or natural or adopted lineal descendant or spouse of such
descendant of such Person.
1.48 "Repayment" shall have the meaning set forth in Section 1.49 below.
1.49 "Sale" or "Repayment" means the sale or other disposition of a
Property (a "Sale") or, in the absence of a Sale, the repayment of the principal
and interest, if any, payable upon the redemption or remarketing of a Bond which
was included within the Property (a "Repayment"); provided, however, that these
terms shall not include the pledge of a Property in connection with the
financing, refinancing or other leveraging of such Property or otherwise. The
term "Sale" shall include (a) a foreclosure by a third party which is
unaffiliated with the current operating partnership (or respective general
partner) owning a Property, (b) a deed-in-lieu of foreclosure to a third party
which is unaffiliated with the current operating partnership (or respective
general partner) owning a Property, or (c) a sale or transfer of a Property to a
third party which is unaffiliated with the current operating partnership (or
respective general partner) owning a Property; and a "Sale" shall not be deemed
to occur if the Company forecloses on a Property or if the Company directs a
deed-in-lieu of foreclosure on a Property.
1.50 "SCATEF" means the SCA Tax Exempt Fund Limited Partnership, the entity
that was the predecessor to the Company.
1.51 "Shareholders" means all persons who hold Shares, and shall have the
same meaning as the word "Members."
1.52 "Shares" means Company Interests.
1.53 "Special Shareholder" means Shelter Development Holdings, Inc., for so
long as such Person is subject to certain liabilities as set forth in Section
6.1(b) of this Agreement, and shall also mean any other Person who agrees under
Article 6 to be a Special Shareholder.
1.54 "Specially Appointed Director(s)" shall have the meaning ascribed
thereto in Section 6.1(d) of this Agreement.
1.55 "Subsidiary" shall have the meaning set forth in Section 12.1 of this
Agreement.
1.56 "Tax Matters Partner" shall have the meaning ascribed thereto in
Section 3.5 of this Agreement.
1.57 "Transfer" (or "Transferred") means to give, sell, assign, encumber,
pledge, hypothecate, devise, bequeath, or otherwise dispose of, encumber,
transfer, or permit to be transferred, during life or at death. The word
"Transfer," when used as a noun, shall mean any Transfer transaction.
1.58 "Transferee" means any Person to whom Shares are Transferred for any
reason or by any means.
1.59 "Treasury Regulations" means the federal income tax regulations,
including any temporary or proposed regulations, promulgated under the Code, as
such Treasury Regulations may be amended from time to time (it being understood
that all references herein to specific sections of the Treasury Regulations
shall be deemed also to refer to any corresponding provisions of succeeding
Treasury Regulations).
1.60 "Valuation Date" shall have the meaning set forth in Section 12.3 of
this Agreement.
1.61 "Working Capital Reserves" means funds held in reserves which are
maintained as working capital for the Company and available for any
contingencies relating to the ownership of the Property and the operation of the
Company. Amounts held in the Working Capital Reserves may at any time, in the
discretion of the Board of Directors, be added to the respective Allocable
Portfolio Cash Flows or to liquidation proceeds allocable to the respective
Shares (depending upon the characterization of such amounts when received by the
Company), but may not be otherwise removed from the respective Working Capital
Reserve.
ARTICLE 2
Continuation, Purpose and Term
2.1 Continuation. The parties hereto hereby agree to continue the limited
liability company known as Municipal Mortgage & Equity, LLC, as a limited
liability company under the provisions of the Act.
2.2 Company Name. The name of the Company is "Municipal Mortgage & Equity,
LLC". The business of the Company shall be conducted under such name or such
other names as the Board of Directors or the Shareholders may from time to time
determine on and pursuant to the terms of this Agreement.
2.3 The Certificate. The Shareholders hereby agree to execute, file and
record all such certificates and documents, including amendments to the
Certificate, and to do such other acts as may be appropriate to comply with all
requirements for the formation, continuation, and operation of a limited
liability company, the ownership of property, and the conduct of business under
the laws of the State of Delaware and any other jurisdiction in which the
Company may own property or conduct business.
2.4 Principal Business Office. The principal business office of the Company
shall be located at 218 North Charles Street, Suite 500, Baltimore, Maryland
21201, or at such other location as may hereafter be determined by the Board of
Directors. The principal business office, as well as the registered office and
the registered agent, of the Company may be changed by the Board of Directors
from time to time in accordance with the then applicable provisions of the Act
and any other applicable laws, as well as the terms and conditions of this
Agreement.
2.5 Term of Company. The term of the Company shall continue until it is
wound up and dissolved pursuant to the provisions of Article 10 hereof.
2.6 Purposes. The purposes of the Company are (a) to invest in or engage
in activities related to investment in Bonds and in real estate, including but
not limited to loan servicing and loan origination (whether in connection with
loans to the Company or to others), and to generate returns from such
investments; this may include investing in entities which invest in bonds and in
real estate assets; provided, however, that the investment criteria shall be
established by the Board of Directors from time to time in its sole discretion
subject to the requirement that such criteria be consistent with the purposes of
the Company; (b) to engage in any other activities relating to, and compatible
with, the purposes set forth above; (c) to acquire, own and dispose of general
and limited partnership interests, membership interests, and stock or other
equity interests in Entities, and to exercise all rights and powers granted to
the owner of any such interests; (d) to take such other actions, or do such
other things, as are necessary or appropriate (in the sole discretion of the
Board of Directors) to carry out the provisions of this Agreement; and (e) to
invest in any type of investment and to engage in any other lawful act or
activity for which limited liability companies may be organized under the Act,
and by such statement all lawful acts and activities shall be within the
purposes of the Company, except for express limitations, if any.
2.7 Powers. In furtherance of its purposes, but subject to all of the
provisions of this Agreement, the Company shall have the power and is hereby
authorized to (a) invest (at any time during the term of the Company) in (i)
mortgage revenue bonds or portions of or interests in (including junior
positions) mortgage revenue bonds financing multifamily properties, senior
living facilities, manufactured housing communities, or congregate care
facilities, beneficial ownership certificates or any other securities of other
funds or investments with similar underlying investment objectives, (ii)
multifamily real estate, including senior living facilities, manufactured
housing communities, and congregate care facilities, and (iii) entities which
engage in any activities described in clauses (i) or (ii) of this sentence;
invest (at any time during the term of the Company) in other assets which are
designed to accomplish any of the foregoing investment purposes or in any manner
consistent with the Company's then-existing investment criteria and objectives;
and to reinvest the proceeds of any sales by the Company of Company assets, in
any permitted investments; (b) act as a general or limited partner, member,
joint venturer, manager or shareholder of any Entity (including but not limited
to an operating partnership), and to exercise all of the powers, duties, rights
and responsibilities associated therewith; (c) take any and all actions
necessary, convenient or appropriate as the holder of any such interests or
positions; (d) operate, purchase, maintain, finance, improve, own, sell, convey,
assign, mortgage, lease, demolish or otherwise dispose of any real or personal
property that may be necessary, convenient or incidental to the accomplishment
of the purposes of the Company; (e) borrow money and issue evidences of
indebtedness in furtherance of any or all of the purposes of the Company, and
secure the same by mortgage, pledge or other lien on any assets of the Company;
(f) invest any funds of the Company pending distribution or payment of the same
pursuant to the provisions of this Agreement; (g) prepay in whole or in part,
refinance, recast, increase, modify or extend any indebtedness of the Company
and, in connection therewith, execute any extensions, renewals or modifications
of any mortgage or security agreement securing such indebtedness; (h) enter
into, perform and carry out contracts of any kind, including, without
limitation, contracts with any Person affiliated with any of the Shareholders,
necessary to, in connection with or incidental to the accomplishment of the
purposes of the Company; (i) establish reserves for capital expenditures,
working capital, debt service, taxes, assessments, insurance premiums, repairs,
improvements, depreciation, depletion, obsolescence and general maintenance of
buildings and other property out of the rents, profits or other income received;
(j) employ or otherwise engage employees, managers, contractors, advisors and
consultants, and pay reasonable compensation for such services, and enter into
employee benefit plans of any type; (k) enter into partnerships or other
ventures with other Persons in furtherance of the purposes of the Company; (l)
purchase or repurchase Shares from any Person for such consideration as the
Board of Directors may determine in its reasonable discretion (whether more or
less than the original issuance price of such Share or the then trading price of
such Share); (m) enter into rights plans or other plans relating to Shares,
options or bonuses, and to issue Shares, options or warrants thereunder (or
other derivatives relating thereto) for any consideration (even if such
consideration is less than the market value of such Shares); and (n) do such
other things and engage in such other activities as may be necessary, convenient
or advisable with respect to the conduct of the business of the Company, and
have and exercise all of the powers and rights conferred upon limited liability
companies formed pursuant to the Act.
2.8 Effectiveness of this Agreement. This Agreement shall govern the
operations of the Company and the rights and restrictions applicable to the
Shareholders, to the extent permitted by law. Pursuant to Section
18-101(7)(a)(2) of the Act, all Persons who become holders of Shares in the
Company shall be bound by the provisions of this Agreement and shall be deemed
to be parties hereto, whether or not such Persons execute a counterpart of this
Agreement. The payment for any Shares acquired by any Person, or the action of
becoming an assignee or Transferee of such Shares, shall be deemed to constitute
a request that the records of the Company reflect such admission, assignment or
Transfer, and shall be deemed to be sufficient acts to comply with the
requirements of Section 18-101(7)(a)(2) of the Act and to so cause that Person
to become a Shareholder and to bind that Person to the terms and conditions of
this Agreement (and to entitle that Person to the rights of a Shareholder
hereunder), without the requirement for execution of this Agreement by such
Person.
ARTICLE 3
Classes of Shares; Admission of Shareholders; Capitalization
3.1 Classes of Shares.
(a) The Company shall have the authority to issue the following
classes and series of Shares:
(i) shares which are designated "Common Shares"; and
(ii) one or more other classes or series of Shares, as to
which the Board of Directors shall have the exclusive authority,
by resolution or resolutions providing for the issuance of Shares
or of a particular class or series thereof, to fix and determine
the voting powers, full or limited or no voting power, and such
designations, preferences, and relative, participating, optional
or other special rights, and qualifications, limitations, or
restrictions thereof, as may be desired by the Board of Directors
from time to time, to the fullest extent now or hereafter
permitted by the laws of the State of Delaware (collectively, all
such other classes and series to be referred to as the "Future
Shares"). Nothing in this Section 3.1(a)(ii) shall be deemed to
restrict the ability of the Company to incur secured or unsecured
debt (directly or indirectly), including but not limited to
through custodial, trust or similar or other arrangements.
(b) Each Common Share shall (i) have no stated par value per
Share, and (ii) have the rights and be governed by the provisions set
forth in this Agreement; and none of such shares shall have any
preemptive rights, or give the holders thereof any rights to convert
into any other securities of the Company, or give the holders thereof
any cumulative voting rights, except as specifically set forth herein.
(c)The Board of Directors may cause the Company to issue such
numbers of Common Shares and Future Shares from time to time as the
Board of Directors may determine in its sole discretion, and the
number of such shares is not limited.
(d) If the Board of Directors determines that it is necessary or
desirable to amend this Agreement or to make any filings under the Act
or otherwise in order to reference the existence or creation of a
class or series of Future Shares, the Board of Directors may cause
such amendments and filings to be made, which filings might take the
form of amendments to the Company's Certificate; provided, however,
that, unless specifically required by the Act or this Agreement, no
approval or Consent of any Shareholders shall be required in
connection with the making of any such filing, instrument or
amendment.
(e) No Future Share shall have any preemptive rights or give the
holder thereof any rights to convert into any other securities of the
Company, or give any holders thereof any cumulative voting rights,
unless such rights are specifically provided for in the Board of
Directors' resolution creating the class of which such Future Share is
a part.
(f) The Board of Directors, without any Consent of any
Shareholders being required, may effect a split or reverse split of
Shares of any series or class, by adopting a resolution therefor. If
the Board of Directors determines that it is necessary or desirable to
make any filings under the Act or otherwise in order to reference the
existence of such a split or reverse split, the Board of Directors may
cause such filings to be made, which filings might take the form of
amendments to the Company's Certificate; provided, however, that,
unless specifically required by the Act or this Agreement, no approval
or Consent of any Shareholders shall be required in connection with
the making of any such filing or amendment.
(g) Notwithstanding any other provisions of this Agreement, the
Board of Directors may, without the Consent of Shareholders, amend
this Agreement to the extent required to allow the Board of Directors
to exercise the powers granted to it by this Section 3.1.
3.2 Additional Provisions Relating to Additional Shareholders. In the
event that the Board of Directors determines that additional funds are
required by the Company for any Company purpose, or that the Company should
for any reason seek to raise additional capital, the Board may cause the
Company to sell Future Shares for a price equal to what the Board of
Directors determines to be the fair value of such Shares, in exchange for
cash, other property, services or any other lawful consideration to be
received by the Company in consideration of such Shares (to be valued by
the Board of Directors in its discretion), or may cause the Company to
obtain funds as a loan from any third party upon such terms and conditions
as the Board of Directors deems appropriate, or any combination thereof
from time to time. The Initial Capital Contribution of any such additional
Shareholders shall be specified by the Board of Directors at the time of
admission of such additional Shareholder.
3.3 Capital Accounts. A separate capital account (a "Capital Account")
shall be established and maintained for each Shareholder, including any
Transferee or additional Shareholder who shall hereafter acquire a Company
Interest, in accordance with the following provisions:
(a) To each Shareholder's Capital Account there shall be credited
the amount of cash and fair market value of the property actually
contributed to the Company by such Shareholder pursuant to Section 3.2
hereof, such Shareholder's allocable share of Profit, and the amount
of any Company liabilities that are assumed by such Shareholder or
that are secured by any Company property distributed to such
Shareholder.
(b) To each Shareholder's Capital Account there shall be debited
the amount of cash and the fair market value of any Company property
distributed to such Shareholder pursuant to any provision of this
Agreement, such Shareholder's allocable share of Loss, and the amount
of any liabilities of such Shareholder that are assumed by the Company
or that are secured by any property contributed by such Shareholder to
the Company.
(c) If any asset of the Company is distributed in kind, the
Company shall be deemed to have realized Profit or Loss thereon in the
same manner as if the Company had sold such asset for an amount equal
to the greater of (i) the fair market value of such asset, or (ii) the
fair market value of any debts to which such asset is then subject, in
each case as determined by the Board of Directors. If at any time
after the date of this Agreement, the Book Value of any Company asset
is adjusted pursuant to the last sentence of the definition of Book
Value set forth in Section 1 hereof, the Capital Accounts of all
Shareholders shall be adjusted simultaneously to reflect the aggregate
net adjustments, as if the Company recognized Profit or Loss equal to
the respective amounts of such aggregate net adjustments.
(d) The provisions of this Agreement relating to the maintenance
of Capital Accounts are intended to comply with Section
1.704-1(b)(2)(iv) of the Treasury Regulations, and shall be
interpreted and applied in a manner consistent with such Treasury
Regulations.
(e) A Shareholder shall not be entitled to withdraw any part of
its Capital Account or to receive any distributions from the Company,
except as provided in Article 5 hereof, nor shall a Shareholder be
entitled to make any loan or Capital Contribution to the Company other
than as expressly provided herein. No loan made to the Company by any
Shareholder shall constitute a capital contribution to the Company for
any purpose.
(f) Except as required by the Act, no Shareholder shall have any
liability for the return of the Capital Contribution of any other
Shareholder. A Shareholder who has more than one interest in the
Company may have a separate Capital Account for each different class
of interest owned.
3.4 Transfer of Capital Accounts. The original Capital Account
established for each Transferee shall be in the same amount as the Capital
Account of the Shareholder which such Transferee succeeds, at the time such
Transferee is admitted to the Company. The Capital Account of any
Shareholder whose Company Interest shall be increased by means of the
Transfer to it of all or part of the Company Interest of another
Shareholder shall be appropriately adjusted to reflect such Transfer. Any
reference in this Agreement to a Capital Contribution of, or distribution
to, a then-Shareholder shall include a Capital Contribution or distribution
previously made by or to any prior Shareholder on account of the Company
Interest of such then-Shareholder.
3.5 Tax Matters Partner.
(a) Shelter Development Holdings, Inc. or its assignee shall be
the Company's "tax matters partner" (as such term is defined in
Section 6231(a)(7) of the Code) (the "Tax Matters Partner"), for
purposes of Section 6231 of the Code, with all of the powers that
accompany such status (except as otherwise provided in this
Agreement). Promptly following the written request of the Tax Matters
Partner, the Company shall, to the fullest extent permitted by law,
reimburse and indemnify the Tax Matters Partner for all reasonable
expenses, including reasonable legal and accounting fees, claims,
liabilities, losses and damages incurred by the Tax Matters Partner in
connection with any administrative or judicial proceeding with respect
to the tax liability of the Shareholders. The provisions of this
Section 3.7 shall survive the termination of the Company and shall
remain binding on the Shareholders for as long as a period of time as
is necessary to resolve with the Internal Revenue Service any and all
matters regarding the federal income taxation of the Company or the
Shareholders.
(b) Notwithstanding Section 3.5(a) hereof, the Tax Matters
Partner shall have no fiduciary duty whatsoever to any other
Shareholder, and shall be treated in exactly the same manner as any
other Shareholder other than as specifically provided in Section
3.5(a) hereof.
ARTICLE 4
Allocations
4.1 General Rules Concerning Allocations. Within 45 days after the end
of each calendar month, the Company shall conduct an interim closing of the
books as of the end of the last day of that calendar month. On the basis of
the closing of the books for each calendar month, the Company shall
determine the amount of Profit and Loss attributable to that calendar
month. Profits and Losses shall be determined in accordance with the
accounting methods followed by the Company for federal income tax purposes.
4.2 Allocations of Profits and Losses. All allocations to the
Shareholders of items included within the Company's Profits and Losses
attributable to each calendar month shall be allocated solely among the
Shareholders recognized as Shareholders as of the last day of that calendar
month, as follows:
(a) The Company's Profit or Loss for the applicable period shall
be allocated among the Common Shareholders in proportion to their
relative ownership of Common Shares.
(b) The Tax Matters Partner is authorized to make reasonable
determinations regarding the allocation of Profit and Loss under this
Section 4.2, including determinations relating to the calculation of
Profit or Loss, and such other items of the Company's income, gain,
loss, deduction and credit as may be appropriate to carry out the
intent of this Section 4.2.
4.3 Special Allocations. Notwithstanding any other provision of this
Agreement, to the extent an allocation of Profit or Loss or any item
thereof to any Shareholder pursuant to Sections 4.1 or 4.2 of this
Agreement would be in violation of the requirements of the Treasury
Regulations under Section 704(b) of the Code, the Tax Matters Partner shall
comply with the requirements of such Treasury Regulations and adjust such
allocations to comply with such requirements in a manner that will, in the
reasonable judgment of the Tax Matters Partner, have the least effect on
the amounts to be allocated and distributed under this Agreement. In the
event a Shareholder unexpectedly receives any adjustment, allocation or
distribution described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)
(4), (5) and (6) that causes or increases a negative balance in a
Shareholder's Capital Account, items of Profit shall be specially allocated
to such Shareholder so as to eliminate such negative balance as quickly as
possible. The Shareholders agree that if this Section 4.3 becomes
applicable, the Tax Matters Partner is authorized to review and adjust the
allocations made pursuant to Sections 4.1 or 4.2 of this Agreement.
4.4 Additional Allocations.
(a) If there is a net decrease in "partnership minimum gain"
(within the meaning of Treasury Regulation Section 1.704-2(d)) during
a taxable year, a Shareholder shall be allocated, before any other
allocation of the Company's items for such taxable year (and if
necessary, subsequent years), items of the Company's income and gain
in the amount equal to the Shareholder's share of such net decrease in
partnership minimum gain (within the meaning of Treasury Regulations
Section 1.704-2(g)).
(b) The Tax Matters Partner, in order to preserve uniformity of
Shares within a class, may, in its sole discretion, make a special
allocation of items of income, gain, loss or deduction but only if
such allocations would not have a material adverse effect on the
Shareholders and if they are consistent with the principles of Section
704 of the Code.
(c) If, and to the extent that any Shareholder is deemed to
recognize income as a result of any transaction between such
Shareholder and the Company pursuant to Sections 1272-1274, Section
7872, Section 483 or Section 482 of the Code, or any similar provision
now or hereafter in effect, any corresponding loss or deduction of the
Company shall be allocated to the Shareholder who was charged with
such income.
(d) Adjustments to the Capital Accounts of Shareholders with
respect to an adjustment to the tax basis of any asset of the Company
pursuant to Section 734(b) or Section 743(b) of the Code shall be made
in accordance with the provisions of Treasury Regulation Section
1.704-1(b)(2)(m).
4.5 Tax Allocations.
(a) For federal income tax purposes, except as otherwise provided
in this Section 4.5, each item of income, gain, loss and deduction of
the Company shall be allocated among the Shareholders in the same
proportion as the corresponding items are allocated pursuant to
Sections 4.3 and Section 4.4 hereof.
(b) In the event that the Book Value of any asset contributed to
and held by the Company differs from its basis for federal income tax
purposes ("Tax Basis"), allocations of income, gain, loss or deduction
with respect to such asset shall, solely for tax purposes, be
allocated among the Shareholders so as to take account of any
variation between Book Value and Tax Basis in accordance with the
provisions of Section 704(c) of the Code and Treasury Regulations
thereunder. The Tax Matters Partner may elect any reasonable method or
methods for making such allocations.
(c) If the Book Value of any asset of the Company is adjusted
pursuant to Section 1.11 hereof, subsequent allocations of income,
gain, loss and deductions with respect to such asset shall take into
account any variation between Book Value and Tax Basis in accordance
with the provisions of Section 704(c) of the Code and Treasury
Regulations thereunder.
(d) The Tax Matters Partner shall have the sole discretion to
make special allocations of items of income, gain, loss and deductions
that are consistent with the principles of Section 704(c) of the Code
and to amend the provisions of this Agreement (without Shareholder
action, notwithstanding Section 14.4 of this Agreement), as
appropriate, to reflect the proposal or promulgation of Treasury
Regulations under Subchapter K of the Code. The Tax Matters Partner
may adopt and employ such methods and procedures for (A) the
maintenance of capital accounts for book and tax purposes, (B) the
determination and allocation of adjustments under Sections 704(c), 734
and 743 of the Code, (C) the determination and allocation of taxable
income, tax loss and items thereof under this Agreement and pursuant
to the Code, (D) the determination of the identities and tax
classification of Shareholders, (E) the provision of tax information
and reports to the Shareholders, (F) the adoption of reasonable
conventions and methods for the valuation of assets and the
determination of tax basis, (G) the allocation of asset values and tax
basis, (H) conventions for the determination of depreciation, cost
recovery and amortization deductions and the adoption and maintenance
of accounting methods, (I) the recognition of the transfer of Shares,
and (J) compliance and other tax-related requirements, including
without limitation, the use of computer software, to use filing and
reporting procedures similar to those employed by publicly-traded
partnerships and limited liability companies, as it determines in its
sole discretion are necessary and appropriate to execute the
provisions of this Agreement and to comply with federal and state tax
law, and to achieve uniformity of Shares. The Tax Matters Partner
shall be indemnified and held harmless by the Company for any
expenses, penalties or other liabilities arising as a result of
decisions made in good faith on any of the matters referred to in the
preceding sentence. If the Tax Matters Partner determines, based on
advice of counsel, that no reasonable allowable convention or other
method is available to preserve the uniformity of Shares within a
class, or the Tax Matters Partner in its discretion so elects, Shares
may be separately identified as distinct classes to reflect
differences in tax consequences.
ARTICLE 5
Distributions, Liquidations and Priority
5.1 Distributions. The Board of Directors may from time to time
authorize the Company to pay distributions to holders of Common Shares from
cash of the Company which the Board of Directors determines is available
for distribution to the holders of Common Shares after taking into account
amounts determined by the Board of Directors to be necessary or advisable
to meet actual or anticipated expenses or liabilities of the Company or to
create reasonable reserves thereof.
5.2 Liquidation, Dissolution or Winding-Up.
(a) Liquidation. Upon the dissolution, liquidation or winding-up
of the Company, after payment of all of the Company's creditors, each
Shareholder shall receive an amount in cash or in kind equal to the
positive Capital Account balance of such Shareholder, as determined
after taking into account all Capital Account adjustments for the
taxable year of the dissolution, liquidation or winding-up of the
Company other than the distribution under this Section 5.2(a).
(b) A consolidation or merger of the Company with or into any
other Entity, or a sale, lease or exchange of any or all of the assets
of the Company in consideration for the issuance of equity securities
of another Entity, shall not be deemed to be a liquidation,
dissolution or winding up of the Company.
5.3 Priority. Notwithstanding any other provision of this Agreement,
it is specifically acknowledged and agreed by each Shareholder that the
Company's failure to pay any amounts to such Shareholder, whether as a
dividend, redemption payment or other distribution, even if such payment is
specifically required hereunder, shall not give such Shareholder creditor
status with regard to such unpaid amount; but rather, such Shareholder
shall be treated only as a shareholder of whatever class such person is a
Shareholder, and not as a creditor, of the Company. This Section 5.3 is, as
permitted by Section 18-606 of the Act, intended to override the provisions
of Section 18-606 of the Act relating to a member's status and remedies as
a creditor, to the extent that such provisions would be applicable in the
absence of this Section 5.3.
5.4 Payments to Shareholders for Services. Any payments by the Company
to a Shareholder for services rendered to or on behalf of the Company shall
be treated as guaranteed payments for services under Section 707(c) of the
Code.
ARTICLE 6
Shareholders
6.1 Limited Liability.
(a) Except as otherwise provided by the Act or in Section 6.1(b)
hereof, the debts, obligations and liabilities of the Company, whether
arising in contract, tort or otherwise, shall be solely the debts,
obligations and liabilities of the Company, and the Shareholders shall
not be obligated personally for any such debt, obligation or liability
of the Company solely by reason of being a Shareholder of the Company.
The Shareholders shall not be required to lend any funds to the
Company. Each of the Shareholders shall only be liable to make payment
of his, her or its respective contributions as and when due hereunder
and other payments as expressly provided in this Agreement. If and to
the extent a Shareholder's contribution shall be fully paid, such
Shareholder shall not, except as required by the express provisions of
the Act regarding repayment of sums wrongfully distributed to
Shareholders, be required to make any further contributions.
(b) Notwithstanding Section 6.1(a) hereof, the Special
Shareholder, for so long as such Person holds Shares (unless such
Person duly resigns as a Special Shareholder in accordance with this
Section 6.1 or Section 6.3 of this Agreement), shall have personal
liability to creditors of the Company (and any such creditor may seek
personal satisfaction from the Special Shareholder), to the extent
that the assets of the Company (including without limitation the
proceeds of any and all available insurance) are insufficient to
satisfy such creditor's claim (and, if there be more than one Special
Shareholder at any time, then such Special Shareholders shall be
jointly liable for all liabilities set forth in this Section 6.1(b));
provided, however, that, notwithstanding Section 6.3 of this
Agreement, any Special Shareholder may resign its status as a Special
Shareholder after (i) the consummation of a transaction in which a
Person acquires more than 10% of the then-outstanding Shares of any
class or series where such acquisition is not consented to by the
Special Shareholder, or (ii) any Shareholder or group of Shareholders
controls a majority of the seats on the Board of Directors in any case
where such control is not consented to by the Special Shareholder. In
the event of such a resignation, (x) the Special Shareholder's
personal liability under the first sentence of this Section 6.1(b)
shall, to the fullest extent permissible under law, terminate
immediately, automatically, and in full, although such Person may
continue to hold Shares, and (y) the Company shall pay to the Special
Shareholder, promptly after such resignation, the sum of $1,000,000 in
direct consideration for the Special Shareholder's prior service to
the Company.
(c) Notwithstanding Section 6.1(b) hereof, the Special
Shareholder shall have no fiduciary duty whatsoever to any other
Shareholder, and shall be treated in exactly the same manner as any
other Shareholder other than as specifically provided in Section
6.1(b) hereof. Without limiting the foregoing, it is agreed that (i)
the Special Shareholder has no responsibility to treat other
Shareholders as creditors of the Company toward which the Special
Shareholder would bear any responsibility or have any liability
whatsoever (including without limitation in the event of any Company
failure to pay any amounts to such Shareholders, whether as a
dividend, redemption payment or other distribution, even if such
amounts are specifically required hereunder to be paid), and (ii) the
Special Shareholder is entitled to act solely in its own self
interests without regard to the interests of other Shareholders.
(d) Notwithstanding any other provision of this Agreement, the
Dissolution Shareholder shall have the right to serve as one (or, if
there are at any time more than ten Directors on the Board of
Directors, two) of the Company's Directors, through such
representatives as are appointed by the Dissolution Shareholder (such
designated persons to be referred to as the "Specially Appointed
Director(s)") at all times and from time to time, and shall have the
sole right to remove such representative(s) as Directors; all as
provided in Section 7.2(b) of this Agreement.
6.2 Voting Rights of Shareholders; Authority of Board of Directors.
(a) The Board of Directors shall make all decisions made for and
on behalf of the Company, such decisions shall be binding upon the
Company, and the Shareholders shall have no voting rights; except,
however, as expressly set forth herein. The Board of Directors, in its
sole discretion, has full, complete and exclusive right, power and
authority in the management and control of the Company business to do
any and all things necessary to effectuate the purpose of the Company;
except, however, as expressly set forth herein. The members of the
Board of Directors shall devote such time as is necessary to the
affairs of the Company, and shall receive such compensation from the
Company and such reimbursement for expenses as is permitted by the
Company's By-laws as then in effect. No Person dealing with the Board
of Directors shall be required to determine its authority to make any
undertaking on behalf of the Company or to determine any facts or
circumstances bearing upon the existence of such authority.
(b) Notwithstanding Section 6.2(a) above, but subject to Sections
10.1(a)(i) and 10.1(a)(ii), Article 12 and Article 13 hereof, in the
event of a proposed sale or other disposition of all or substantially
all of the assets of the Company at any one time, merger or
consolidation of the Company (where the Company is not the surviving
Entity), dissolution of the Company, or issuance of any restricted
Share or deferred Share awards under a Company incentive share plan,
any such proposed occurrence, in order to be approved must, (i) with
respect to the merger or consolidation of the Company (where the
Company is not the surviving Entity), first receive the approval of
the Board of Directors, (ii) with respect to a sale or other
disposition of all or substantially all of the assets of the Company
at any one time, or dissolution of the Company, any such proposed
action must first receive the approval of the Board of Directors, and
(iii) receive the vote, at a duly held meeting, of more than 50% in
interest of the total then issued and outstanding Shares (or, in the
case of a written Consent without a meeting, more than 50% in interest
of the total then issued and outstanding Shares), voting as one class
(and not as separate classes, notwithstanding the fact that there may
be members of more than one class voting) or such greater percentage
as is then required under the Act.
(c) Notwithstanding Section 6.2(a) above, but subject to Sections
6.1(d), 7.2(a) and 7.2(b) and Articles 12 and 13 hereof, the vote, at
a duly held meeting, of more than 50% in interest of the total then
issued and outstanding Shares (or, in the case of a written Consent
without a meeting, more than 50% in interest of the total then issued
and outstanding Shares), voting as one class (and not as separate
classes, notwithstanding the fact that there may be members of more
than one class voting), shall be able to remove any Director (other
than a Specially Appointed Director) and elect a replacement therefor.
If the Shareholders vote to remove a Director pursuant to this Section
6.2(c), they shall provide the removed Director with notice thereof,
which notice shall set forth the date upon which such removal is to
become effective.
(d) Except as otherwise provided in this Agreement or in any
share plan or share incentive plan adopted by the Company, the holders
of Common Shares have sole Shareholder authority;
(i) to vote on such matters as may be brought before the
Shareholders from time to time (on issues other than those as to
which this Agreement specifically provides for voting rights of
Shareholders in addition to or instead of holders of Common
Shares);
(ii) to elect Directors, and shall do so on an annual basis;
and in all such votes on which the holders of Common Shares have sole
Shareholder voting authority, in order for the holders of Common
Shares to act to approve a matter on which they are voting, such
matter must receive the vote of more than 50% in interest of the
Common Shares which are voted at a meeting at which a quorum of Common
Shares is present (or, in the case of a written Consent without a
meeting, must receive the written Consent of more than 50% in interest
of the aggregate Common Shares), voting as one class (and not as
separate classes, notwithstanding the fact that there may be members
of more than one class voting) (or such greater percentage as is then
required under the Act or under the express terms of this Agreement).
For purposes of the foregoing sentence, the term "quorum" means more
than 50% of the then issued and outstanding Common Shares, except as
provided in any share plan or share incentive plan adopted by the
Company.
The annual meeting of the holders of Common Shares of the Company
for the election of Directors and for the transaction of such other
business as properly may come before such meeting shall be held in
accordance with the By-laws. Subject to the provisions of Article 13
relating to meetings of Shareholders and related subjects, the By-laws
shall govern matters relating to, among other things, annual and
special meetings, notice, waiver of notice, adjournment, proxies,
written consents, procedures, and telephonic meetings, to the extent
not inconsistent with this Agreement.
(e) Notwithstanding any other provision of this Agreement,
Shareholders have voting rights with respect to a particular matter
(to the extent provided herein with regard to categories of
Shareholders permitted to vote on particular matters, and otherwise)
only after such matter has first been approved by the Board of
Directors, except with regard to (i) the removal of a Director (and
the election of a replacement therefor in connection therewith) as
provided in this Agreement, (ii) the amendment of this Agreement,
(iii) the sale or other disposition of all or substantially all of the
assets of the Company at any one time, (iv) the dissolution of the
Company, and (v) any matter as to which any share plan or share
incentive plan adopted by the Company provides otherwise.
(f) For purposes of this Agreement, in order for a meeting of
Shareholders to be considered duly held with regard to a particular
question, a quorum of more than 50% in interest of the Shares which
are entitled to vote at such meeting on the particular question must
be present (in person or by proxy).
6.3 Transfers of Special Shareholder Interests. The restrictions,
limitations and other provisions of this Section 6.3 shall in no manner
limit or restrict the right of a Special Shareholder to resign its status
as a Special Shareholder to the extent permitted under Section 6.1(b) of
this Agreement; and, once such Special Shareholder properly resigns
pursuant thereto, the transfer restrictions set forth in this Section 6.3
as they relate to such Special Shareholder shall automatically and
immediately terminate. Subject to the foregoing sentence, it is agreed
that:
(a) No Special Shareholder (a "Special Transferor") may make any
Transfer of any of its Shares to a Transferee (a "Special Transferee")
unless each of the following requirements is met:
(i) At all times during the existence of the Company,
including upon consummation of such Transfer, one or more Special
Shareholders must have, in the aggregate, at least a number of
Shares which will result in the allocation to the Special
Shareholder(s), in the aggregate, of the minimum percentage
interest in the Company which will permit the Company to retain
its tax status as an association taxable as a partnership rather
than as a corporation, in the opinion of counsel to the Company;
and
(ii) Before any such Transfer can be made, the Company must
be furnished with an opinion of counsel (which may or may not be
the same counsel as is referenced in subparagraph (i) above) to
the effect that the Transfer in question will not adversely
affect the Company's tax status as an association taxable as a
partnership rather than as a corporation.
(b) No Transfer to a Special Transferee shall be recognized by
the Company unless the Board of Directors of the Company receives
documentation satisfactory to it that the requirements of this Section
6.3 have been met.
(c) If the Special Transferor transfers all of its Shares in such
Transfer, in accordance with the restrictions and requirements of
Sections 6.3(a) and 6.3(b) of this Agreement, then such Special
Transferor shall thereafter no longer be a Special Shareholder. If the
Special Transferor transfers fewer than all of its Shares in such
Transfer, then:
(i) if such Special Transferor makes no provision for the
termination of its status as a Special Shareholder in accordance
with clause (ii) immediately below, such Special Transferor shall
continue to be a Special Shareholder; and
(ii) if the Special Transferee agrees in writing to be a
Special Shareholder and to be subject to the liabilities of a
Special Shareholder as provided in this Agreement, then, if all
of the requirements and limitations set forth in Section 6.3(a)
of this Agreement are complied with, the Special Transferor may
terminate its status as a Special Shareholder upon notice thereof
to the Company; provided, however, that no such resignation shall
be recognized by the Company unless the Board of Directors of the
Company receives documentation satisfactory to it that the
requirements of this Section 6.3(c) have been met.
6.4 Transfers of Dissolution Shareholder Interests.
(a) No Dissolution Shareholder (a "Dissolution Transferor") may
make any Transfer of any of its Shares to a Transferee (a "Dissolution
Transferee") unless each of the following requirements is met:
(i) At all times during the existence of the Company,
including upon consummation of such Transfer, one or more
Dissolution Shareholders must have, in the aggregate, at least a
number of Shares which will result in the allocation to the
Dissolution Shareholder, in the aggregate, of the minimum
percentage interest in the Company which will permit the Company
to retain its tax status as an association taxable as a
partnership rather than as a corporation, in the opinion of
counsel to the Company; and
(ii) Before any such Transfer can be made, the Company must
be furnished with an opinion of counsel (which may or may not be
the same counsel as is referenced in subparagraph (i) above) to
the effect that the Transfer in question will not adversely
affect the Company's tax status as an association taxable as a
partnership rather than as a corporation.
(b) No Transfer to a Dissolution Transferee shall be recognized
by the Company unless the Board of Directors of the Company receives
documentation satisfactory to it that Section 6.4(a)'s requirements
have been met.
(c) If the Dissolution Transferor transfers all of its Shares in
such Transfer, in accordance with the restrictions and requirements of
Sections 6.4(a) and 6.4(b) of this Agreement, then such Dissolution
Transferor shall thereafter no longer be a Dissolution Shareholder. If
the Dissolution Transferor transfers fewer than all of its Shares in
such Transfer, then:
(i) if such Dissolution Transferor makes no provision for
the termination of its status as a Dissolution Shareholder in
accordance with clause (ii) immediately below, such Dissolution
Transferor shall continue to be a Dissolution Shareholder; and
(ii) if the Dissolution Transferee agrees in writing to be a
Dissolution Shareholder, then, if all of the requirements and
limitations set forth in Section 6.4(a) of this Agreement are
complied with, the Dissolution Transferor may terminate its
status as a Dissolution Shareholder upon notice thereof to the
Company; provided, however, that no such resignation shall be
recognized by the Company unless the Board of Directors of the
Company receives documentation satisfactory to it that this
Section 6.4(c)'s requirements have been met.
ARTICLE 7
Directors and Officers
7.1 General Powers of Directors.
(a) Except as may otherwise be provided by the Act or by this
Agreement, the property, affairs and business of the Company shall be
managed by or under the direction of the Board of Directors, the Board
of Directors may exercise all the powers of the Company (including but
not limited to deciding whether to make various tax elections), and
the Shareholders shall have no right to act on behalf of or bind the
Company. The Directors shall act only as a Board, and the individual
Directors shall have no power as such. Subject to the provisions of
this Agreement and the By-laws with regard to Board of Directors
actions that can be taken without a quorum, the approval of a matter
by a majority of the Directors present at a meeting at which a quorum
is present shall constitute approval by the Board of Directors (or, in
the case of a written consent without a meeting, the approval of a
matter by all of the Directors shall constitute approval by the Board
of Directors).
(b) Unless expressly provided otherwise under this Agreement, the
Board of Directors shall have the exclusive authority to make all
determinations under this Agreement and under the By-laws.
(c) No contract or transaction among the Company and one or more
of its Affiliates, Directors or officers, or among the Company and any
other Entity in which one or more of the Company's Affiliates,
Directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely
because the Director or officer is present at or participates in the
meeting of the Board of Directors or of a committee thereof which
authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose, if:
(i) The material facts as to such Affiliate's, Director's or
officer's relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good
faith authorizes the contract or transaction by the affirmative
vote of a majority of the disinterested Directors, even though
the disinterested Directors be less than a quorum;
(ii) The material facts as to such Affiliate's, Director's
or officer's relationship or interest and as to the contract or
transaction are disclosed or are known to the Shareholders
entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by more than 50% in interest
of the Common Shares which are present and entitled to vote at a
meeting at which a quorum is present (or, in the case of a
written Consent without a meeting, more than 50% in interest of
the aggregate Common Shares), voting as one class (and not as
separate classes, notwithstanding the fact that there may be
members of more than one class voting), who are not Affiliates of
any of the interested Persons involved in such transaction; or
(iii) The contract or transaction is fair as to the Company.
Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
Notwithstanding the foregoing provisions of this Section 7.1(c), the
Company shall enter into or renew no agreement pursuant to which any
Affiliate of any Director would provide management services for any
Property, unless such agreement is approved by a majority of the
Directors who (a) are not officers of the Company, (b) are neither
related to any Company officer nor represent concentrated or family
holdings of the Company's Shares, and (c) are, in the view of the
Board of Directors, free of any relationship that would interfere with
the exercise of independent judgment; and, if such approval is
obtained in the case of a particular contract, such approval shall be
deemed to satisfy the requirements of this Section 7.1(c).
(d) Notwithstanding the above provisions of this Section 7.1, in
any transaction in which the Company wishes to issue Shares to SCATEF
or any Affiliate of SCATEF in exchange for such Person giving up fees
otherwise payable to it, such transaction, including but not limited
to the exchange ratio of Shares for such fees, shall not be approved
or undertaken by the Company unless and until approved, in lieu of the
requirements set forth in Section 7.1(c), by a majority of the
directors of the Company who are not Affiliates of SCATEF or of any
SCATEF Affiliate (even though the disinterested Directors may be less
than a quorum of the full Board of Directors), after the material
facts as to such transaction are disclosed or are known to such
unaffiliated Directors.
7.2 Number and Term of Office of Directors.
(a) The number of seats constituting the entire Board of
Directors shall be at least five and no more than 15, with the exact
number of seats on the Board of Directors to be determined from time
to time by resolution of the Board of Directors. At least a majority
of the Directors in office at any point in time must be individuals
who are not employed by the Company or by any Affiliate of the
Company. Each Director (whenever elected) shall hold office until his
or her successor has been duly elected and qualified, or until his or
her earlier death, resignation, or removal. A Director shall not be
required to be a Shareholder or a resident of the State of Delaware.
(b) The Specially Appointed Director(s) shall have all of the
powers, rights, privileges, obligations and duties as all other
Directors, and shall for all purposes be Directors of the Company,
except that (i) the Specially Appointed Director(s) shall not be
counted when determining the total size of the Board of Directors for
the sole purpose of making the determination in Section 7.2(c) below
as to how many Directors are in each class, (ii) no Shareholders other
than the Dissolution Shareholder shall have any right to elect, remove
or replace the Specially Appointed Director(s), and, without limiting
the foregoing, the Specially Appointed Director(s) shall not stand for
election or reelection at any meeting of the holders of Common Shares.
Without limiting the foregoing, all other Shareholders, by becoming
Shareholders of the Company, agree that (I) the Dissolution
Shareholder has such rights to serve, through its appointed
representatives, as the Specially Appointed Director(s) and that the
necessary one seat or two seats on the Board of Directors shall be
reserved for such appointment(s) (and the size of the Company's Board
of Directors shall automatically be expanded at any time if such
expansion is necessary in order to permit the Dissolution Shareholder
to effect such appointment(s)) and (II) the Company's officers and
Directors may take any and all steps deemed appropriate by them, in
connection with Shareholder meetings or otherwise, to implement this
Section 7.2(b).
(c) Subject to Section 7.2(b) above, at all times the Board of
Directors shall be divided into three classes, as nearly equal in
numbers as the then total number of directors constituting the entire
Board of Directors permits, with the term of office of one class
expiring each year (with the first such class expiration to occur at
the first annual meeting of Shareholders); and the Board of Directors
shall have sole power to make such determinations. At the first annual
meeting of the holders of Common Shares, only the Directors of the
first class shall be elected by the holders of Common Shares (in
accordance with Section 6.2 hereof), and such persons shall hold
office thereafter for a term expiring at the third succeeding annual
meeting. At the second annual meeting of Shareholders, only the
Directors of the second class shall be elected by the holders of
Common Shares (in accordance with Section 6.2 hereof), and such
persons shall hold office thereafter for a term expiring at the third
succeeding annual meeting. At the third annual meeting of
Shareholders, only the Directors of the third class shall be elected
by the holders of Common Shares (in accordance with Section 6.2
hereof), and such persons shall hold office thereafter for a term
expiring at the third succeeding annual meeting. At each subsequent
annual meeting of Shareholders thereafter, the successors to any class
of directors whose term shall then expire shall be elected by the
holders of Common Shares (in accordance with Section 6.2 hereof) to
hold office for a term expiring at the third succeeding annual
meeting.
7.3 By-law Provisions. The By-laws shall govern matters relating to,
among other things, (a) with respect to directors, annual and special
meetings, notice, waiver of notice, quorum, voting, adjournment, written
consents, committees, procedures, telephonic meetings, resignations,
removals, vacancies, books and records, reports, and compensation and
reimbursement of expenses, to the extent not inconsistent with this
Agreement, (b) with respect to officers, all matters not governed by this
Agreement, and (c) employee benefit matters, which matters shall be subject
to and managed as provided by the discretion of the Board of Directors.
ARTICLE 8
Exculpation and Indemnification
8.1 Limitations on Liability, and Indemnification of, Directors and
Officers.
(a) No director or officer of the Company shall be liable,
responsible or accountable in damages or otherwise to the Company or
any of the Shareholders for any act or omission performed or omitted
by him or her, or for any decision, except in the case of fraudulent
or illegal conduct of such person. For purposes of this Section 8.1,
the fact that an action, omission to act or decision is taken on the
advice of counsel for the Company shall be evidence of good faith and
lack of fraudulent conduct.
(b) All Directors and officers of the Company shall be entitled
to indemnification from the Company for any loss, damage or claim
(including any reasonable attorney's fees incurred by such person in
connection therewith) due to any act or omission made by him or her,
except in the case of fraudulent or illegal conduct of such person;
provided, that any indemnity shall be paid out of, and to the extent
of, the assets of the Company only (or any insurance proceeds
available therefor), and no Shareholder shall have any personal
liability on account thereof.
(c) The termination of any action, suit or proceeding by
judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the Person acted fraudulently or illegally.
(d) The indemnification provided by this Section 8.1 shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any agreement, vote of Shareholders or Directors, or
otherwise, and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(e) Any repeal or modification of this Section 8.1 shall not
adversely affect any right or protection of a Director or officer of
the Company existing at the time of such repeal or modification.
(f) The Company may, if the Board of Directors of the Company
deems it appropriate in its sole discretion, obtain insurance for the
benefit of the Company's Directors and officers, relating to the
liability of such persons.
ARTICLE 9
Transfers of Interests; Admission of New Shareholders
9.1 Transfers. Subject to Section 6.3 of this Agreement (relating to
Special Shareholders) and Section 6.4 of this Agreement (relating to
Dissolution Shareholders), the Shares shall be freely transferable; and any
Person who is a Transferee of Shares shall, by having such status, (a)
automatically become a Shareholder of the Company with no further action
being required on such Person's part, and (b) automatically be bound to the
terms and conditions of this Agreement (and be entitled to the rights of a
Shareholder hereunder), without the requirement for execution of this
Agreement by such Person. Certain mechanical aspects of the transfer of
Shares shall be set forth in the By-laws.
ARTICLE 10
Dissolution and Termination
10.1 Events of Dissolution.
(a) In accordance with Section 18-801 of the Act, and the
provisions therein permitting this Agreement to specify the events of
the Company's dissolution, the Company shall be dissolved and the
affairs of the Company wound up upon the occurrence of any of the
following events:
(i) a unanimous written decision of all of the Original
Shareholders who are then still Shareholders to dissolve the
Company;
(ii) the death, retirement, resignation, expulsion,
bankruptcy (as defined in Section 18-304 of the Act) or
dissolution of a Person who is then a Dissolution Shareholder, or
the occurrence of any other event that terminates the continued
membership in the Company of a Person who is then a Dissolution
Shareholder, unless more than 50% in interest of the
then-outstanding Shares votes, at a duly held meeting (or, in the
case of a written Consent without a meeting, more than 50% in
interest of the aggregate Shares acts), within 180 days of such
event to continue the Company; or
(iii) the vote of the Shareholders pursuant to Section
6.2(b) hereof.
The death, retirement, resignation, expulsion, bankruptcy (as
defined in Section 18-304 of the Act) or dissolution of a Shareholder
or the occurrence of any other event that terminates the continued
membership of a Shareholder in the Company, shall not cause the
dissolution of the Company except to the extent specified above in
this Section 10.1(a).
(b) Dissolution of the Company shall be effective on the day on
which the event occurs giving rise to the dissolution, but the Company
shall not terminate until the assets of the Company shall have been
distributed as provided herein and a certificate of cancellation of
the Certificate has been filed with the Secretary of State of the
State of Delaware.
10.2 Application of Assets. In the event of dissolution, the Company
shall conduct only such activities as are necessary to wind up its affairs
(including the sale of the assets of the Company in an orderly manner), and
the assets of the Company shall be applied, first, as required by Section
18-804(a)(1) of the Act, and then in the manner, and in the order of
priority, set forth in Article 5.
10.3 Gain or Losses in Process of Liquidation. Any gain or loss or
disposition of Company property in the process of liquidation shall be
credited or charged to the Capital Accounts of Shareholders in accordance
with the provisions of Article 3. Any property distributed in kind in the
liquidation shall be valued and treated as though the property were sold at
its fair market value and the cash proceeds were distributed. The
difference between the fair market value of property distributed in kind
and its Book Value shall be treated as a gain or loss on the sale of such
property and shall be credited or charged to the Capital Account of
Shareholders in accordance with Article 3; provided, that no Shareholder
shall have the right to request or require the distribution of the assets
of the Company in kind.
10.4 Procedural and Other Matters.
(a) Upon dissolution of the Company and until the filing of a
certificate of cancellation as provided in Section 10.4(b), the
Persons winding up the affairs of the Company may, in the name of, and
for and on behalf of, the Company, prosecute and defend suits, whether
civil, criminal or administrative, gradually settle and close the
business of the Company, dispose of and convey the property of the
Company, discharge or make reasonable provision for the liabilities of
the Company, and distribute to the members any remaining assets of the
Company, in accordance with this Article 10 and all without affecting
the liability of Shareholders and Directors and without imposing
liability on a liquidating trustee.
(b) The Certificate may be canceled upon the dissolution and the
completion of winding up of the Company, by any Person authorized to
cause such cancellation in connection with such dissolution and
winding up.
ARTICLE 11
Appointment of Attorney-in-Fact
11.1 Appointment and Powers.
(a) Each Shareholder hereby irrevocably constitutes and appoints
the Company's chief executive officer, with full power of
substitution, as his, her or its true and lawful attorney-in-fact,
with full power and authority in his, her or its name, place and stead
to execute, acknowledge, deliver, swear to, file and record at the
appropriate public offices such documents, instruments and conveyances
as may be necessary or appropriate to carry out the provisions or
purposes of this Agreement, including, without limitation, the
following: (i) the Certificate; (ii) all other certificates and
instruments and amendments thereto that the Board of Directors deems
appropriate to qualify or continue the Company as a limited liability
company in the jurisdiction in which the Company may conduct business;
(iii) all instruments that the Board of Directors deems appropriate to
reflect a change or modification of the Company in accordance with the
terms of this Agreement; (iv) all conveyances and other instruments
that the Board of Directors deems appropriate to reflect the
dissolution and termination of the Company; (v) all fictitious or
assumed name certificates required or permitted to be filed on behalf
of the Company; (vi) any and all documents necessary to admit
Shareholders to the Company, or to reflect any change or transfer of a
Shareholder's Company Interest, or relating to the admission or
increased Capital Contribution of a Shareholder; (vii) any amendment
or other document to be filed as referenced in Section 3.1(d) or
3.1(f) of this Agreement; and (viii) all other instruments that may be
required or permitted by law to be filed on behalf of or relating to
the Company and that are not inconsistent with this Agreement.
(b) The authority granted by this Section 11.1 (i) is a special
power of attorney coupled with an interest, is irrevocable, and shall
not be affected by the subsequent incapacity or disability of the
Shareholder; (ii) may be exercised by a signature for each Shareholder
or by listing the names of all of the Shareholders executing this
Agreement with a single signature of any such Person acting as
attorney-in-fact for all of them; and (iii) shall survive the Transfer
by a Shareholder of the whole or any portion of his, her or its
Company Interest.
11.2 Presumption of Authority. Any Person dealing with the Company may
conclusively presume and rely upon the fact that any instrument referred to
above, executed by such Person acting as attorney-in-fact, is authorized,
regular and binding, without further inquiry.
ARTICLE 12
Certain Provisions Relating to
Changes in Control and Business Combinations
12.1 Definitions. For purposes of this Article 12, the following
definitions shall apply:
"Associate" when used to indicate a relationship with any Person,
means:
(a) Any Entity (other than the Company or a Subsidiary of the
Company) of which such Person is an officer, director or partner or
is, directly or indirectly, the beneficial owner of 10 percent or more
of any class of equity securities of such Entity;
(b) Any trust or other estate in which such Person has a
substantial beneficial interest or as to which such person serves as
trustee or in a similar fiduciary capacity; and
(c) Any Relative of such Person, or any Relative of a spouse of
such Person, who has the same home as such Person or who is a Director
or officer of the Company or a manager, director or officer of any of
its Affiliates.
"Beneficial Owner" when used with respect to Company Interests,
means a Person:
(a) That, individually or with any of its Affiliates or
Associates, beneficially owns Company Interests, directly or
indirectly; or
(b) That, individually or with any of its Affiliates or
Associates, has (i) the right to acquire Company Interests (whether
such right is exercisable immediately or only after the passage of
time), pursuant to any agreement, arrangement, or understanding or
upon the exercise of conversion rights, exchange rights, warrants or
options, or otherwise; or (ii) the right to vote Company Interests
pursuant to any agreement, arrangement or understanding; or
(c) That has any agreement, arrangement, or understanding for the
purpose of acquiring, holding, voting, or disposing of Company
Interests with any other Person that beneficially owns, or whose
Affiliates or Associates beneficially own, directly or indirectly,
such Company Interests.
"Business Combination" means:
(a) Unless the merger, consolidation or exchange of Company
Interests does not alter the contract rights of the Company Interests
as expressly set forth in this Agreement or change or convert in whole
or in part the outstanding Company Interests, any merger,
consolidation or exchange of Company Interests or any Subsidiary with
(i) any Interested Party or (ii) any other Entity (whether or not
itself an Interested Party) which is, or after the merger,
consolidation or exchange of interests would be, an Affiliate of an
Interested Party that was an Interested Party prior to the
transaction;
(b) Any sale, lease, transfer or other disposition, other than in
the ordinary course of business or pursuant to a distribution or any
other method affording substantially proportionate treatment to the
Shareholders, in one transaction or a series of transactions in any
12-month period, to any Interested Party or any Affiliate of any
Interested Party (other than the Company or any of its Subsidiaries)
of any assets of the Company or any Subsidiary having, measured at the
time the transaction or transactions are approved by the Board of
Directors of the Company, an aggregate book value as of the end of the
Company's most recently ended fiscal quarter of 10 percent or more of
the total market value of the outstanding Company Interests or of its
net worth as of the end of its most recently ended fiscal quarter;
(c) The issuance or transfer by the Company or any Subsidiary, in
one transaction or a series of transactions, of any Company Interests
or any equity securities of a Subsidiary which have an aggregate
market value of five percent or more of the total market value of the
outstanding Company Interests to any Interested Party or any Affiliate
of any Interested Party (other than the Company or any of its
Subsidiaries) except pursuant to the exercise of warrants or rights to
purchase securities pro-rata to all Shareholders or any other method
affording substantially proportionate treatment to those Shareholders;
(d) The adoption of any plan or proposal for the liquidation or
dissolution of the Company in which anything other than cash will be
received by an Interested Party or any Affiliate of any Interested
Party;
(e) Any reclassification of securities or recapitalization of the
Company, or any merger, consolidation or exchange of Company Interests
with any of its Subsidiaries which has the effect, directly or
indirectly, in one transaction or series of transactions, of
increasing by five percent or more the total number of outstanding
Company Interests, the proportionate amount of the outstanding Company
Interests or the outstanding number of any class of equity securities
of any Subsidiary which is directly or indirectly owned by any
Interested Party or any Affiliate of any Interested Party; or
(f) The receipt by any Interested Party or any Affiliate of any
Interested Party (other than the Company or any of its Subsidiaries)
of the benefit, directly or indirectly (except proportionately as a
holder of Company Interests), of any loan, advance, guarantee, pledge
or other financial assistance or any tax credit or other tax advantage
provided by the Company or any of its Subsidiaries.
"Interested Party" means any Person (other than (i) the Company,
(ii) any subsidiary of the Company, (iii) the General Partners, the
Special Shareholder, the Original Shareholders, and the Dissolution
Shareholder, and (iv) any Affiliate or Associate of any Person
described in clause (iii) above) that:
(a) Is the beneficial owner, directly or indirectly, of 10
percent or more of the outstanding Company Interests;
(b) Is an Affiliate or Associate of the Company and at any time
within the two-year period immediately prior to the date in question
was the beneficial owner, directly or indirectly, of 10 percent or
more of the then outstanding Company Interests; or
(c) Is an Affiliate or Associate of (a) or (b).
For purposes of determining whether a Person is an Interested Party,
the number of Company Interests deemed to be outstanding shall include
Company Interests deemed beneficially owned by the Person through the
definition of Beneficial Ownership set forth above but shall not
include any other Company Interests which may be issuable pursuant to
any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
"Market Value" means:
(a) In the case of Company Interests, the highest closing sale
price during the 30-day period immediately preceding the date in
question of a Company Interest of the same class or series on the
composite tape of the New York Stock Exchange-listed stocks, or, if
such Company Interest of the same class or series is not quoted on the
composite tape, on the New York Stock Exchange, or if such Company
Interest of the same class or series is not listed on such Exchange,
on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which the Company Interest of
the same class or series is listed, or, if the Company Interest of the
same class or series is not listed on any such exchange, the highest
closing bid quotation with respect to such a Company Interest of the
same class or series during the 30-day period preceding the date in
question on the National Association of Securities Dealers, Inc.
automated quotations system or any system then in use, or, if no such
quotations are available, the fair market value on the date in
question of such a Company Interest of the same class or series as
determined by the Board of Directors in good faith; and
(b) In the case of property other than cash or stock, the fair
market value of such property on the date in question as determined by
the Board of Directors in good faith.
"Subsidiary" means any Person (other than an individual) in which
the Company, directly or indirectly, holds a majority of the voting
securities.
12.2 Business Combinations.
(a) Unless an exemption under Section 12.3(c) applies, the
Company may not engage in any Business Combination with any Interested
Party or any Affiliate of an Interested Party for a period of five
years following the most recent date on which such Interested Party
became an Interested Party (the "Five Year Tolling Period"), unless:
(i) in addition to any vote otherwise required by law or
this Agreement, the Board of Directors of the Company, prior to
the most recent date upon which the Interested Party became an
Interested Party, approved either the Business Combination or the
transaction which resulted in the Interested Party becoming an
Interested Party; or
(ii) on or subsequent to the date upon which the Interested
Party became an Interested Party, the Business Combination is (A)
approved by at least two-thirds of the persons who are then
members of the Board of Directors and (B) authorized at an annual
or special meeting of the Shareholders (and not by written
consent) by the affirmative vote of at least two-thirds in
interest of the Shareholders, excluding the Company Interests
held by an Interested Party who will (or whose Affiliate will be)
a party to the Business Combination or by an Affiliate or
Associate of that Interested Party, voting together as a single
class.
(b) Unless an exemption under Section 12.3 applies, in addition
to any vote otherwise required by law or this Agreement, a Business
Combination proposed by an Interested Party or an Affiliate of the
Interested Party after the Five Year Tolling Period shall be permitted
only if recommended by the Board of Directors who are present at a
duly-called meeting at which a quorum is present and approved by the
affirmative vote of at least:
(i) 80% in interest of all Shareholders, voting together as
a single voting group; and
(ii) Two-thirds in interest of the Shareholders, excluding
Company Interests held by an Interested Party who will (or whose
Affiliate will) be a party to the Business Combination or by an
Affiliate or Associate of the Interested Party, voting together
as a single voting group.
12.3 Exemptions.
(a) For purposes of this Section 12.3:
"Announcement Date" means the first general public announcement
of the proposal or intention to make a proposal of the Business
Combination or its first communication generally to the Shareholders,
whichever is earlier;
"Determination Date" means the most recent date on which the
Interested Party became an Interested Party; and
"Valuation Date" means:
(i) For a Business Combination voted upon by the
Shareholders, the latter of the day prior to the date of the vote
or the day 20 days prior to the consummation of the Business
Combination; and
(ii) For a Business Combination not voted upon by the
Shareholders, the date of the consummation of the Business
Combination.
(b) The vote required by Section 12.2(b) does not apply to a
Business Combination if (1) the Business Combination or the
transaction which resulted in the Interested Party becoming an
Interested Party shall have been approved by the Board of Directors
prior to the Determination Date or (2) each of the conditions in items
(i) through (iii) below is met:
(i) The aggregate amount of the cash and the market value as
of the Valuation Date of consideration other than cash to be
received for each Company Interest in such Business Combination
(whether or not the Interested Party has previously acquired the
particular class or series of Company Interest in question) is at
least equal to the highest of the following:
(A) The highest per Company Interest price (including
any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by the Interested Party for any Company
Interests of the same class or series acquired by it within
the five-year period immediately prior to the Announcement
Date of the proposal of the Business Combination, plus an
amount equal to interest compounded annually from the
earliest date on which the highest per Company Interest
acquisition price was paid (for the same class or series)
through the Valuation Date at the rate for one-year United
States Treasury obligations from time to time in effect,
less the aggregate amount of any cash distributions paid and
the market value of any distributions paid in other than
cash, per Company Interest (for the same class or series)
from the earliest date through the Valuation Date, up to the
amount of the interest; or
(B) The highest per Company Interest price (including
any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by the Interested Party for any Company
Interest of the same class or series acquired by it on, or
within the five-year period immediately before, the
Determination Date, plus an amount equal to interest
compounded annually from the earliest date on which the
highest per Company Interest acquisition price was paid for
the same class or series through the valuation Date at the
rate for one-year United States Treasury obligations from
time to time in effect, less the aggregate amount of any
cash distributions paid and the market value of any
distributions paid in other than cash, per Company Interest
of the same class or series from the earliest date through
the Valuation Date, up to the amount of the interest; or
(C) The highest preferential amount per Company
Interest to which the holders of Company Interests of such
class or series are entitled in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the
Company; or
(D) The Market Value per Company Interest of the same
class or series on the Announcement Date, plus an amount
equal to interest compounded annually from that date through
the Valuation Date at the rate for one-year United States
Treasury obligations from time to time in effect, less the
aggregate amount of any cash distributions paid and the
market value of any distributions paid in other than cash,
per Company Interest of the same class or series from that
date through the Valuation Date, up to the amount of
interest; or
(E) The Market Value per Company Interest of the same
class or series on the Determination Date, plus an amount
equal to interest compounded annually from that date through
the Valuation Date at the rate for one-year United States
Treasury obligations from time to time in effect, less the
aggregate amount of any cash distributions paid and the
Market Value of any distributions paid in other than cash,
per Company Interest of the same class or series from that
date through the Valuation Date, up to the amount of the
interest; or
(F) The price per Company Interest equal to the Market
Value per Company Interest of the same class or series on
the Announcement Date or on the Determination Date,
whichever is higher, multiplied by the fraction of:
(1) The highest per Company Interest price
(including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by the Interested
Party for any Company Interests of the same class or
series acquired by it within the five-year period im-
mediately prior to the Announcement Date, over
(2) The Market Value per Company Interest of the
same class or series on the first day in such five-
year period on which the Interested Party acquired
the Company Interests.
(ii) The consideration to be received by the holders of any
Company Interests is to be in cash or in the same form as the
Interested Party has previously paid for Company Interests,
except to the extent that the Shareholders otherwise elect in
connection with their approval of the proposed transaction under
Section 6.2 of this Agreement. If the Interested Party has paid
for Company Interests with varying forms of consideration, the
form of consideration for such Company Interests of the same
class or series shall be either cash or the form used to acquire
the largest number of Company Interests of the same class or
series previously acquired by it, except to the extent that the
Shareholders otherwise elect.
(iii) After the Determination Date and prior to the
consummation of such Business Combination:
(A) There shall have been no failure to declare and pay
at the regular date therefor (if applicable) any full
periodic distributions (whether or not cumulative) on any
outstanding Company Interests or other securities of the
Company;
(B) There shall have been:
(1) No reduction in the annual rate of distribu-
tions made with respect to any class or series
of Company Interests (except as necessary to reflect
any subdivision of Company Interests); and
(2) An increase in such annual rate of distribu-
tions as necessary to reflect any reclassification,
recapitalization, reorganization or any similar
transaction which has the effect of reducing the
number of outstanding Company Interests; and
(C) The Interested Party did not become the Beneficial
Owner of any additional Company Interests except as part of
the transaction which resulted in such Interested Party
becoming an Interested Party or by virtue of proportionate
Company Interest splits or distributions.
The provisions of items (A) and (B) of this subsection (b)(iii) do not
apply if no Interested Party or an Affiliate or Associate of the Interested
Party voted as a member of the Board of Directors of the Company in a
manner inconsistent with such items (A) and (B) and the Interested Party,
within 10 days after any act or failure to act inconsistent with such
items, notifies the Board of Directors of the Company in writing that the
Interested Party disapproves thereof and requests in good faith that the
Board of Directors rectify such act or failure to act.
(c) The provisions of Section 12.2 do not apply to any Business
Combination of the Company with an Interested Party that became an
Interested Party inadvertently, if the Interested Party:
(i) As soon as practicable (but not more than 10 days after
the Interested Party knew or should have known it had become an
Interested Party) divests itself of a sufficient amount of
Company Interests so that it no longer is the beneficial owner,
directly or indirectly, of 10 percent or more of the outstanding
Company Interests; and
(ii) Would not at any time with the five-year period
preceding the Announcement Date with respect to the Business
Combination have been an Interested Party except by inadvertence.
12.4 Amendment. Notwithstanding any other provisions of this
Agreement, this Article 12 may be amended or repealed only by a vote of 80%
in interest of all Shareholders, voting together as a single class,
excluding Company Interests held by any Interested Party or any Affiliate
of an Interested Party.
12.5 Certain Determinations with Respect to this Article 12. The Board
of Directors shall have the power to determine for the purposes of this
Article 12, on the basis of information known to the Directors: (i) the
number of Company Interests of which any Person is the Beneficial Owner,
(ii) whether a Person is an Affiliate or Associate of another, (iii)
whether a Person has an agreement, arrangement or understanding with
another as to the matters referred to in the definition of "Beneficial
Owner" as hereinabove defined, (iv) whether two or more transactions
constitute a "series of transactions," and (v) such other matters with
respect to which a determination is required under this Article 12.
ARTICLE 13
Voting Rights of Certain Control Company Interests
13.1 Definitions. For purposes of this Article 13, the following
definitions shall apply:
"Acquiring Person" means a person who makes or proposes to make a
Control Company Interests Acquisition, or such Person's Affiliate or
Associate.
"Associate" when used to indicate a relationship with any Person
means:
(a) An "Associate" as defined in Section 12.1; or
(b) A Person that:
(i) Directly or indirectly controls, or is controlled by, or
is under common control with, the Person specified; or
(ii) Is acting or intends to act jointly or in concert with
the Person specified.
"Control Company Interests" means those Company Interests that,
except for this Article 13, would, if aggregated with all other
Company Interests (including Company Interests the acquisition of
which is excluded from the definition "Control Company Interests
Acquisition" below) owned by a Person or in respect of which that
Person is entitled to exercise or direct the exercise of voting power,
except solely by virtue of a revocable proxy, entitle that Person,
directly or indirectly, to exercise or direct the exercise of the
voting power of any class or series of Company Interests within any of
the following ranges of voting power:
(a) One-fifth or more, but less than one-third of all voting
power;
(b) One-third or more, but less than a majority of all voting
power; or
(c) A majority or more of all voting power.
"Control Company Interests" includes Company Interests only to the extent
that the Acquiring Person, following the acquisition of the Company
Interests, is entitled, directly or indirectly, to exercise or direct the
exercise of voting power within any level of voting power set forth in this
section for which approval has not been obtained previously under Section
13.2.
"Control Company Interests Acquisition" means the acquisition,
directly or indirectly, by any Person (other than (i) the Company,
(ii) any subsidiary of the Company, (iii) the General Partners, the
Special Shareholder, the Original Shareholders, and the Dissolution
Shareholder, and (iv) any Affiliate or Associate of any Person
described in clause (iii) above), of ownership of, or the power to
direct the exercise of voting power with respect to, issued and
outstanding Control Company Interests. Control Company Interests
Acquisition does not include the acquisition of Control Company
Interests:
(a) Under the laws of descent and distribution;
(b) Under the satisfaction of a pledge or other security interest
created in good faith and not for the purpose of circumventing this
Article 13; or
(c) Under a merger, consolidation or exchange of interests if the
Company is a party to the merger, consolidation or exchange of
interests.
Unless the acquisition entitles any Person, directly or indirectly, to
exercise or direct the exercise of voting power of Company Interests in
excess of the range of voting power previously authorized or attained under
an acquisition that is exempt under items (a), (b) or (c) of this
definition, "Control Company Interests Acquisition" does not include the
acquisition of Company Interests in good faith and not for the purpose of
circumventing this Article 13, by or from any Person whose voting rights
have previously been authorized by the Shareholders in compliance with this
Article 13 or any Person whose previous acquisition of Company Interests
would have constituted a Control Company Interests Acquisition but for the
exclusions in items (a) through (c) of this definition.
"Interested Company Interests" means Company Interests in respect
of which an Acquiring Person is entitled to exercise or direct the
exercise of the voting power of Company Interests in the election of
Directors or otherwise.
13.2 Voting Rights.
(a) Control Company Interests acquired in a Control Company
Interests Acquisition have no voting rights except to the extent
approved by the Shareholders at a meeting held under Section 13.4 by
the affirmative vote of two-thirds in interest of all Shareholders,
excluding any votes cast with respect to Interested Company Interests.
(b) For purposes of this Section 13.2:
(i) Company Interests acquired within 180 days or Company
Interests acquired under a plan to make a Control Company
Interests Acquisition are considered to have been acquired in the
same acquisition; and
(ii) A Person may not be deemed to be entitled to exercise
or direct the exercise of voting power with respect to Company
Interests held for the benefit of others if the Person:
(A) Is acting in the ordinary course of business, in
good faith and not for the purpose of circumventing the
provisions of this Section of the Agreement; and
(B) Is not entitled to exercise or to direct the
exercise of the voting power of the Company Interests unless
the Person first seeks to obtain the instruction of another
person.
13.3 Acquiring Person Statement. Any Person who proposes to make or
who has made a Control Company Interests Acquisition may deliver an
Acquiring Person statement to the Company at the Company's principal
office. The Acquiring Person statement shall set forth all of the
following:
(a) The identity of the Acquiring Person and each other member of
any group of which the Person is a part for purposes of determining
Control Company Interests;
(b) A statement that the Acquiring Person statement is given
under this Article 13;
(c) The number of Company Interests owned (directly or
indirectly) by the Acquiring Person and each other member of any
group;
(d) The applicable range of voting power as set forth in the
definition of "Control Company Interests"; and
(e) If the Control Company Interests Acquisition has not
occurred:
(i) A description in reasonable detail of the terms of the
proposed Control Company Interests Acquisition; and
(ii) Representations of the Acquiring Person, together with
a statement in reasonable detail of the facts on which they are
based, that:
(A) The proposed Control Company Interests Acquisition,
if consummated, will not be contrary to law; and
(B) The Acquiring Person has the financial capacity,
through financing to be provided by the Acquiring Person,
and any additional specified sources of financing required
under Section 13.5, to make the proposed Control Company
Interests Acquisition.
13.4 Special Meeting.
(a) Except as provided in Section 13.5, if the Acquiring Person
requests, at the time of delivery of an Acquiring Person statement,
and gives a written undertaking to pay the Company's expenses of a
special meeting, except the expenses of opposing approval of the
voting rights, within ten days after the day on which the Company
receives both the request and undertaking, the Board of Directors of
the Company shall call a special meeting of the Shareholders, to be
held within 50 days after receipt of the Acquiring Person statement
and undertaking, for the purpose of considering the voting rights to
be accorded the Company Interests acquired or to be acquired in the
Control Company Interests Acquisition.
(b) The Board of Directors may require the Acquiring Person to
give bond, with sufficient surety, to reasonably assure the Company
that this undertaking will be satisfied.
(c) Unless the Acquiring Person agrees in writing to another
date, the special meeting of Shareholders shall be held within 50 days
after the day on which the Company has received both the request and
the undertaking.
(d) If the Acquiring Person makes a request in writing at the
time of delivery of the Acquiring Person statement, the special
meeting may not be held sooner than 30 days after the day on which the
Company receives the Acquiring Person statement.
(e) If no request is made under subsection (a) of this Section
13.4, the issue of the voting rights to be accorded the Company
Interests acquired in the Control Company Interests Acquisition may,
at the option of the Company, be presented for consideration at any
meeting of the Shareholders. If no request is made under subsection
(a) of this Section 13.4 and the Company proposes to present the issue
of the voting rights to be accorded the Company Interests acquired in
a Control Company Interests Acquisition for consideration at any
meeting of the Shareholders, the Company shall provide the Acquiring
Person with written notice of the proposal not less than 20 days
before the date on which notice of the meeting is given.
13.5 Calls.
(a) A call of a special meeting of Shareholders is not required
to be made under Section 13.4 unless, at the time of delivery of an
Acquiring Person statement under Section 13.3, the Acquiring Person
has:
(i) Entered into a definitive financing agreement or
agreements with one or more responsible financial institutions or
other entities that have the necessary financial capacity,
providing for any amount of financing of the Control Company
Interests Acquisition not to be provided by the Acquiring Person;
and
(ii) Delivered a copy of the agreements to the Company.
13.6 Notice of Meeting.
(a) If a special meeting of the Shareholders is requested, notice
of the special meeting shall be given as promptly as reasonably
practicable by the Company to all Shareholders of record as of the
record date set for the meeting, whether or not the Shareholder is
entitled to vote at the meeting.
(b) Notice of the special or annual meeting at which the voting
rights are to be considered shall include or be accompanied by the
following:
(i) A copy of the Acquiring Person statement delivered to
the Company under Section 13.3; and
(ii) A statement by the Board of Directors setting forth its
position or recommendation, or stating that it is taking no
position or making no recommendation, with respect to the issue
of voting rights to be accorded the Control Company Interests.
13.7 Redemption Rights.
(a) If an Acquiring Person statement has been delivered on or
before the 10th day after the Control Company Interests Acquisition,
the Company may, at its option, redeem any or all Control Company
Interests, except Control Company Interests for which voting rights
have been previously approved under Section 13.2, at any time during a
60-day period commencing on the day of a meeting at which voting
rights are considered under Section 13.4 and are not approved.
(b) In addition to the redemption rights authorized under
subsection (a) of this Section 13.7, if an Acquiring Person statement
has not been delivered on or before the 10th day after the Control
Company Interests Acquisition, the Company may, at its option, redeem
any or all Control Company Interests, except Control Company Interests
for which voting rights have been previously approved under Section
13.2, at any time during a period commencing on the 11th day after the
Control Company Interests Acquisition and ending 60 days after the
acquiring person statement has been delivered.
(c) Any redemption of Control Company Interests under this
Section shall be at the fair value of the Company Interests. For
purposes of this section, "fair value" shall be determined:
(i) As of the date of the last acquisition of Control
Company Interests by the Acquiring Person in a Control Company
Interests Acquisition or, if a meeting is held under Section
13.4, as of the date of the meeting; and
(ii) Without regard to the absence of voting rights for the
Control Company Interests.
13.8 Amendment. Notwithstanding any other provisions of this
Agreement, this Article 13 may only be amended or repealed by a vote of 80%
in interest of all Shareholders, voting together as a single class,
excluding any votes cast with respect to Interested Company Interests.
ARTICLE 14
Miscellaneous Provisions
14.1 Notices.
(a) Except as otherwise provided in this Agreement or in the
By-laws, any and all notices, consents, offers, elections and other
communications required or permitted under this Agreement shall be
deemed adequately given only if in writing and the same shall be
delivered either in hand, by telecopy, or by mail or Federal Express
or similar expedited commercial carrier, addressed to the recipient of
the notice, postage prepaid and registered or certified with return
receipt requested (if by mail), or with all freight charges prepaid
(if by Federal Express or similar carrier).
(b) All notices, demands, and requests to be sent hereunder shall
be deemed to have been given for all purposes of this Agreement upon
the date of receipt or refusal.
(c) All such notices, demands and requests shall be addressed as
follows: (i) if to the Company, to its principal place of business, as
set forth in Article 2 hereof and (ii) if to a Shareholder, to the
address of such Shareholder listed on the Company's Shareholder
register.
(d) By giving to the other parties written notice thereof, the
parties hereto and their respective successors and assigns shall have
the right from time to time and at any time during the term of this
Agreement to change their respective addresses effective upon receipt
by the other parties of such notice and each shall have the right to
specify as its address any other address.
14.2 Word Meanings. The words such as "herein", "hereinafter",
"hereof" and "hereunder" refer to this Agreement as a whole and not merely
to a subdivision in which such words appear unless the context otherwise
requires. The singular shall include the plural and the masculine gender
shall include the feminine and neuter, and vice versa, unless the context
otherwise requires.
14.3 Binding Provisions. The covenants and agreements contained herein
shall be binding upon, and inure to the benefit of, the heirs, legal
representatives, successors and assignees of the respective parties hereto.
14.4 Amendment and Modification. Unless otherwise specifically
provided in this Agreement, this Agreement may be amended, modified or
supplemented only by the vote, at a duly held meeting, of more than 50% in
interest of the then-outstanding Common Shares (or, in the case of a
written Consent without a meeting, more than 50% in interest of the
aggregate then-outstanding Common Shares), voting or acting as one class
(and not as separate classes, notwithstanding the fact that there may be
members of more than one class voting); provided, however, that Section 8.1
shall not be amended, modified or supplemented, unless such amendment,
modification or supplement receives the Consent of at least 80% in interest
of the holders of then-outstanding Common Shares.
14.5 Waiver. The waiver by any party hereto of a breach of any
provisions contained herein shall be in writing, signed by the waiving
party, and shall in no way be construed as a waiver of any succeeding
breach of such provision or the waiver of the provision itself.
14.6 Applicable Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware, without regard to such
state's laws concerning conflicts of laws. In the event of a conflict
between any provision of this Agreement and any nonmandatory provision of
the Act, the provision of this Agreement shall control and take precedence.
14.7 Separability of Provisions. Each provision of this Agreement
shall be deemed severable, and if any part of any provision is held to be
illegal, void, voidable, invalid, nonbinding or unenforceable in its
entirety or partially or as to any party, for any reason, such provision
may be changed, consistent with the intent of the parties hereto, to the
extent reasonably necessary to make the provision, as so changed, legal,
valid, binding and enforceable. If any provision of this Agreement is held
to be illegal, void, voidable, invalid, nonbinding or unenforceable in its
entirety or partially or as to any party, for any reason, and if such
provision cannot be changed consistent with the intent of the parties
hereto to make it fully legal, valid, binding and enforceable, then such
provision shall be stricken from this Agreement, and the remaining
provisions of this Agreement shall not in any way be affected or impaired,
but shall remain in full force and effect.
14.8 Headings. The headings contained in this Agreement (including but
not limited to the titles of the Schedules and Exhibits hereto) have been
inserted for the convenience of reference only, and neither such headings
nor the placement of any term hereof under any particular heading shall in
any way restrict or modify any of the terms or provisions hereof.
14.9 Further Assurances. The Shareholders shall execute and deliver
such further instruments and do such further acts and things as may be
required to carry out the intent and purposes of this Agreement.
14.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
taken together shall constitute one and the same instrument.
14.11 Entire Agreement. This Agreement, and all Schedules and Exhibits
hereto, constitutes the entire agreement between the parties hereto with
respect to the transactions contemplated herein, and supersedes all prior
understandings or agreements, oral or written, between the parties.
IN WITNESS WHEREOF, the undersigned, being the Chairman and Chief Executive
Officer and the President of the Company, respectively, have executed and
delivered this Amended and Restated Certificate of Formation and Operating
Agreement on behalf of the Shareholders who have duly approved this Agreement as
required by Section 14.4 as of the day and year first-above written.
By: /s/ Mark K. Joseph
-------------------------------------------------
Name: Mark K. Joseph
Title: Chairman and Chief Executive Officer
By: /s/ Michael L. Falcone
-------------------------------------------------
Name: Michael L. Falcone
Title: President
EXHIBIT 3.4
AMENDED AND RESTATED
BY-LAWS
OF
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
(a Delaware limited liability company)
All capitalized words and terms used in these By-Laws and not defined
herein shall have the respective meanings ascribed to them in the Amended and
Restated Certificate of Formation and Operating Agreement of Municipal Mortgage
and Equity, L.L.C. (the "Company"), as amended from time to time (the "Operating
Agreement").
ARTICLE I.
Offices and Fiscal Year
1.1. Registered Office. The registered office of the Company shall be in
the City of Wilmington, County of New Castle, State of Delaware until a change
in such office is established by resolution of the Board of Directors and a
statement of such change is filed in the manner provided by applicable law.
1.2. Other Offices. The Company may also have offices and keep its books,
documents and records at such other places within or without the State of
Delaware as the Board of Directors may from time to time determine or the
business of the Company may require.
1.3. Fiscal Year. The fiscal year of the Company shall end on the last day
of December in each year or on such other date as the Board of Directors may
designate by resolution.
ARTICLE II.
Meetings of Shareholders
2.1. Annual Meetings. The annual meeting of Shareholders of the Company for
the election of the appropriate class and number of Directors, pursuant to the
terms of the Operating Agreement, and for the translation of such other business
as properly may come before such meeting, shall be held at such place, either
within or without the State of Delaware, and at such time and on such date as
shall be fixed from time to time by resolution of the Board of Directors and set
forth in the notice or waiver of notice of the meeting.
2.2. Special Meetings. Subject to the provisions of Article 13 of the
Operating Agreement, special meetings of Shareholders may be called at any time
by the Board of Directors. In addition, a special meeting shall be called by the
Board of Directors or the President, promptly upon receipt of a written request
therefor from Shareholders holding in the aggregate at least ten percent in
interest of the Shares which would be entitled to vote on any matter to be
considered and acted upon at the special meeting being so called. If such
officers or the Board of Directors shall fail to call such meeting within 20
days after receipt of such request, any Shareholder executing such request may
call such meeting. Such special meetings of Shareholders shall be held at such
places, within or without the State of Delaware, as shall be specified in the
respective notices or waivers of notice thereof.
2.3. Notice of Meetings; Waiver. (a) Subject to the provisions of Article
13 of the Operating Agreement, the Secretary or any Assistant Secretary shall
cause written, telephonic or telecopied notice of the place, date, and hour of
each meeting of Shareholders, and, in the case of a special meeting, the purpose
or purposes for which such meeting is called, to be given personally or by
telephone, facsimile, other electronic transmission, or mail, not less than ten
nor more than 60 days prior to the meeting, to each Shareholder entitled to vote
at such meeting. If such notice is mailed, it shall be deemed to have been given
to a Shareholder when deposited in the United States mail, postage prepaid,
directed to the Shareholder at his, her, or its address as it appears on the
record of Shareholders of the Company, or, if he, she, or it shall have duly
filed with the Secretary of the Company a written request that notices to him,
her, or it be mailed to some other address, then directed to such other address.
Such further notice shall be given as may be required by law.
(b) No notice of any meeting of Shareholders need be given to any
Shareholder who submits a signed waiver of notice, whether before or after the
meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of Shareholders need be specified in a written waiver
of notice. The of any Shareholder at a meeting of Shareholders shall constitute
a waiver of notice of such meeting, except when the Shareholder attends a
meeting for the sole and express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
2.4. Quorum. The required number of Shareholders to be present at any
meeting of Shareholders so to constitute a quorum thereat shall be as set forth
in the Operating Agreement.
2.5. Voting. Shareholders shall be entitled to vote on such actions as are
specified in the Operating Agreement, and the required vote of Shareholders to
approve any such actions shall be as is set forth in the Operating Agreement.
2.6. Adjournment. If a quorum is not present at any meeting of
Shareholders, the Shareholders present in person or by proxy shall have the
power to adjourn any such meeting from time to time until a quorum is present.
The Shareholders present in person or by proxy shall have the power to adjourn
any meeting of the Shareholders. Notice of any adjourned meeting of Shareholders
of the Company need not be given if the place, date, and hour thereof are
announced at the meeting at which the adjournment is taken; provided, that if
the adjournment is for more than 30 days, a notice of the adjourned meeting,
conforming to the requirements of Section 2.3 hereof, shall be given to each
Shareholder entitled to vote at such meeting. At any adjourned meeting at which
a quorum is present, any business may be transacted that might have been
transacted on the original date of the meeting.
2.7. Proxies. (a) Any Shareholder entitled to vote at any meeting of
Shareholders or to express consent to or dissent from action without a meeting
may, by a written instrument signed by such Shareholder or his, her or its
attorney-in-fact, authorize another Person to vote at any such meeting and
express such consent or dissent for him, her or it by proxy. Execution may be
accomplished by the Shareholder or his, her or its authorized officer, director,
employee or agent signing such writing or causing his, her or its signature to
be affixed to such writing by any reasonable means including, but not limited
to, facsimile signature. A Shareholder may authorize another Person to act for
him, her or it as proxy by transmitting or authorizing the transmission of a
telegram, facsimile or other means of electronic transmission to the Person who
will be the holder of the proxy; provided, that any such telegram, facsimile or
other means of electronic transmission must either set forth or be submitted
with information from which it can be determined that the telegram, facsimile or
other electronic transmission was authorized by the Shareholder.
(b) No such proxy shall be voted or acted upon after the expiration of the
three years from the date of such proxy, unless such proxy provides for a longer
period. Every proxy shall be revocable at the pleasure of the Shareholder
executing it, except in those cases where applicable law provides that a proxy
shall be irrevocable. A Shareholder may revoke any proxy that is not irrevocable
by attending the meeting and voting in person or by filing an instrument in
writing revoking the proxy or by filing another duly executed proxy bearing a
later date with the Secretary. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power.
2.8. Organization; Procedure. At every meeting of Shareholders, the
presiding officer shall be the Chairman of the Board or, in the event of his or
her absence or disability, the President or, in the event of his or her absence
or disability, a presiding officer chosen by the Board of Directors prior to or
at such meeting. The Secretary, any Assistant Secretary, or any appointee of the
presiding officer shall act as secretary of the meeting. The order of business
and all other matters of procedure at every meeting of Shareholders may be
determined by such presiding officer.
2.9. Inspectors. The presiding officer of the meeting of Shareholders shall
appoint one or more inspectors to act at any meeting of Shareholders. Such
inspectors shall perform such duties as shall be specified by the presiding
officer of the meeting. Inspectors need not be Shareholders. No Director or
nominee for the office of Director shall be appointed to be such inspector.
2.10. Consent of Shareholders in Lieu of Meeting. (a) To the fullest extent
permitted by the Delaware Limited Liability Company Act, Del. Code Ann. tit. 6,
ch. 18, as amended from time to time (the "Act"), but subject to the terms of
the Operating Agreement (which limit, define or modify such rights in certain
circumstances), whenever the vote of Shareholders at a meeting is required or
permitted to be taken for or in connection with any action, such action may be
taken without a meeting, without prior notice, and without a vote of
Shareholders, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of such percentage of the Shares entitled
to vote as would be necessary under the terms of the Operating Agreement to
authorize or take such action and shall be delivered to the Company by delivery
to its registered office in the State of Delaware, its principal place of
business, or a Director, officer, or agent of the Company having custody of the
book in which proceedings of meetings of Shareholders are recorded.
(b) Prompt written or telephonic notice of the taking of any action without
a meeting by less than unanimous written consent of the Shareholders entitled to
vote shall be given to those Shareholders (entitled to vote thereon) who have
not consented in writing.
2.11. Action by Telephonic Communications. Shareholders may participate in
a meeting of Shareholders by means of conference telephone or similar
communications equipment by means of which all Persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
provision shall constitute presence in person at such meeting.
2.12. Shareholder Proposals. For any Shareholder proposal to be presented
in connection with an annual meeting of Shareholders of the Company, as
permitted by this Agreement or required by applicable law, including any
proposal relating to the nomination of a person to be elected to the Board of
Directors of the Company, the Shareholders must have given timely notice thereof
in writing to the Secretary of the Company. To be timely, a Shareholder's notice
shall be delivered to the Secretary at the principal business offices of the
Company not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice by the
Shareholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made.
Such Shareholder's notice shall set forth (a) as to each person whom the
Shareholder proposes to nominate for election or reelection as a Director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a Director if elected); (b) as to any
other business that the Shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such Shareholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the Shareholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (i) the name and address of such Shareholder, as they may appear on the
Company's books, and of such beneficial owner and (ii) the class and number of
Shares of the Company which are owned beneficially and of record by such
Shareholder and such beneficial owner.
ARTICLE III.
Board of Directors
3.1. General Powers. Except as may otherwise be provided by the Act or by
the terms of the Operating Agreement, the property, affairs and business of the
Company shall be managed by or under the direction of the Board of Directors,
and the Board of Directors may exercise all the powers of the Company as set
forth in the Operating Agreement. The Directors shall act only as a Board or by
designated committees, and the individual Directors shall have no power as such.
3.2. Number and Term of Office. The number and classes of Directors
constituting the entire Board of Directors shall be as provided by the terms of
the Operating Agreement. Each Director (whenever elected) shall, subject to the
terms of the Operating Agreement, hold office until his or her successor has
been duly elected and qualified, or until his or her earlier death, resignation,
or removal. A Director shall not be required to be a Shareholder or a resident
of the State of Delaware.
3.3. Election of Directors. Except as provided in Section 3.12 hereof, or
as otherwise provided in the Operating Agreement (with respect to Specially
Appointed Directors(s), the Payments Director, or otherwise), the appropriate
class and number of Directors shall be elected at each annual meeting of
Shareholders. At each meeting of Shareholders for the election of Directors,
provided a quorum of Shareholders is present, the appropriate class and number
of Directors to be elected thereat shall be elected by the vote of Shareholders
(entitled to vote thereon) set forth in the Operating Agreement. The Operating
Agreement shall govern the election of specific classes of directors in addition
to the Specially Appointed Director(s) and Payments Director.
3.4. Annual and Regular Meetings. The annual meeting of the Board of
Directors for the purpose of electing officers and for the transaction of such
other business as may come before the meeting shall be held as soon as possible
following adjournment of the annual meeting of Shareholders at the place of such
annual meeting of Shareholders or at such other place as the Board of Directors
may determine. Notice of such annual meeting of the Board of Directors need not
be given. The Board of Directors from time to time may by resolution provide for
the holding of regular meetings and fix the place (which may be within or
without the State of Delaware) and the date and hour of such meetings. Notice of
regular meetings need not be given; provided, that if the Board of Directors
shall fix or change the time or place of any regular meeting, notice of such
action shall be mailed, given by telephone, hand delivered or sent by facsimile
promptly, to each Director who shall not have been present at the meeting at
which such action was taken. Notice of such action need not be given to any
Director who attends the first regular meeting after such action is taken
without protesting the lack of notice to him or her, prior to or at the
commencement of such meeting, or to any Director who submits a signed waiver of
notice, whether before or after such meeting.
3.5. Special Meetings; Notice. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, by the President or
by a majority of the members of the Board of Directors, at such place (within or
without the State of Delaware), date and hour as may be specified in the
respective notices or waivers of notice of such meetings. Special meetings of
the Board of Directors may be called on 24 hours' notice, if notice is given to
each Director personally or by telephone or facsimile, or on three days' notice,
if notice is mailed to each Director. Unless otherwise indicated in the notice
thereof, and subject to the terms of Operating Agreement, any and all business
may be transaction at any special meeting of the Board of Directors. Notice of
any special meeting need not be given to any Director who attends such meeting
without protesting the lack of notice to him or her, prior to or at the
commencement of such meeting, or to any Director who submits a signed waiver of
notice, whether before or after such meeting.
3.6. Quorum: Voting. Subject to the terms of the Operating Agreement and
these By-Laws with respect to matters on which action may be taken without the
presence of a quorum, at all meetings of the Board of Directors, the presence of
a majority of the members of the Board (including in such membership count the
Specially Appointed Director(s) and the Payments Director) then in office as
Directors shall constitute a quorum for the transaction of business. Except as
otherwise required by law, and subject to the terms of the Operating Agreement
and these By-Laws (with respect to the required vote of disinterested Directors
on certain specified matters or otherwise), the vote of a majority of the
Directors present at any meeting at which a quorum is present shall be the act
of the Board of Directors.
3.7. Adjournment. A majority of the Directors present, whether or not a
quorum is present, may adjourn any meeting of the Board of Directors to another
time or place. No notice need be given of any adjourned meeting unless the time
and place of the adjourned meeting are not announced at the time of adjournment,
in which case notice conforming to the requirements of Section 3.5 hereof shall
be given to each Director.
3.8. Action Without a Meeting. Any action required or permitted to be taken
at any meeting of the Board of Directors may be taken without a meeting if all
members of the Board of Directors consent thereto in writing, and such writing
or writings are filed with the minutes of proceedings of the Board of Directors.
3.9. Regulations: Manner of Acting. To the extent consistent with
applicable law and the terms of the Operating Agreement, the Board of Directors
may adopt such rules and regulations for the conduct of meetings of the Board of
Directors and for the management of the property, affairs and business of the
Company as the Board of Directors may deem appropriate.
3.10. Action by Telephonic Communications. Members of the Board of
Directors may participate in a meeting of the Board of Directors by means of
conference telephone or similar communications equipment by means of which all
Persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this provision shall constitute presence in person at such
meeting.
3.11. Resignations; Removal. Subject to the terms of the Operating
Agreement, a Director may resign at any time upon 60 days' prior written notice
to the Company. A Director may be removed, with or without cause at any time
pursuant to the terms of the Operating Agreement.
3.12. Vacancies and Newly Created Directorships. Subject to the terms of
the Operating Agreement (with respect to the Specially Appointed Director(s),
Payments Director, or other Directors to be elected by a specific class of
Shares), if any vacancies shall exist or occur in the Board of Directors, by
reason of death, resignation, removal or otherwise, or if the authorized number
of Directors shall be increased by the Board of Directors or by the Operating
Agreement, the Directors then in office shall continue to act, and such
vacancies and newly created directorships may be filled by a majority of the
Directors then in office, although less than a quorum. A Director elected to
fill a vacancy or a newly created position on the Board shall hold office until
his or her successor has been elected and qualified or until his or her earlier
death, resignation or removal. Any such vacancy or newly created position on the
Board of Directors also may be filled at any time by vote of Shareholders
pursuant to the terms of the Operating Agreement and Section 3.3 hereof. In the
event that a vacancy on the Board of Directors is filled pursuant to the terms
of this Section 3.12, any such replacement shall assume the term of his/her
predecessor.
3.13. Books and Records. (a) The Board of Directors shall cause to be kept
complete and accurate books and records of account of the Company. The books of
the Company (other than books required to maintain Capital Accounts) shall be
kept on a basis that permits the preparation of financial statements in
accordance with generally accepted accounting principles, and shall be made
available to the Board of Directors for review from time to time, at the
principal business office of the Company.
(b) In addition to the foregoing, and for purposes of fully complying with
the Act so to allow Shareholders access to certain information relating to the
Company (for any purpose reasonably related to the requesting Shareholder's
interest as a Shareholder of the Company), the Company shall maintain at its
principal business office the following information: (i) a current list of the
full name and last known business or mailing address of each Shareholder and
Director, set forth in alphabetical order, (ii) a copy of the Certificate, the
Operating Agreement and By-Laws including all amendments thereto, and executed
copies of all powers of attorney pursuant to which the Certificate, the
Operating Agreement or any amendment thereto has been executed, (iii) copies of
the Company's federal, state and local income tax returns and reports, for each
fiscal year of the Company, (iv) copies of any financial statements of the
Company for the three most recent years (or for such number of years as shall be
necessary to afford a Shareholder full information regarding the financial
condition of the Company), (v) true and full information regarding the status of
the business of the Company, (vi) true and full information regarding the amount
of cash and a description and statement of the agreed value of any other
property or services contributed by each Shareholder and which each Shareholder
has agreed to contribute in the future, and the date on which each became a
Shareholder, and (vii) all other records and information required to be
maintained pursuant to the Act. A Shareholder desiring to review any of the
foregoing information must, prior to being given access to such information,
make a written request on the Board of Directors or President of the Company for
permission to review such information. Whether or not to allow access to
Shareholders to any of the foregoing information shall be at the sole discretion
of the Board of Directors or President of the Company, and shall be subject to
such reasonable standards (including standards governing what information and
documents are to be furnished at what time and location and at whose expense) as
shall be established by the Board of Directors or President of the Company from
time to time.
(c) Notwithstanding anything contained in the foregoing to the contrary,
but subject to the provisions of the Act, the Board of Directors and the
President each has the right to keep confidential from the Shareholders, for
such period of time as the Board of Directors or President deems reasonable, any
information which the Board of Directors or President reasonably believes to be
in the nature of trade secrets or other information the disclosure of which the
Board of Directors or President in good faith believes is not in the best
interest of the Company or could damage the Company or its business or which the
Company is required by law or by agreement with a third party to keep
confidential.
3.14. Reports. Forthwith upon request, the Board of Directors shall, at the
cost and expense of the Company, cause the officers of the Company to furnish to
each Director such information bearing on the financial condition and operations
of the Company as any such Director may from time to time reasonably request,
provided however, that such Director shall hold and maintain all such
information in confidence unless otherwise approved in advance by the Board of
Directors.
3.15. Compensation to Directors. Compensation for any Director shall be
determined by the affirmative vote of a majority of the disinterested Directors,
even though the disinterested Directors be less than a quorum. Upon submission
of appropriate documentation, the Company shall reimburse Directors for all
reasonable costs and expenses incurred by each Director in the performance of
his/her duties as a Director of the Company.
3.16. Reserves. The Board of Directors may from time to time in its
discretion establish reasonable cash reserves.
3.17. Committees of the Board of Directors. The Board of Directors may,
from time to time, establish committees of the Board of Directors to exercise
such powers and authorities of the Board of Directors and to perform such other
functions, as the Board of Directors may from time to time determine by
resolution. Such committees shall be composed of two or more Directors. The
Board of Directors shall appoint all members, including the chairman, of each
such committee.
ARTICLE IV.
Officers
4.1. Number. The officers of the Company shall consist of a Chairman of the
Board, a President, one or more Vice-Presidents, a Secretary, a Chief Financial
Officer, and, if deemed necessary, expedient, or desirable by the Board of
Directors, one or more Assistant Secretaries, one or more Assistant Financial
Officers, and such other officers with such titles as the resolution of the
Board of Directors choosing them shall designate.
4.2. Election. Unless otherwise determined by the Board of Directors, the
officers of the Company shall be elected by the Board of Directors at the annual
meeting of the Board of Directors, and shall be elected to hold office until the
next succeeding annual meeting of the Board of Directors. In the event of the
failure to elect officers at such annual meeting, officers may be elected at any
regular or special meeting of the Board of Directors. Each officer shall hold
office until his or her successor has been elected and qualified, or until his
or her earlier death, resignation or removal.
4.3. Salaries. The salaries of the Chief Executive Officer and the
Executive and Senior Vice Presidents of the Company shall be fixed by the
Compensation Commitee; the salaries of the other officers, employees and agents
of the Company shall be fixed by the Board of Directors.
4.4. Resignation, Vacancies and Removal. Subject to any employment
contractual arrangements that may be in place with the Company, any officer may
resign at any time by giving written notice of resignation, signed by such
officer, to the Board of Directors, at the Company's principal office. Unless
otherwise specified therein, such resignation shall take effect upon delivery.
Any vacancy occurring in any office of the Company by death, resignation,
removal or otherwise, shall, subject to the terms of the Operating Agreement, be
filled by the Board of Directors. Subject to any employment contractual
arrangements that may be in place with the Company, all officers, agents and
employees of the Company shall be subject to removal with or without cause at
any time by the affirmative vote of a majority of all members of the Board of
Directors then in office.
4.5. Authority and Duties of Officers. The officers of the Company shall
have such authority and shall exercise such powers and perform such duties as
may be specified in the Operating Agreement, in these By-Laws or from time to
time by the Board of Directors, except that in any event each officer shall
exercise such powers and perform such duties as may be required by law. The
express powers and duties set forth below for each officer shall not restrict
nor be in limitation of any powers or duties that may be delegated to any such
officer by the Board of Directors or the President.
4.6. The Chairman of the Board. The Chairman of the Board shall preside at
all meeting of the Shareholders and of the Board of Directors at which he or she
is present. The Chairman of the Board (a) shall perform all of the duties
usually incident to such office, subject to the direction of the Board of
Directors and (b) shall perform such other duties as may from time to time be
assigned by the Board of Directors to the Chairman of the Board.
4.7. The President. The President shall be the chief executive officer and
the chief operating officer of the Company, shall have general control and
supervision of the policies and operations of the Company, and shall see that
all orders and resolutions of the Board of Directors are carried into effect. He
or she shall manage and administer the Company's business and affairs. In the
event of the absence or disability of the Chairman of the Board, the President
shall preside at all meetings of the Shareholders and the Directors at which he
or she is present. He or she shall have the authority to sign, in the name and
on behalf of the Company, checks, orders, contracts, leases, notes, drafts and
other documents and instruments in connection with the business of the Company,
and together with the Secretary or an Assistant Secretary, conveyances of real
estate and other documents and instruments to which the seal of the Company, if
any, is affixed, subject to any requirements for prior approval of the Board of
Directors and/or the Shareholders contained in the Act or in the Operating
Agreement. He or she shall have the authority to cause the employment or
appointment of such employees and agents of the Company as the conduct of the
business of the Company may require, and to remove or suspend any employee or
agent elected or appointed by him or her. The President shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
4.8. The Vice President. If one or more Vice Presidents is elected, he/they
shall perform the duties of the President in his absence (in their order of
rank) and such other duties as may from time to time be assigned to them by the
Board of Directors or the President.
4.9. The Secretary. The Secretary shall have the following powers and
duties: (a) keep or cause to be kept a record of all the proceedings of the
meetings of Shareholders and of the Board of Directors in books provided for
that purpose; (b) cause all notices to be duly given in accordance with the
provisions of these By-Laws and as required by law; (c) be the custodian of the
records of the Company; (d) properly maintain and file all books, reports,
statements, certificates and all other documents and records required by law,
the terms of the Operating Agreement or these By-Laws; (e) have charge of the
books and ledgers of the Company and cause the books to be kept in such manner
as to show at any time the Shares of all Shareholders, the names (alphabetically
arranged) and the addresses of the Shareholders, the Shares held by such
Shareholders, and the date as of which each became a Shareholder; (f) sign
(unless the Chief Financial Officer, an Assistant Financial Officer or Assistant
Secretary shall have signed) certificates (if any) representing Shares, the
issuance of which shall have been authorized by the Board of Directors; and (g)
perform, in general, all duties incident to the officer of Secretary and such
other duties as may be assigned to him or her from time to time by the Board of
Directors or the President.
4.10. The Chief Financial Officer. The Chief Financial Officer shall have
the following powers and duties: (a) have charge and supervision over and be
responsible for the moneys, securities, receipts and disbursements of the
Company, and shall keep or cause to be kept full and accurate records of all
receipts of the Company; (b) cause the moneys and other valuable effects of the
Company to be deposited in the name and to the credit of the Company in such
banks or trust companies or with such bankers or other depositaries as shall be
selected in accordance with the terms of the Operating Agreement and these
By-Laws; (c) cause the moneys of the Company to be disbursed by checks or drafts
(signed as provided in Section 7.2 hereof) upon the authorized depositaries of
the Company and cause to be taken and preserved proper vouchers for all moneys
disbursed; (d) render to the Board of Directors, individual directors or the
President, whenever requested, a statement of the financial condition of the
Company and of all his or her transactions as Chief Financial Officer, and
render a full financial report at the annual meeting of the Shareholders, if
called upon to do so by the Board of Directors or the President; (e) be
empowered from time to time to require from any officers or agents of the
Company reports or statements giving such information as he or she may desire
with respect to any and all financial transactions of the Company; (f) sign
(unless an Assistant Financial Officer or the Secretary or an Assistant
Secretary shall have signed) certificates (if any) representing Shares, the
issuance of which shall have been authorized by the Board of Directors; and (g)
perform, in general, all duties incident to the office of Chief Financial
Officer and such other duties as may be assigned to him or her from time to time
by the Board of Directors or the President.
4.11. Additional Officers. The Board of Directors may appoint such other
officers and agents as it may deem appropriate, and such other officers and
agents shall hold their offices for such terms and shall exercise such powers
and perform such duties as may be determined from time to time by the Board of
Directors. The Board of Directors from time to time may delegate to any officer
or agent the power to appoint subordinate officers or agents and to prescribe
their respective rights, terms of office, authorities and duties. Any such
officer or agent may remove any such subordinate officer or agent appointed by
him or her, for or without cause.
4.12. Failure to Elect. A failure to elect officers shall not dissolve or
otherwise affect the Company.
ARTICLE V.
Notice; Waivers of Notice
5.1. Notice, What Constitutes. Except as otherwise provided by the terms of
these By-Laws, any provision of applicable law, the Operating Agreement or these
By-Laws which requires notice to be given to any Director or Shareholder of the
Company shall not be deemed or construed to require personal notice (unless
otherwise expressly provided therein), such notice may be given in writing and
delivered by telecopy, first or second class mail or Federal Express or similar
expedited commercial carrier, addressed to such Director or Shareholder at his
address as it appears on the records of the Company, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same
is received or deposited in the U.S. mail or with Federal Express or similar
expedited commercial carrier or at the time it is telecopied.
Whenever any notice is required to be given by applicable law, the terms of
the Operating Agreement or these By-Laws to any Shareholder, to whom (a) notice
of two consecutive annual meetings, and all notices of meetings or of the taking
of action by written consent without a meeting to such Shareholder during the
period between such two consecutive annual meetings, or (b) all, and at least
two, distributions (if sent by first class mail, Federal Express or similar
expedited commercial carrier) during a twelve-month period, have been mailed
addressed to such Shareholder at his address as shown on the records of the
Company and have been returned undeliverable, the giving of such notice to such
Shareholder shall not thereafter be required. Any action or meeting which shall
be taken or held without notice to such Shareholder shall have the same force
and effect as if such notice had been duly given.
If any such Shareholder shall deliver to the Company a written notice
setting forth his then current address, the requirement that notice be given to
such Shareholder shall be reinstated.
5.2. Waivers of Notice. Except as otherwise provided by the terms of these
By-Laws, whenever any notice is required to be given under applicable law, the
terms of the Operating Agreement or these By-Laws, a written waiver thereof,
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Except as
otherwise provided by applicable law, the terms of the Operating Agreement or
these By-Laws, neither the business to be transacted at, nor the purpose of, any
regular or special meeting of Shareholders, Directors or members of a committee
of Directors need be specified in any written waiver of notice of such meeting.
ARTICLE VI.
Certificates of Shares, Transfer, Etc.
6.1. Issuance. Each Shareholder shall be entitled to a certificate or
certificates for Shares of the Company owned by him, her or it upon his, her or
its request therefor. The Share certificates of the Company shall be registered
in the Share ledger and transfer books of the Company as they are issued. They
shall be signed by (i) the Chairman of the Board, the President or a
Vice-President, and (ii) the Secretary or an Assistant Secretary, if any, or by
the Chief Financial Officer or an Assistant Financial Officer, if any; and shall
bear the Company's seal, if any, which may be a facsimile, engraved or printed.
Any or all of the signatures upon such certificate may be a facsimile, engraved
or printed. In case any officer, transfer agent or registrar who has signed, or
whose facsimile signature has been placed upon, any share certificate shall have
ceased to be such officer, transfer agent or registrar before the certificate is
issued, it may be issued with the same effect as if he or she were such officer,
transfer agent or registrar at the date of its issue.
6.2. Transfer, Legends, etc. Upon surrender to the Company or the transfer
agent of the Company of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the Company
shall issue a new certificate to the person entitled thereto, cancel the old
certificate, and record the reaction upon its books. Subject to applicable law,
the Board of Directors may, by resolution, (a) impose restrictions on transfer
or registration of transfer of Shares of the Company, and (b) require as a
condition to the issuance or transfer of such Shares that the person or persons
to whom such Shares are to be issued or transferred agree in writing to such
restrictions. In the event that any such restrictions on transfer or
registration of transfer are so imposed, the Company shall require that such
restrictions be conspicuously noted on all certificates representing such
Shares.
6.3. Share Certificate. Share certificates of the Company shall be in such
form as is required or authorized by statute and approved by the Board of
Directors. The Share record books and the blank Share certificate books shall be
kept by the Secretary or an Assistant Secretary, if any, or by any agent
designated by the Board of Directors for that purpose.
6.4. Lost, Stolen, Defaced, Worn Out, or Destroyed. The Board of Directors
may direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Company alleged to have
been lost, stolen, defaced, worn out or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of Share to be
lost, stolen, defaced, worn out or destroyed. When authorizing such issuance of
a new certificate or certificates, the Company may, as a condition precedent
thereto, (a) require the owner of any defaced or worn out certificate to deliver
such certificate to the Company and order the cancellation of the same, and (b)
require the owner of any lost, stolen, or destroyed certificate or certificates,
or his, her or its legal representative, to advertise the same in such manner as
the Company shall require and to give the Company a bond in such sum as it may
direct as indemnity against any claim that may be made against the Company with
respect to the certificate alleged to have been lost, stolen, or destroyed.
Thereupon, the Company may cause to be issued to such person a new certificate
in replacement for the certificate alleged to have been lost, stolen, defaced,
worn out or destroyed. Upon the stub of every new certificate so issued shall be
noted the fact of such issue and the number, date and name of the registered
owner of the lost, stolen, defaced, worn out or destroyed certificate in lieu of
which the new certificate is issued. Every certificate issued hereunder shall be
issued without payment to the Company for such certificate; provided, that there
shall be paid to the Company a sum equal to any exceptional expenses incurred by
the Company in providing for or obtaining any such indemnity and security as is
referred to herein.
6.5. Record Holder of Shares. Except as otherwise provided by applicable
law, the terms of the Operating Agreement, or these By-Laws, the Company (a)
shall be entitled to recognize the exclusive right of a person registered on its
books as the owner of Shares to receive distributions and to vote as such owner
and (b) shall not be bound to recognize any equitable or other claim to or
interest in such Share or Shares on the part of any other person, whether or not
it shall have express or other
notice thereon.
The Company may treat a fiduciary as having capacity and authority to
exercise all rights of ownership in respect of Shares of record in the name of a
decedent holder, a person, firm or corporation in conservation, receivership or
bankruptcy, a minor, an incompetent person, or a person under disability, as the
case may be, for whom such fiduciary is acting, and the Company, its transfer
agent and its registrar, if any, upon presentation of evidence of appointment of
such fiduciary shall be under no duty to inquire as to the powers of such
fiduciary and shall not be liable for any loss caused by any act done or omitted
to be done by the Company or its transfer agent or registrar, if any, in
reliance thereon.
6.6. Determination of Shareholders of Record. In order that the Company may
determine the Shareholders entitled to notice of or to vote at any meeting of
Shareholders or any adjournment thereof, or to express consent to the Company's
actions in writing without a meeting, or entitled to exercise any rights in
respect of any change, conversion or exchange of Shares, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty (60) nor less than ten (10) calendar
days before the date of such meeting, nor more than sixty (60) calendar days
prior to any other action.
If no record date is fixed:
(a) The record date for determining Shareholders entitled to notice of or
to vote at a meeting of Shareholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding
the day on which the meeting is held.
(b) The record date for determining Shareholders entitled to express
consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is necessary, shall be the day
on which the first written consent is expressed.
(c) The record date for determining Shareholders for any other purpose
shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of Shareholders of record entitled to notice of or to vote at a
meeting of Shareholders shall apply to any adjournment of the meeting; provided,
that the Board of Directors may fix a new record date for the adjourned meeting.
6.7. Appointment of Transfer Agents, Registrars, etc. The Board of
Directors may from time to time by resolution appoint (a) one or more transfer
agents and registrars for the Shares of the Company, (b) a plan agent to
administer any employee benefit, dividend reinvestment, or similar plan of the
Company, and (c) a dividend disbursing agent to disburse any and all dividends
authorized by the Board and payable with respect to the Shares of the Company.
The Board of Directors shall also have authority to make such other rules and
regulations, not inconsistent with applicable law, the terms of the Operating
Agreement or these By-Laws, as it deems necessary or advisable with respect to
the issuance, transfer and registration of certificates for Shares and the
Shares represented thereby.
ARTICLE VII.
General Provisions
7.1. Contracts , etc. Except as otherwise provided by applicable law, the
terms of the Operating Agreement or these By-Laws, the Board of Directors may
authorize any officer or officers, any employee or employees, or any agent or
agents, to enter into any contract or to execute, acknowledge or deliver any
agreement, deed, mortgage, bond or other instrument in the name of and on behalf
of the Company, and to affix the Company's seal, if any, thereon. Such authority
may be general or confined to specific instances.
7.2. Checks. All checks, notes, obligations, bills of exchange, acceptances
or other orders in writing shall be signed by such person or persons as the
Board of Directors may from time to time designate by resolution, or by those
officers of the Corporation given such express authority by the terms of these
By-Laws.
7.3. Company's Seal. The Company's seal, if any such seal is approved by
the Board of Directors, shall have inscribed thereon the name of the Company and
the year of its formation. The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
7.4. Deposits. All funds of the Company shall be deposited from time to
time to the credit of the credit of the Company in such banks, trust companies
or other depositories as the Board of Directors may approve or designate, and
all such funds shall be withdrawn only upon checks or other orders signed by
such one or more officers, employees or agents as designated in the Operating
Agreement, in these By-Laws or from time to time by the Board of Directors.
7.5. Amendment of By-Law. Except as otherwise provided by the terms of the
Operating Agreement, these By-Laws may be amended, modified or repealed, or new
By-Laws may be adopted, by the affirmative vote of a majority of all members of
the Board of Directors then in office at any regular meeting of the Board of
Directors, or at any special meeting thereof, if notice of such amendment,
modification, repeal, or adoption of new By-Laws is contained in the notice of
such special meeting.
7.6. Operating Agreement. In the event of a conflict between the provisions
of these By-Laws and the Provisions of the Operating Agreement or of applicable
law, the terms of the Operating Agreement or of such law, respectively, shall
control.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary Jurisdiction of Organization
------------------ ----------------------------
Affordable Property Holdings, LLC Michigan
CAPREIT Tera Venture, LLC Maryland
FM Sponsor I, LLC Maryland
MEC Bond Warehousing, LLC Maryland
MEC Warehousing, LLC Maryalnd
Midland Advisory Services, Inc. Michigan
Midland Capital Corporation Michigan
Midland Equity Corporation Florida
Midland Financial Holdings, Inc. Florida
Midland Middle Tier I, LP Delaware
Midland Mortgage Investment Corporation Florida
Midland Realty Investment Corporation Florida
Midland Securities Corporation Florida
Midland Special Limited Partner, Inc. Florida
Midland Special Partners Corporation Washington
MMA Credit Enhancement I, LLC Maryland
MMA Servicing, LLC Maryland
MMA Taxable Holdings, LLC Maryland
MMACap, LLC Delaware
Municipal Mortgage & Equity, LLC Employee
Compensation Trust Delaware
Municipal Mortgage Investments II, LLC Maryland
Municipal Mortgage Investments III, LLC Maryland
Municipal Mortgage Investments IV, LLC Maryland
Municipal Mortgage Investments, LLC Maryland
Munimae Enhancement, LLC Maryland
MuniMae Investment Services Corporation Maryland
MuniMae Midland Construction Finance, LLC
(formerly MMA Taxable Structured Finance, LLC) Maryland
MuniMae Midland Equity I, LLC Maryland
MuniMae Midland Equity II, LLC Maryland
MuniMae Midland Equity III, LLC Maryland
MuniMae Midland Equity IV, LLC Maryland
MuniMae Midland Equity Ventures, LLC Maryland
MuniMae Midland, LLC (formerly MuniMae Operating, LLC) Maryland
MuniMae Portfolio Services, LLC
(formerly Municipal Mortgage Servicing, LLC) Maryland
MuniMae Structured Finance, LLC Maryland
MuniMae Swap Partner, LLC Maryland
MuniMae TE Bond Subsidiary, LLC Maryland
MuniMae TEI Holdings, LLC Maryland
SCA Tax Exempt Trust Maryland
TE Bond Holder Associates Limited Partnership Maryland
Whitehawk Capital Fund IV, LLC Maryland
Whitehawk Municipal Finance, LLC Delaware
EXHIBIT 23
CONSENT OF PRICEWATERHOUSECOOPERS LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
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We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-17427), Form S-8 (No. 333-65461), Form S-8 (No.
333-74056), and Form S-3/A (No.333-20945), S-3/A (No. 333-56049) of Municipal
Mortgage & Equity, LLC of our report dated February 27, 2003 relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K.
/s/PricewaterhouseCoopers LLP
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Baltimore, Maryland
March 25, 2003
EXHIBIT 99
Officers' Certificate
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned officers of Municipal Mortgage & Equity, LLC, a
Delaware limited liability company (the "Company"), hereby certifies that
(i) the Company's Quarterly Report on Form 10-K for the year ended December 31,
2002 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (ii) the information contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002 fairly
presents, in all material respects, the financial condition and results of
operations of the Company, at and for the periods indicated.
Date: March 26, 2003 /s/ Mark K. Joseph
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Name: Mark K. Joseph
Title: Chief Executive Officer and
Chairman of the Board
/s/ William S. Harrison
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Name: William S. Harrison
Title: Senior Vice President and
Chief Financial Officer