1
Filed Pursant to Rule 424(b)(2)
Registration No. 333-56049
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 30, 1998)
3,800,000 SHARES
MUNIMAE
MUNICIPAL MORTGAGE & EQUITY, LLC
COMMON SHARES
----------------------
MuniMae is selling all of the shares. The shares trade on the New York
Stock Exchange under the symbol "MMA." On January 31, 2001, the last sale price
as reported on the New York Stock Exchange was $23.07 per share.
INVESTING IN THE COMMON SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE 4 OF THE ACCOMPANYING PROSPECTUS.
----------------------
PER SHARE TOTAL
--------- -----
Public offering price.............. $23.07 $87,666,000
Underwriting discount.............. $1.18 $4,484,000
Proceeds, before expenses, to
MuniMae.......................... $21.89 $83,182,000
The underwriters may also purchase up to an additional 570,000 shares from
MuniMae at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus supplement to cover over-allotments, if
any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about February 6, 2001.
----------------------
MERRILL LYNCH & CO.
UBS WARBURG LLC
FIRST UNION SECURITIES, INC.
LEGG MASON WOOD WALKER
INCORPORATED
----------------------
The date of this prospectus supplement is January 31, 2001.
2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Prospectus Supplement Summary............................... S-3
Risk Factors................................................ S-10
Forward-Looking Information................................. S-21
Use of Proceeds............................................. S-21
Price Range of Common Shares and Distribution History....... S-22
The Company................................................. S-23
Business Segments and Sources of Income..................... S-27
Management.................................................. S-30
Federal Income Tax Considerations........................... S-32
Underwriting................................................ S-40
Legal Matters............................................... S-42
Experts..................................................... S-42
PROSPECTUS
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 2
The Company................................................. 3
Risk Factors................................................ 4
Ratios of Earnings to Combined Fixed Charges and Preferred
Dividends................................................. 9
Use of Proceeds............................................. 10
Description of Common Shares................................ 10
Description of Preferred Shares............................. 10
Description of Warrants..................................... 13
Plan of Distribution........................................ 13
Experts..................................................... 15
Legal Matters............................................... 15
------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompany prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference is accurate only as of
their respective dates. Our business, financial condition, results of operations
and prospects may have changed since those dates.
------------------------
In this prospectus supplement, "we," "us," "our" or "ours" each refers to
MuniMae, its subsidiaries and its predecessor as a combined entity. "MuniMae"
refers to Municipal Mortgage & Equity, LLC and its subsidiaries organized as
limited liability companies. "Midland" refers to Midland Financial Holdings,
Inc. and its subsidiaries.
S-2
3
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement. It is not complete and may not contain all of the information that
is important to you. To understand this offering of common shares, you should
read the entire prospectus supplement and accompanying prospectus carefully,
especially the risk factors and federal income tax considerations.
THE COMPANY
We are in the business of originating, investing in and servicing
investments related to multifamily housing financings. A significant portion of
our investments are mortgage revenue bonds, or interests in mortgage revenue
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. As a result, interest income from
these investments is exempt for federal income tax purposes. Multifamily housing
developments, as well as the rents paid by the tenants, secure these
investments. We also originate, invest in and service investments related to
multifamily housing financings that are not mortgage revenue bonds issued by any
government or authority. These investments generate taxable, not tax-exempt,
income. At September 30, 2000, we owned or managed a portfolio of investments
secured directly or indirectly by 667 properties that contained a total of
63,618 units and were located in 45 states, the District of Columbia and the
U.S. Virgin Islands.
In October 1999 we acquired Midland Financial Holdings, Inc., which is now
our wholly owned corporate subsidiary. Midland is a fully integrated real estate
investment firm specializing in providing financing to the affordable
multifamily housing industry. After the Midland acquisition, we restructured our
operations into two business segments: (1) an investing segment consisting of
subsidiaries holding investments producing primarily tax-exempt interest income
and (2) an operating segment that primarily generates taxable interest income
and, through corporate subsidiaries, fee income by providing servicing, loan
origination and tax credit equity syndication services.
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. As a result, the tax-exempt income we derive from certain
investments remains tax-exempt when we pass it through to shareholders.
Approximately 92% of MuniMae's net income for the nine months ended September
30, 2000 was tax-exempt.
The key elements of our strategy are:
- SELECTIVE ACQUISITIONS. We seek external growth by investing in new
assets secured by multifamily housing that have characteristics similar
to our other investments and possess attractive returns. For the nine
months ended September 30, 2000, we have participated in transactions
with respect to mortgage revenue bonds and bond related investments
having a face value of approximately $142 million, all of which are
expected to generate tax-exempt income. In each transaction we either
purchased a whole mortgage revenue bond, a portion of a mortgage revenue
bond or a residual interest security.
- INTENSIVE ASSET MANAGEMENT. We seek to maximize current and future cash
flow through active management of our investments. To achieve this goal,
we utilize strategic asset management plans to maximize collections of
debt service payments while maintaining the long term economic viability
of the properties securing our investments. On a portfolio-wide basis, we
conduct ongoing site visits and inspections, management agent
assessments, budget reviews, market analyses and monthly and annual
operating statement reviews, and also monitor the capital plans for each
property. Participating mortgage revenue bonds, on which the amount of
the interest payments made to us is based, in part, on property
performance, represented 46% of the fair value of the mortgage revenue
bonds we held at September 30, 2000. These participating bonds provide us
the opportunity to realize greater returns if and to the extent property
performance improves.
S-3
4
- BALANCED FUNDING STRATEGY. We seek a combination of equity financing,
debt financing and two types of securitizations of our assets to finance
the acquisition of tax-exempt investments. We believe that
securitizations (which are described in detail on page S-26) of
investments that generate tax-exempt income provide funds for
acquisitions at a low cost relative to the costs of other forms of
financing.
- DIVERSE ACCESS TO CAPITAL AND EXPANDED PRODUCT LINE. The acquisition of
Midland has enabled us to increase our access to capital from both
pension funds and Fannie Mae and expand our product line to include
investments that generate taxable income, syndication of tax credit
equity and investment advisory services. We have used our expanded
product line to create a full service, one-stop resource for tax-exempt
and taxable financing to the multifamily housing markets and believe we
can take advantage of cross-selling opportunities with our larger
customer base.
We utilize our unique combination of real estate and tax-exempt investment
expertise to select and aggressively manage our investments and to develop
financing opportunities. We have been acquiring and financing investments
secured by real estate for over 50 years. Our senior management team, led by
Mark K. Joseph, Chairman and Chief Executive Officer, has an average of 10 years
of experience with us and our affiliates, and an average of 22 years of
experience in the real estate industry. Upon completion of this offering, our
management and employees will own approximately 11% of the outstanding common
shares.
Our executive offices are located at 218 North Charles Street, Suite 500,
Baltimore, Maryland 21201 and our telephone number is (410) 962-8044.
BUSINESS SEGMENTS AND SOURCES OF INCOME
Our operations consist of two business segments: (1) an investing segment
consisting of subsidiaries holding investments producing primarily tax-exempt
interest income and (2) an operating segment that primarily generates taxable
interest income and, through corporate subsidiaries, fee income by providing
servicing, loan origination and tax credit equity syndication services.
INVESTING SEGMENT
The following table sets forth summary data with respect to the mortgage
revenue bonds and bond-related investments held by our investing segment as of
September 30, 2000:
PRO
WEIGHTED FORMA FACE AMOUNT RANGE INTEREST RATE
FACE FAIR AVERAGE ANNUAL (000S) RANGE(5)
AMOUNT VALUE INTEREST INTEREST ------------------ --------------
(000S) (000S) RATE (000S)(4) LOW HIGH LOW HIGH
-------- -------- -------- --------- ------- -------- ----- ------
INVESTMENTS IN MORTGAGE REVENUE
BONDS:
Participating bonds............... $157,735 $150,258 7.66%(2) $12,085 $6,725 $33,900 4.98% 9.51%
Non-participating bonds........... 254,309 241,559(1) 7.11(3) 18,075 25 54,999 5.05 9.50
Participating subordinate bonds... 64,704 60,544 9.31(2) 6,022 1,489 12,415 0.66 22.06
Non-participating subordinate
bonds........................... 12,862 12,309 10.00(3) 1,287 675 5,000 5.00 13.00
-------- -------- ----- -------
TOTAL............................. $489,610 $464,670 7.67% $37,469
======== ======== ===== =======
PRO FORMA
FACE FAIR ANNUAL
AMOUNT VALUE INTEREST
(000S) (000S) (000S)(4)
-------- -------- ---------
INVESTMENT IN RESIDUAL BOND RELATED
INVESTMENTS....................... $ 4,955 $ (1,485) $8,585
======== ======== ======
---------------
(1) Aggregate fair value of the non-participating bonds includes the fair values
of two mortgage revenue bonds that we have securitized resulting in $24
million of corresponding short term debt on our balance sheet. These bonds
continue to be reflected on our balance sheet because the accounting for
these transactions is partially dependent on certain call provisions which
enable us to retain effective control over these mortgage revenue bonds.
S-4
5
(2) Weighted average interest rate of participating bonds is derived by
annualizing September 30, 2000 year-to-date aggregate interest paid on all
participating bonds and dividing by the aggregate face amount of all
participating bonds as of September 30, 2000.
(3) Weighted average interest rate of non-participating bonds is derived by
summing the product of the face amount times the interest rate of each
non-participating bond and dividing the total by the aggregate face amount
of all non-participating bonds.
(4) Pro forma annual interest represents year-to-date aggregate interest income
as of September 30, 2000 annualized. Interest income from our residual
interests may vary substantially as interest rates rise and fall. See "Risk
Factors -- We may suffer adverse consequences from changing interest rates
and the effectiveness of our hedging strategies."
(5) With respect to participating mortgage revenue bonds, low and high interest
rates are derived by annualizing September 30, 2000 year-to-date aggregate
interest paid and dividing by the face amount as of September 30, 2000. With
respect to non-participating mortgage revenue bonds, low and high interest
rates are based upon the stated base rates in the mortgage revenue bonds.
OPERATING SEGMENT
The following table sets forth summary data with respect to our operating
segment for the nine months ended September 30, 2000:
FEE INCOME FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 2000
(000S)
-----------------------
Loan origination fees(1).................................... $ 6,455
Loan servicing fees(2)...................................... 4,163
-------
TOTAL............................................. $10,618
=======
---------------
(1) Brokerage fees derived from tax credit equity syndication fund originations
are allocated to origination fees. Segment figure excludes the adjustment to
arrive at consolidated loan origination fees of ($1.626) million which is
related to origination fees on purchased investments which are deferred and
amortized into income over the life of the investment.
(2) Fees for servicing existing tax credit equity syndication funds which
totaled $1.4 million through September 30, 2000 are not included in
servicing fees.
THE OFFERING
Common shares offered......... 3,800,000
Common shares outstanding
after the offering............ 21,455,737
Use of proceeds............... We estimate that our net proceeds from this
offering without exercise of the over-allotment
option will be approximately $82.7 million. We
intend to use the net proceeds to reduce
outstanding notes payable of our corporate
subsidiary; however, we may use a portion of
the proceeds to fund future investment
activity. See "Use of Proceeds."
Risk Factors.................. See "Risk Factors" and other information
included in this prospectus supplement for a
discussion of factors you should carefully
consider before deciding to invest in the
common shares.
NYSE symbol................... "MMA"
S-5
6
The number of shares outstanding after the offering excludes 1,822,033
shares reserved for issuance under our share option plans, of which options to
purchase 1,220,970 shares at an average exercise price of $18.00 have been
issued. This number assumes that the underwriters' over-allotment options are
not exercised. If the over-allotment options are exercised in full, we will
issue and sell an additional 570,000 shares yielding estimated additional net
proceeds of $12.5 million which we intend to use to reduce outstanding notes
payable; however, we may use a portion of the proceeds to fund future investment
activity. See "Use of Proceeds."
DISTRIBUTION POLICY
The holders of the common shares are entitled to distributions as declared
by our board of directors. Our current policy is to distribute to the holders of
common shares at least 80% of our cash flow from operations (exclusive of
capital-related items and reserves), but only after payment of distributions to
the holders of our preferred shares, preferred capital distribution shares and
term growth shares and payments to holders of preferred shares issued by one of
our subsidiaries.
RECENT DEVELOPMENTS
RECENT TRANSACTIONS
Since September 30, 2000, we have acquired approximately $59 million in
face value of mortgage revenue bonds. All of the mortgage revenue bonds that we
have acquired since September 30, 2000 were acquired at their face value. The
following table sets forth summary data regarding these transactions:
INVESTMENTS IN MORTGAGE REVENUE BONDS:
FACE AMOUNT
BOND (000S) INTEREST RATE CLOSING DATE
---- ----------- ------------- ------------
Bedford Park.......................................... $ 9,325 8.00%(1) 10/24/2000
Fort Branch........................................... 12,318 7.70(2) 12/13/2000
Timber Ridge.......................................... 5,215 7.95(3) 12/15/2000
Arlington............................................. 12,625 8.10(4) 12/29/2000
Jefferson Commons..................................... 19,900 8.20(5) 12/28/2000
-------
Total............................................ $59,383
=======
---------------
(1) Interest rate is the permanent interest rate. Construction rate is 8.625%.
(2) Interest rate is permanent interest rate. Construction rate is 8.10%.
(3) Interest rate is the base rate. Bond accrues interest up to a maximum rate
of 8.25%.
(4) Interest rate is base rate until the first remarketing date. Bond accrues
interest up to a maximum rate of rate of 8.75%. Construction rate is 8.75%.
(5) Interest rate is the base rate. Bond accrues interest up to a maximum rate
of rate of 8.65%.
S-6
7
SHORT TERM SECURITIZATIONS:
Since September 30, 2000, we have engaged in three short term
securitization transactions that generated proceeds to us of approximately $49
million:
STATED FACE AMOUNT
FACE AMOUNT OF INTEREST RATE OF
UNDERLYING OF RESIDUAL
BOND UNDERLYING INTERESTS
UNDERLYING BOND (000S) BOND (000S)
--------------- -------------- ------------- -------------
Fort Branch(1)...................................... $12,318 7.70% $ 8
Barrington(2)....................................... 27,250 7.85 5
Bedford Park(3)..................................... 9,325 8.00 5
------- ---
Total.......................................... $48,893 $18
======= ===
---------------
(1) Stated rate is permanent interest rate. Construction rate is 8.10%.
(2) Stated rate is the base rate. Bond accrues interest up to 8.35%.
(3) Stated rate is permanent interest rate. Construction rate is 8.625%.
REPAYMENT OF MORTGAGE REVENUE BONDS:
On December 20, 2000, our mortgage revenue bond known as Southfork was
redeemed. The proceeds that we received upon the redemption included a return of
principal of $10.375 million, contingent interest of $1.7 million and repayment
of a working capital loan of $175,000. As a result of the Southfork redemption,
holders of our preferred shares are entitled to receive a distribution from us
in the amount of $1.3 million.
MIDLAND:
In the agreement pursuant to which we acquired Midland we set performance
goals related to Midland for each of the three years following the acquisition.
The achievement of these performance targets will result in aggregate payments
of approximately $10 million over the three years to the former owners of
Midland. As of September 30, 2000, Midland reached the first of these targets.
As a result, we issued 155,234 common shares to the former owners of Midland.
CREDIT ENHANCEMENT FACILITY:
During December 2000 we closed a $100 million credit enhancement facility,
which immediately refinanced short term credit enhancement on approximately $70
million of our existing securitization portfolio with long term credit
enhancement through Fannie Mae. The facility also provided credit enhancement to
two of our previously unenhanced mortgage revenue bonds having an aggregate fair
market value of approximately $10 million as of September 30, 2000 and replaced
the credit enhancement on approximately $19.4 million of mortgage revenue bonds
that were previously credit enhanced by a credit facility provided through
MMACap LLC prior to December 2000. The $100 million credit enhancement facility,
which was completed through MMACap, LLC, our wholly owned subsidiary, is an
open-ended facility and will facilitate the placement of long term
securitization capital, thereby enabling us to securitize our mortgage revenue
bonds at a fixed interest rate and for a term that more closely matches the term
of the bond. The MMACap credit enhancement facility was arranged through our
Midland subsidiary, a Fannie Mae approved lender, and enables us to diversify
our traditional securitization capabilities. In order to provide credit
enhancement to the bonds secured by the facility, we pledged investments that we
own having a fair value of $28,057,000 as of September 30, 2000.
S-7
8
SUMMARY FINANCIAL DATA
The following table sets forth our summary financial data. The following
information should be read in conjunction with the financial statements and
notes included or incorporated by reference in this prospectus supplement. The
financial data as of and for the years ended December 31, 1999 and 1998 have
been derived from audited financial statements incorporated by reference in this
prospectus supplement.
The financial data at September 30, 2000 and for the nine months ended
September 30, 2000 is derived from unaudited consolidated financial statements
incorporated by reference in this prospectus supplement. The unaudited financial
information includes all adjustments (consisting of normal recurring
adjustments) that our management considers necessary for a fair presentation of
the financial position and results of operations for these periods. Operating
results for the nine months ended September 30, 2000 are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2000.
The summary financial data reflects our acquisition of Midland effective
October 20, 1999. The transaction was accounted for as a purchase.
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, 2000 ----------------------------
(UNAUDITED) 1999 1998
------------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
INCOME:
Interest on mortgage revenue bonds and other bond
related investments............................ $ 30,018 $ 35,435 $ 23,241
Interest on loans................................ 22,948 6,543 4,563
Loan origination and brokerage fees.............. 4,829 3,925 425
Loan servicing fees.............................. 4,163 1,759 883
Interest on short term investments............... 3,128 1,848 1,330
Other income..................................... 3,790 1,356 273
Net gain on sales................................ 200 2,680 4,743
---------- ---------- ----------
TOTAL INCOME..................................... $ 69,076 $ 53,546 35,458
---------- ---------- ----------
EXPENSES:
Salaries and benefits............................ $ 10,827 $ 6,746 $ 3,309
Operating expenses............................... 5,675 3,069 2,693
Goodwill and other intangibles amortization...... 1,074 297 --
Interest expense................................. 22,303 6,665 --
Other-than-temporary impairments related to
investments in mortgage revenue bonds and other
bond related investments....................... -- -- 2,049
---------- ---------- ----------
TOTAL EXPENSES................................... $ 39,879 $ 17,897 $ 8,051
---------- ---------- ----------
NET INCOME BEFORE INCOME ALLOCATED TO PREFERRED
SHAREHOLDERS IN A SUBSIDIARY COMPANY AND INCOME
TAXES.......................................... 29,197 35,649 27,407
Income allocable to preferred shareholders in a
subsidiary company............................. 5,868 3,433 --
---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES................... 23,329 32,216 27,407
Income taxes..................................... 904 703 --
---------- ---------- ----------
NET INCOME....................................... $ 22,425 $ 31,513 $ 27,407
========== ========== ==========
NET INCOME ALLOCATED TO COMMON SHARES............ $ 20,732 $ 28,796 $ 24,728
========== ========== ==========
S-8
9
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, 2000 ----------------------------
(UNAUDITED) 1999 1998
------------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NET INCOME PER COMMON SHARE...................... $ 1.19 $ 1.70 $ 1.62
========== ========== ==========
Weighted average common shares outstanding....... 17,436,639 16,922,788 15,233,380
DILUTED NET INCOME PER COMMON SHARE.............. $ 1.16 $ 1.67 $ 1.60
========== ========== ==========
Diluted weighted average common shares
outstanding.................................... 17,880,850 17,740,671 15,938,249
BALANCE SHEET DATA:
Total assets..................................... $ 950,926 $ 801,746 $ 364,161
Total liabilities................................ $ 454,127 $ 357,976 $ 8,709
Preferred shareholders' equity in a subsidiary
company........................................ $ 137,676 $ 80,159 --
Total shareholders' equity....................... $ 359,123 $ 363,611 $ 355,452
OTHER DATA (UNAUDITED):
Recurring cash available for distribution to
common shareholders(1)......................... $ 23,508 $ 28,789 $ 25,133
Cash available for distribution to common
shareholders(1)................................ $ 23,508 $ 29,773 $ 26,596
Cash distributions to common shareholders........ $ 21,853 $ 27,388 $ 23,933
---------------
(1) Cash Available for Distribution ("CAD") does not represent cash flow from
operations as defined by generally accepted accounting principles ("GAAP")
and should not be considered an alternative to net income as an indicator of
our operating performance and is not indicative of cash available to fund
all cash flow needs. We use CAD as the primary measure of our ability to pay
distributions. CAD differs from net income because of differences between
GAAP and actual cash received. There are three primary differences between
CAD and GAAP income. The first is the treatment of loan origination fees,
which for CAD purposes are recognized when received, but for GAAP purposes
are amortized over the life of the associated investment. The second
difference is the non-cash gain and loss recognized for GAAP associated with
valuations and sales of investments, which are not included in the
calculation of CAD. The third difference is the treatment of goodwill and
other intangibles, which are amortized into expenses for GAAP, and not
included in the calculation of CAD.
S-9
10
RISK FACTORS
Before you invest in the common shares, you should be aware that the
occurrence of any of the events described in this risk factors section and
elsewhere in this prospectus supplement and the accompanying prospectus could
have a material adverse effect on our business, financial condition and results
of operations. You should carefully consider these risk factors, together with
all of the other information included in this prospectus supplement and the
accompanying prospectus, before you decide to purchase the common shares.
THE PROPERTIES SECURING OUR INVESTMENTS MAY NOT GENERATE SUFFICIENT INCOME TO
MAKE THE PAYMENTS DUE TO US.
One of the major risks of owning investments secured by multifamily
residential properties is the possibility that the owner of the property
securing an investment does not make the payments due to us. The following is a
list of some of the things that might result in a decrease in income from the
properties:
- Adverse economic conditions, either local, regional or national, may limit the
amount of rent that can be charged for rental units at the properties. Adverse
economic conditions may also result in a reduction in timely rent payments or
a reduction in occupancy levels.
- 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.
- 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.
- City, state and federal housing programs that subsidize many of the properties
impose rent limitations and may limit the ability of the operators of the
properties to increase rents. This may discourage operators from maintaining
the properties in proper condition during periods of rapid inflation or
declining market value of the properties. In addition, the programs may impose
income restrictions on tenants, which may reduce the number of eligible
tenants in the properties and result in a reduction in occupancy rates. Even
if a property is not subject to legal restrictions on the amount of rent that
may be charged to low and moderate income tenants, rental market conditions
and other factors may result in reduced rents.
- Tenants who are eligible for subsidies or similar programs may not find the
differences in rents between the subsidized or supported properties and other
multifamily rental properties in the same area to be a sufficient economic
incentive to reside at a subsidized or supported property, which may have
fewer amenities or otherwise be less attractive as a residence.
- Increases in expenses at the property level, 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 us with respect to the
related mortgage revenue bonds. This could affect our cash available for
distribution to holders of our common shares.
OUR INCOME MAY BE ADVERSELY AFFECTED BY DECLINING PROPERTY VALUES AND PROPERTY
PERFORMANCE.
Our business 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 our investments and increases the possibility of a loss in the
event of a default. Additionally, some of our income comes from contingent
interest on participating mortgage revenue bonds. Accordingly, a decline in the
performance of the related multifamily property would likely have a negative
affect on our cash available for distribution to holders of our common shares.
S-10
11
MANY OF OUR INVESTMENTS ARE ILLIQUID.
Substantially all of our bond investments lack a regular trading market and
are illiquid. This lack of liquidity would be exacerbated during turbulent
market conditions or if any of our tax-exempt bonds become taxable or go into
default. In the event that we require additional cash during a turbulent market,
we may have to liquidate our investments on unfavorable terms. In addition, this
illiquidity associated with our mortgage bond investments may cause significant
changes in the fair value of our investments which would be reflected in our
book value and other comprehensive income.
WE MAY SUFFER ADVERSE CONSEQUENCES FROM CHANGING INTEREST RATES AND THE
EFFECTIVENESS OF OUR HEDGING STRATEGIES.
Changes in interest rates. A decrease in market interest rates may result
in a bond issuer redeeming or a bond borrower prepaying or refinancing the bond
prior to its stated maturity. We may not be able to reinvest the proceeds of any
redeemed investment at an attractive rate of return. This may affect our ability
to generate sufficient income to pay distributions on our common shares.
Additionally, holders of our preferred shares have the right to distributions
upon a sale or refinancing of a specified portfolio of our mortgage revenue
bonds. To the extent that we have to make distributions to our preferred
holders, we will be able to reinvest only a portion of the proceeds of a sale or
refinancing. As of September 30, 2000, the preferred shares are entitled to
receive approximately $23 million if all mortgage revenue bonds in the specified
portfolio are sold or refinanced at fair value.
An increase in market interest rates may lead our securitization
counterparties or prospective purchasers of our existing investments to demand a
higher annual yield than they currently receive. This could increase our cost of
capital, reduce the market value of our investments and may result in a
reduction, possibly to zero, of interest distributions we receive from our
residual trust interests. These occurrences would adversely affect the amount of
cash available for distribution to the holders of our common shares.
In addition, an increase in market interest rates could lead to a decrease
in the value of some of our investments. This could cause some counterparties to
demand additional collateral to preserve our existing short term securitization
facilities. To the extent that additional collateral could not be provided to
satisfy these demands, these securitization facilities could be terminated,
which could adversely affect cash available for distribution to holders of the
common shares and our financial condition.
Hedging Strategies. Developing an effective interest rate risk management
strategy is complex, and no strategy can completely insulate us from all
potential risks associated with interest rate changes. There is a significant
risk that we could be required to liquidate investments to satisfy margin calls
if interest rates rise or fall dramatically. In addition, hedging involves
transaction costs. If we hedge against interest rate risks, we may substantially
reduce our net income or adversely affect our financial condition. Furthermore,
there can be no assurance that our interest rate hedging activities will protect
us fully against all of the risks involved.
At September 30, 2000, we had $311 million of floating interest rate
exposure related to our securitizations. To reduce our exposure to rising
interest rates, we often enter into interest rate hedges. At September 30, 2000,
substantially all of our floating rate exposure was hedged by interest rate
swaps and caps. Net payments received by us from our interest rate hedges, if
any, will be taxable income, even though the investments we are hedging
typically pay tax-exempt interest. We enter into hedges for limited time periods
and there can be no assurance that we will be able to enter into hedges at
favorable prices, or at all, when the existing arrangements expire.
We may also engage in limited amounts of buying and selling of other
hedging products, including, but not limited to, buying and selling financial
futures contracts and options on financial futures contracts and trading forward
contracts in order to hedge bond purchase commitments. These types of hedging
devices and mortgage instruments are complex and can produce volatile results,
including margin calls. Additionally, hedging exposes us to the credit risks of
our counterparties which may in certain
S-11
12
circumstances not pay or perform under their contracts. Accordingly, we cannot
assure you that our hedging strategy will have the desired beneficial impact.
OTHER PARTIES HAVE PRIORITY ON THE INTEREST AND PRINCIPAL OF SOME OF OUR
INVESTMENTS, INCLUDING WHERE WE HAVE ISSUED GUARANTEES.
Investments owned by MuniMae TE Bond Subsidiary, LLC. We own 100% of the
common shares of one of our subsidiaries, TE Bond Subsidiary, LLC; however, TE
Bond Subsidiary has also issued $144 million of preferred shares. The holders of
the preferred shares have the first right to income and principal of the
investments held by the subsidiary, up to the liquidation preference of the
preferred shares of $144 million plus unpaid distributions upon any liquidation.
The investments in TE Bond Subsidiary represented $462 million of fair value or
49% of our gross assets as of September 30, 2000 and generated $31.8 million or
46% of our gross income for the nine months ended September 30, 2000. As of
September 30, 2000, all but 12% of our mortgage revenue bonds and other bond
related investments were held by TE Bond Subsidiary. For the nine months ended
September 30, 2000, holders of the subsidiary's preferred shares received an
aggregate of $5.868 million in distributions.
Investments we have securitized or pledged as collateral. We believe that
securitizations of our investments that generate tax-exempt income provide funds
for acquisitions at a low cost relative to the cost of other forms of financing.
We engage in two types of securitization transactions. In a typical short term
securitization, we cause mortgage bonds to be deposited into a trust. The trust
sells short term floating rate interests in the trust, which have first priority
on the cash flow from the deposited mortgage revenue bonds, to third party
investors. We purchase from the trust the right to receive the interest
remaining after the trust makes payments to the holders of the senior floating
rate interests, which is called a residual interest. In the event the trust
cannot meet its obligations, all or a portion of the deposited mortgage revenue
bonds may be sold to satisfy the obligations to the holders of the senior
interests. Therefore, cash flow from these mortgage revenue bonds may not be
available to pay any amounts on our residual interests. In the event of the
liquidation of the mortgage revenue bonds, no payment will be made to us except
to the extent that the sale price received for the mortgage revenue bonds
exceeds the amounts due on the senior obligations of the trust.
Typically the payment of the interest and principal on the senior floating
rate interests is guaranteed by a third party credit enhancement provider. We
also typically pledge mortgage revenue bonds (however we may pledge assets other
than mortgage revenue bonds) to secure this third party's guarantee of payment
to the holders of the senior floating rate certificates. In the event that the
trust has insufficient income to repay the short term senior floating rate
certificates and the third party is required to repay the senior floating rate
certificates, our pledged mortgage revenue bonds may be sold to reimburse the
third party for its advance of funds and we may lose the cash flow from the
mortgage revenue bonds and our ownership interest in them. Our ability to remedy
defaults inside the trust is limited. At September 30, 2000, $228 million in
fair value or 50% of MuniMae's mortgage revenue bonds and bond related
investments (in addition to the mortgage revenue bonds which are the subject of
the securitization) were pledged to secure repayment by a third party of $311
million in principal amount of short term senior floating rate certificates.
These assets that were pledged as collateral produced $19.6 million or 42.5% of
MuniMae's pro forma annual interest. Pro forma annual interest represents
aggregate interest income as of September 30, 2000 annualized.
In addition to short term securitizations, we also utilize longer term
fixed-rate securitizations. The interests sold from the longer term
securitization trusts bear interest at a fixed rate or at a fixed rate for
several years and then are subject to a remarketing. Similar to short term
securitizations, we pledge other mortgage revenue bonds that we own to secure
our repayment obligation as a credit enhancer. We completed a $67.7 million term
securitization facility in 1999. At September 30, 2000, approximately $61
million in fair value (or 6.4% of our gross assets) were pledged to secure
repayment of the $67.7 million in principal amount of senior trust certificates
issued by the securitization facility.
S-12
13
Subordinated Investments. A portion of our investments are subordinated
securities or interests in bonds, notes or other instruments that are junior in
right of payment to other bonds, notes or instruments. At September 30, 2000,
these investments represented $71 million or 15% of MuniMae's mortgage revenue
bonds and bond related investments and produced $15.9 million or 35% of
MuniMae's pro forma annual interest income. The risk of these investments
include the risk that borrowers may not be able to make payments on both the
senior and the junior interests and that the value of the underlying asset may
be less than the amounts owed to both the senior and the junior interest
holders. As a consequence, we, as a holder of the junior security, could receive
less than the full and timely repayment of our investment. Moreover, the holders
of the senior interests may control the ability to enforce remedies. Without the
consent of the senior holders, we will have limited ability to take actions that
might protect our interests. If the cash flow with respect to a particular
investment is not sufficient to make full payments on the junior interests, our
ability to make distributions to our shareholders could be adversely affected.
We have obligations under guarantee and loss sharing agreements. We have a
loss sharing agreement with Fannie Mae for the $302.5 million of loans we made
through Midland that were outstanding at December 31, 1999. Pursuant to this
agreement, we may be required to make servicing advancements to pay taxes or
insurance premiums or delinquency advances to pay principal or interest if the
borrower under the loan fails to make payment. We may also have to participate
in deficiencies after foreclosures. In connection with this obligation, we are
required to maintain a minimum net worth and collateral with a custodian. Our
financial exposure is limited, however, by certain deductibles and a loss limit
as of September 30, 2000 of $12.1 million. At September 30, 2000, we had not
made any payments pursuant to this obligation. We have also guaranteed payment
of $16.2 million of demand notes relating to loans we made and then sold. In
addition, to facilitate the closing of the MMACap credit enhancement facility in
December 2000, we caused an insurance policy to be provided for the benefit of
Fannie Mae to cover the first approximately $24 million of losses incurred by
Fannie Mae under the MMACap credit enhancement facility. To obtain this
insurance policy, we pledged assets with a fair value of $28 million as
collateral to the insurance provider. Under the MMACap credit enhancement
facility, we are also obligated to maintain a minimum credit rating with respect
to the insurance policy. To the extent that the credit rating of the insurance
provider is downgraded below this minimum credit requirement, we may be unable
to replace or upgrade the policy to the minimum requirement. Failure to maintain
the policy would result in a default under the MMACap credit enhancement
facility.
WE HAVE LIMITED RECOURSE UPON A MORTGAGE REVENUE BOND DEFAULT OR UPON THE
BANKRUPTCY OF A BORROWER UNDER A MORTGAGE BOND.
Although state or local governments or their agencies or authorities issue
the mortgage revenue bonds that we own (or which underlie many of our
investments), the mortgage revenue bonds are not general obligations of any
state or local government. No government is liable under the mortgage revenue
bonds, nor is the taxing power of any government pledged to the payment of
principal or interest under the mortgage revenue bonds. An assignment of the
related mortgage loan secures each mortgage revenue bond we own. The loan is
secured by a mortgage on the underlying property and an assignment of rents. The
owners of the underlying properties are only liable for the payment of principal
and interest under the mortgage loans to the extent of the cash flow and sale
proceeds from the properties. Accordingly, the revenue derived from the
operation of the properties and amounts derived from the sale, refinancing or
other disposition of the properties is the sole source of funds for payment of
principal and interest to us under the mortgage revenue bonds.
Our revenue may also be adversely affected by the bankruptcy of a borrower.
A borrower under bankruptcy protection may be able to restructure its debt
payment and stop making mortgage payments.
WE HOLD INVESTMENTS THAT HAVE FAILED IN THE PAST TO MEET THEIR DEBT SERVICE
OBLIGATIONS AND MAY FAIL TO MEET THEIR OBLIGATIONS AGAIN IN THE FUTURE.
During the late 1980s and early 1990s, mortgage revenue bonds that now
represent approximately 12.3% of MuniMae's pro forma annual interest income
failed to meet the full debt service obligations
S-13
14
required under their mortgage revenue bonds and five of those bonds continued to
be in default at September 30, 2000. In lieu of foreclosure, the deeds to the
properties securing the mortgage revenue bonds were transferred to affiliates of
the general partner of our predecessor entity. As of the date of this prospectus
supplement, two of our recently acquired mortgage revenue bonds that represent
approximately 4.9% of MuniMae's pro forma annual interest income are also in
default. In lieu of foreclosure on one of the bonds, the deed to the property
securing the bond was assigned to a not-for-profit entity. We are currently in
the process of restructuring the other bond so that it will be a performing
bond. Additionally, some of our mortgage revenue bonds have been refunded on
terms that defer, and in certain circumstances reduce, the debt service
obligations on such mortgage revenue bonds. We generally have no ability to
limit or initiate these refundings. We cannot assure you that defaults and
refundings will not occur in the future. We generally obtain updated bond or tax
opinions, as appropriate, whenever one of our mortgage revenue bonds is
restructured.
THE VALUE OF THE COMMON SHARES AND MUNIMAE'S ABILITY TO MAKE DISTRIBUTIONS
DEPENDS ON THE APPLICATION OF TAX LAWS.
Publicly Traded Partnership Status. MuniMae operates as a partnership for
federal income tax purposes. This permits MuniMae to pass through most of its
income, including tax-exempt income, deductions and other tax items to
shareholders. However, the listing of common shares on the NYSE causes MuniMae
to be treated as a "publicly traded partnership" for federal income tax
purposes. As a publicly traded partnership, MuniMae would be taxed as a
corporation unless 90% or more of its gross income consists of "qualifying
income." Qualifying income includes interest, dividends, real property rents,
gains from the sale or other disposition of real property or other capital
assets held for the production of interest or dividends, and certain other
items. Clifford Chance Rogers & Wells LLP, our counsel, has advised us that,
although the issue is not free from doubt, tax-exempt interest income
constitutes qualifying income for this purpose.
In addition, in the opinion of our counsel, although the issue is not free
from doubt, MuniMae and its predecessor have been and are properly treated as a
partnership for federal income tax purposes. In this regard, we have represented
to our counsel that, in all relevant prior years of MuniMae and MuniMae's
predecessor's existence, at least 90% of its gross income was qualifying income,
and have covenanted to conduct MuniMae's operations in a manner such that at
least 90% of its gross income, including tax-exempt income, will constitute
qualifying income. Our counsel's opinion is based on, and subject to, our
foregoing representation and the discussion below entitled "FEDERAL INCOME TAX
CONSIDERATIONS -- General."
If, for any reason, less than 90% of MuniMae's gross income constitutes
qualifying income, income, deductions and other tax items would not pass through
to shareholders, and shareholders would be treated as stockholders in a
corporation for federal income tax purposes. Also, MuniMae would be required to
pay federal income tax at regular corporate rates on its net income, with the
exception of tax-exempt income. In addition, distributions by MuniMae to
shareholders would constitute ordinary dividend income, taxable to the holders
to the extent of its earnings and profits, which would include tax-exempt net
income, as well as any taxable income it may have, reduced by any federal income
taxes paid. MuniMae would not be able to deduct the payment of these dividends.
See "FEDERAL INCOME TAX CONSIDERATIONS -- General -- Publicly Traded Partnership
Rules."
Tax-Exemption of Mortgage Revenue Bonds. On the date of initial issuance
of the mortgage bonds, bond counsel, or special tax counsel, rendered its
opinion to the effect that, based on the federal income tax law in effect on the
date of issuance, interest on such mortgage revenue bonds was excludable from
gross income for federal income tax purposes, except with respect to any
mortgage revenue bond, other than a mortgage revenue bond the proceeds of which
are loaned to a charitable organization qualifying as a certain type of
tax-exempt organization under the federal income tax law, during any period in
which it is held by a "substantial user" of the property or by a "related
person" to such substantial user as such terms are described in the relevant
provisions of the federal income tax law. These opinions are typically
conditioned on the compliance with state and local usury laws. For purposes of
our discussion, we treat
S-14
15
federal income tax law as a body of authorities consisting of the Internal
Revenue Code of 1986, as amended, Treasury Regulations issued under the Code,
administrative interpretations of the Code and judicial interpretations of the
Code.
Federal income tax law establishes certain requirements which must be met
by the issuer of bonds and certain other persons subsequent to the issuance of
such mortgage revenue bonds for interest to remain excluded from gross income
for federal income tax purposes. Among these continuing requirements are
restrictions on the investment and use of the revenue bond proceeds and, for
mortgage revenue bonds the proceeds of which are loaned to a certain type of
tax-exempt charitable organization, the continued tax-exempt status of such
charitable organization borrower. In addition, the continuing requirements
include income restrictions and compliance with an arbitrage compliance
certificate, regulatory agreement or similar document. Failure to comply with
the continuing requirements of the federal income tax law may cause interest on
such mortgage revenue bonds to be includable in gross income for purposes of the
federal income tax law retroactive to the date of issuance, regardless of when
such non-compliance occurs. Each issuer of the mortgage revenue bonds, as well
as the conduit borrower of the mortgage revenue bonds, has covenanted in an
arbitrage compliance certificate, regulatory agreement or similar document, that
it would comply with certain procedures and guidelines designed to ensure
satisfaction with the continuing requirements of the federal income tax law.
Failure to comply with these continuing requirements may cause the interest on
such mortgage revenue bonds to be includable in gross income for federal income
tax purposes, retroactive to the date of issuance, regardless of when such
non-compliance occurs.
In connection with the above, our counsel has not passed upon, and does not
assume any responsibility for, but rather has assumed the continuing correctness
of, the opinions of bond counsel, or special tax counsel, relating to the
tax-exemption of interest on the mortgage revenue bonds. Our counsel has not
independently verified whether any events or circumstances have occurred since
the original issuance of the mortgage revenue bonds that would adversely affect
such opinion of bond counsel or special tax counsel. However, as of the date of
this prospectus supplement, neither we, our affiliates nor our counsel have
knowledge of any events that may adversely affect the tax-exempt status of the
mortgage revenue bonds, including any notice that the Internal Revenue Service
considers interest on any of the mortgage revenue bonds to be includable in
gross income.
MuniMae's predecessor owned 22 mortgage revenue bonds. The borrowers on 11
of these mortgage revenue bonds had failed to make timely debt service payments
resulting in defaults on such mortgage revenue bonds, and the mortgage revenue
bonds were refunded in 1995. The borrowers on five of the remaining mortgage
revenue bonds, which were not refunded, have defaulted on their monetary
obligations and continue to be in default as of September 30, 2000. In addition,
the borrowers on two of the mortgage revenue bonds recently acquired by MuniMae
have defaulted on their monetary obligations and continue to be in default as of
September 30, 2000. Although MuniMae has not completed foreclosure proceedings
in any case of a default, we believe that MuniMae has exercised and continues to
exercise prudent business practices to enforce its creditor's rights under the
applicable bond documents, including initiating foreclosure proceedings on the
mortgaged properties when advisable.
A risk exists that the Internal Revenue Service may treat MuniMae's actions
to exercise, or not to exercise, its rights under one or more of the mortgages
of the defaulted mortgage revenue bonds as constituting a material modification
of such mortgage revenue bond and, therefore, conclude that these mortgage
revenue bonds were reissued for federal income tax purposes. If the Internal
Revenue Service asserts this position and is successful in maintaining it in a
court, interest on these mortgage revenue bonds probably would be taxable for
federal income tax purposes.
In connection with the above, we have been advised by counsel that
MuniMae's actions, or failures to act, taken in connection with the default of
these mortgage revenue bonds would not, under the federal income tax law in
effect at the time of the defaults, result in a reissuance of such mortgage
bonds. We have assumed the continuing correctness of the legal advice we
received on this issue. Our counsel for purposes of this offering has not passed
upon, and does not assume responsibility for, but rather has assumed the
correctness of, counsel's advice to us on this issue. Unlike a ruling from the
Internal Revenue Service,
S-15
16
however, the advice of counsel has no binding effect or official status of any
kind, and no assurance can be given that the conclusions reached will not be
contested by the Internal Revenue Service or, if contested, will be sustained by
a court. We will use commercially reasonable efforts to contest any adverse
determination by the Internal Revenue Service on this issue. We will incur
additional expenses if we contest any adverse determination.
Treatment of Mortgage Revenue Bonds as Equity. Interest payable on certain
of the participating mortgage revenue bonds MuniMae holds for investment depends
upon the cash flow from, and proceeds upon sale of, the underlying properties.
If the Internal Revenue Service determined that these participating mortgage
revenue bonds involved an equity investment in the respective underlying
properties because of this feature, all or part of the interest on those bonds
would not qualify as tax-exempt interest for federal income tax purposes.
However, to our knowledge, the Internal Revenue Service has not challenged the
tax-exempt status of these participating mortgage revenue bonds.
Prior to the acquisition of the participating mortgage revenue bonds,
MuniMae's predecessor received opinions of counsel to the effect that, based
upon certain assumptions described in the opinions, more likely than not, each
of these mortgage revenue bonds would be treated, for federal income tax
purposes, as representing indebtedness and that no portion of the mortgage
revenue bond or any payments receivable thereunder would be considered (i) an
equity interest in the conduit borrower, (ii) an equity interest in a venture
between us and the conduit borrower, or (iii) an ownership interest in the
underlying properties. We have received similar opinions with respect to the
participating subordinate mortgage revenue bonds and one additional
participating mortgage revenue bond we acquired afterward.
With respect to five of these participating mortgage revenue bonds that
have defaulted, but were not refunded, we have not received any updated opinions
of counsel with respect to the issue of whether the underlying mortgage revenue
bonds should be treated as equity. The original opinions issued with respect to
certain of these mortgage revenue bonds indicated that the mortgage revenue
bonds were, more likely than not, indebtedness, but included a qualification
that no opinion was expressed with respect to the characterization of the
mortgage revenue bonds as indebtedness or equity under circumstances of a
default. Unlike a ruling from the Internal Revenue Service, however, an opinion
of counsel has no binding effect or official status of any kind, and no
assurances can be given that the conclusions reached in such opinion will not be
contested by the Internal Revenue Service or, if contested, will be sustained by
a court. We will use commercially reasonable efforts to contest any adverse
determination by the Internal Revenue Service on this issue. We will incur
additional expenses if we contest any adverse determination.
A number of opinions rendered at the time of the issuance of some of our
investments, which were originally acquired by MuniMae's predecessor, were
rendered by Piper Marbury Rudnick & Wolfe LLP, counsel for the underwriters in
this offering. Piper Marbury Rudnick & Wolfe LLP was then acting as counsel for
our predecessor. Except as described in the preceding sentence, none of the
opinions described in the preceding paragraph were rendered by our counsel or
Piper Marbury Rudnick & Wolfe LLP, and neither has passed on or assumes any
responsibility for the opinions of other counsel on this issue. Moreover,
neither our counsel nor Piper Marbury Rudnick & Wolfe LLP has made any
independent determination as to whether any events or circumstances have
occurred or intervened since the original issuance of the "indebtedness"
opinions that would adversely affect such opinions, including the defaults
described above.
Investment in New Assets. MuniMae has been making additional investments
in mortgage revenue bonds and related assets and entering into hedging
transactions, such as interest rate swaps. These investments may produce income
that is subject to federal income tax, and that may not be qualifying income for
purposes of the publicly traded partnership rules. In addition, MuniMae's
investments may include investments in mortgage revenue bonds that need to be
restructured and remarketed. MuniMae could recognize taxable income, gain or
loss, upon any such restructuring and remarketing of the mortgage revenue bonds
even though such restructuring does not result in any cash proceeds to MuniMae.
In addition, various conditions would have to be met to insure that the
restructuring and remarketing of mortgage revenue bonds would not cause the loss
of the tax-exempt status of interest on such bonds. Any
S-16
17
taxable income produced by other assets or taxable income or gain recognized
upon the restructuring and remarketing of new investments in mortgage revenue
bonds will be allocated solely to holders of common shares and not to holders of
either preferred shares or preferred capital distribution shares.
Taxable Income. MuniMae currently invests significantly in tax-exempt
investments. However, MuniMae invests in some assets, and engages in certain
operations that generate income that is not exempt from federal income tax,
including capital gains from the sale of its assets. Further, as described
above, the Internal Revenue Service may seek to recharacterize a portion of
MuniMae's tax-exempt income as taxable income. A shareholder's distributive
share of such income will be taxable to such shareholder, regardless of whether
an amount of cash equal to such distributive share is actually distributed.
Further, although we believe it to be unlikely, shareholders may owe taxes
relating to their investments in MuniMae that exceed distributions made by
MuniMae. See "FEDERAL INCOME TAX CONSIDERATIONS."
Limitations on Business Activities. As stated above, MuniMae is not
taxable as a corporation under the publicly traded partnership rules, provided
it continues to satisfy the 90% qualifying income exception. In determining
whether interest is treated as qualifying income under these rules, interest
income derived from the active conduct of a lending, banking or similar business
is not treated as qualifying income. In this regard, we have represented and
covenanted that MuniMae is acting as an investor with respect to its investments
and that it has not and will not engage in the active conduct of a lending,
banking or similar business. If, for any reason, more than 10% of MuniMae's
gross income constitutes non-qualifying income, such as interest derived from
the active conduct of a lending, banking or similar financial business, MuniMae
will be taxable as a corporation rather than as a partnership for federal income
tax purposes, with the attendant negative consequences to MuniMae and
shareholders described above. See "-- Publicly Traded Partnership Status."
Substantial User Limitation. Interest on a mortgage bond, other than a
mortgage revenue bond the proceeds of which are loaned to a tax-exempt
charitable organization, will not be excluded from gross income during any
period in which we are a "substantial user" of the corresponding property or a
"related person" to a "substantial user." A "substantial user" of a property
generally includes the conduit borrower and any person or entity who uses the
property on other than a de minimis basis. MuniMae would be a related person to
a substantial user for this purpose if, among other things, a substantial user
were also a holder of common shares, term growth shares, preferred shares or
preferred capital distribution shares, the Dissolution Shareholder, the Special
Shareholder, or any person who is a parent, child or spouse of a holder of any
of the foregoing. A partner of a conduit borrower or owner of a property, among
other people or entities, will for this purpose, be a related person to a
substantial user of the property.
We have received opinions and/or advice with respect to certain of the
mortgage revenue bonds MuniMae holds for investment, with respect to the
substantial user limitation, to the effect that MuniMae is not a substantial
user or a related person of such substantial user. There exist certain levels of
direct or indirect common ownership between MuniMae and certain of the borrowers
of the mortgage revenue bonds which were considered when we received such
opinions, and/or advice, that MuniMae is not a related person of a substantial
user of the facilities financed by such mortgage revenue bonds. Our counsel for
this offering has not passed upon, nor assumed any responsibility for, but
rather, except as provided in the next paragraph, has assumed the correctness of
those opinions and/or advice. Based upon discussions with us, as of the date of
this prospectus supplement, our counsel does not have knowledge of any facts or
circumstances that would adversely affect the conclusions underlying those
opinions and/or advice.
As of the date of this prospectus supplement, as a group, three of
MuniMae's officers own, directly or indirectly, more than 50% of the profits
and/or capital interests in partnerships that are the borrowers on 13 mortgage
revenue bonds MuniMae owns through a custodial receipt arrangement. In the
opinion of our counsel, MuniMae will not be treated as a related person of any
substantial user of any of the facilities financed with the proceeds of a
mortgage revenue bond relating to such partnership by virtue of any equity
investment in MuniMae by any of MuniMae's officers upon the consummation of the
offering. Our counsel based its opinion on certain representations that we made
in connection with this offering. Further,
S-17
18
in issuing the foregoing opinion, our counsel has assumed that our
representations are true and correct and has not made any independent
determination as to the equity ownership of MuniMae or the partnerships. The
foregoing opinion also assumes that (i) the mortgage revenue bonds will be
treated as indebtedness for federal income tax purposes, (ii) interest on such
mortgage revenue bonds is excludable from gross income for federal income tax
purposes except during any period in which it is held by a substantial user of
the property or related person thereto, and (iii) neither MuniMae nor any of its
affiliates are treated as a substantial user of the property for any reason.
Unlike a ruling from the Internal Revenue Service, however, the opinion of our
counsel has no binding effect or official status of any kind, and no assurance
can be given that the conclusion reached will not be contested by the Internal
Revenue Service or, if contested, will be sustained by a court. We intend to use
commercially reasonable efforts to contest any adverse determination by the
Internal Revenue Service on the substantial user issue. Any such contest will
result in us incurring additional expenses. The issue of whether MuniMae will be
treated as a related person is a highly factual inquiry which ultimately depends
upon the direct and indirect ownership of MuniMae. Because common shares are
publicly traded, there can be no assurance that MuniMae will not be treated as a
related person to a substantial user at a future time.
Allocation of MuniMae's Taxable and Tax-Exempt Income. MuniMae will use
various accounting and reporting conventions to determine each shareholder's
allocable share of income, including any market discount taxable as ordinary
income, gain, loss and deductions. MuniMae's allocation provisions will be
recognized for federal income tax purposes only if they are considered to have
"substantial economic effect" and are not retroactive allocations. There is no
assurance that the Internal Revenue Service will agree with MuniMae's various
accounting methods, conventions and allocation provisions, particularly its
allocation to shareholders of adjustments attributable to the differences
between the shareholders' purchase price of common shares and their shares of
MuniMae's tax basis in its assets. Because, as a publicly traded partnership,
MuniMae may be unable to comply with the literal requirements of the applicable
tax law provisions, and because certain of its allocations may not have
"substantial economic effect," our counsel for this offering is unable to
express an opinion on these issues. However, we do not expect that any
reasonable adjustments which may be required by the Internal Revenue Service
would substantially increase the income allocable to shareholders. See "FEDERAL
INCOME TAX CONSIDERATIONS -- Certain Federal Income Tax Considerations Relating
to MuniMae and Its Shareholders -- Allocation of Income and Loss."
TAX-EXEMPT NET INCOME COULD DECREASE IF THE FOCUS OF OUR BUSINESS CHANGES.
If the operating segment of our business which generates taxable income
represents a larger percentage of our business in the future or if we invest in
a larger percentage of taxable investments, the percentage of our net income
that is tax-exempt could decrease significantly. Additionally, we may receive
interest income on an intercompany loan we expect to make to Midland, a
corporate subsidiary, and we may also receive dividend income from Midland.
Unlike tax-exempt distributions from a subsidiary organized as a limited
liability company that can act as a pass through entity, taxable interest income
and dividend income from a corporation is not tax-exempt. The percentage of our
net income that is tax-exempt could decrease significantly if, and to the
extent, we receive interest or dividends from Midland.
IF OUR TOTAL RATE OF RETURN SWAPS TERMINATE EARLY, OR THE VALUE OF THE
PROPERTIES UNDERLYING THESE TOTAL RETURN SWAPS DECREASES, WE MAY BE OBLIGATED TO
MAKE SIGNIFICANT TERMINATION PAYMENTS.
We have entered into total rate of return swaps with Merrill Lynch with
respect to $25.4 million notional amount of tax-exempt mortgage bonds. These
swaps are known as total rate of return swaps because the counterparty agrees to
pay us an amount equal to the total rate of return on the bond. Each total rate
of return swap corresponds to a tax-exempt multifamily housing bond purchased by
Merrill Lynch from us or a multifamily housing property owned by an unaffiliated
third party. Each total rate of return swap involves periodic interest payments
and a termination payment. Net payments received by MuniMae generate taxable
income.
S-18
19
We agreed to pay periodic interest payments based on a floating index rate
in an amount corresponding to the value of the tax-exempt bond at the time we
entered into the swap. Merrill Lynch agreed to pay us the amount of interest
paid on that bond or a fixed rate on an amount that is equal to the par amount
of the bond. The net difference between those two interest amounts is paid, from
time to time, either to us or Merrill Lynch, as applicable. While a total rate
of return swap is in effect, we face the risk of having to make net payments to
Merrill Lynch. If a total rate of return swap terminates, we will lose the
possibility of receiving net payments after the termination.
We also agreed to pay Merrill Lynch the amount by which the amount of the
total rate of return swap exceeds the market value of the related tax-exempt
mortgage bond at the time of termination of the swap. Merrill Lynch is obligated
to pay us the amount, if any, by which the market value exceeds the notional
amount at the termination of the total rate of return swap. Our obligation to
make a termination payment is secured by a collateral account. The obligations
and right to receive payments under the total rate of return swaps are reflected
in our financial statements and affect our net assets. If we are obligated to
make significant termination payments at the conclusion of any total rate of
return swap, our cash available for distribution to the holders of our common
shares could decrease. We may also have to sell the investments pledged to
secure our obligations under the total rate of return swaps. Merrill Lynch's
obligation to make the termination payments under the total rate of return swaps
is not secured.
ENVIRONMENTAL PROBLEMS AT THE PROPERTIES SECURING OUR INVESTMENTS WOULD REDUCE
THE INTEREST PAYMENTS TO US AS WELL AS THE VALUE OF THE COLLATERAL SECURING THE
INVESTMENT AND THE INVESTMENT ITSELF.
Our bond and bond related investments are generally secured by real estate.
Under federal, state and local laws, ordinances and regulations, an owner or
operator of real estate is generally liable for the costs of removal or
remediation of hazardous or toxic substances found on a property. These laws
often impose liability without regard to whether the owner was responsible for
the presence of these substances. The costs of removal or remediation could be
substantial and could negatively impact the availability of cash flow at the
property level for payments on our investments. Independent environmental
consultants have conducted Phase I environmental site assessments (which involve
inspection without soil sampling or groundwater analysis) with respect to all
but six of the properties. The investments secured by these properties represent
8.5% of MuniMae's pro forma annual interest income. We cannot assure you that
these assessments or our inspections have revealed all environmental liabilities
and problems relating to the properties or that nothing has occurred since the
completion of such assessments. Additionally, we cannot assure you that the
properties on which no environmental assessment was conducted do not contain
regulated toxic or hazardous substances.
A PORTION OF OUR INCOME IS SUBJECT TO THE RISKS OF INVESTING IN ASSISTED LIVING
FACILITIES.
Five of the properties underlying our investments are assisted living or
other elder care facilities. In addition to the risks associated with investing
in mortgage revenue bonds, investments that are secured by these facilities are
subject to risks related to the operation and regulation of the facility.
Assisted living and elder care facilities are subject to additional regulatory
oversight, licensing requirements, restrictions on evicting tenants and zoning.
In addition, the Internal Revenue Code and related regulations establish
restrictions on the operation of the facility to maintain its tax-exempt status.
A PORTION OF OUR INCOME IS SUBJECT TO THE RISKS OF INVESTING IN STUDENT HOUSING
FACILITIES.
Two of the properties underlying our investments are student housing
facilities. In addition to the risks associated with investing in mortgage
revenue bonds, investments that are secured by student housing facilities are
subject to risks associated with a primarily student population and the
facility's relationship with nearby educational institutions. Moreover, recent
Internal Revenue Service audit activity of bonds financing certain student
housing facilities could adversely affect the value of our investments in the
market.
S-19
20
WE ARE NOT REQUIRED TO BE REGISTERED UNDER THE INVESTMENT COMPANY ACT AND WOULD
NOT BE ABLE TO CONDUCT OUR BUSINESS AS WE CURRENTLY CONDUCT IT IF WE BECAME
REQUIRED TO BE REGISTERED.
We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act of 1940. We are exempt from
registration because we are primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate.
In order to qualify for this exemption, according to current interpretation of
the staff of the Securities and Exchange Commission, we must maintain at least
55% of our assets directly in mortgages and other liens on and interests in real
estate, with the balance of our assets in real estate-type interests. Unless an
investment represents all of the certificates issued with respect to a pool of
mortgages, the investment may be treated as separate from the underlying
mortgage loans and, thus, may not be considered as a qualifying interest for
purposes of the 55% requirement. Additionally, we must own "whole" bonds in
order for our mortgage bonds to be considered qualifying interests for purposes
of the 55% requirement. Based on advice of counsel, we believe that we currently
meet the 55% test. However, our residual interests and some of our mortgage
revenue bonds are not qualifying interests. The requirement that we maintain 55%
of our assets in qualifying interests may inhibit our ability to acquire assets
or to securitize additional interests in the future. If we fail to qualify for
exemption from registration as an investment company, we would be unable to
conduct our business as we currently conduct it and it could result in penalties
and additional operating costs. Additionally, each of our subsidiaries must
qualify individually for an exemption from registration. Even if we maintain our
current exemption, if one or more of our subsidiaries becomes subject to
registration, we would be unable to conduct our business as we currently do.
PENSION FUNDS MAY WITHDRAW THE FUNDS THEY INVEST IN OUR GROUP TRUST.
A significant portion of the construction lending we originate through
Midland is facilitated by our access to the funds in a trust we advise, named
Midland Affordable Housing Group Trust. The trust is funded by a group of
pension fund investors who are under no obligation to continue their investment
in the trust. At September 30, 2000, three pension funds were investors of $160
million in the trust. We would not be able to continue originating construction
loans through Midland if our existing pension fund investors chose to liquidate
their investments and their investments could not be replaced with investments
from other eligible pension fund investors.
CERTAIN OFFICERS AND DIRECTORS AND ENTITIES THEY CONTROL MAY HAVE CONFLICTS OF
INTEREST WITH US.
An affiliate of our Chairman provides property management functions for
some of the properties securing our investments. This affiliate receives
property management fees under management contracts. Our management believes
that these contracts provide for fees that are at or below market rates. These
management contracts will continue to be renewed only if (i) they are providing
property management services at a price competitive with the prices that would
be charged by independent third parties for comparable goods and services in the
same geographic location and (ii) in the case of any management contract with
any company managed or controlled by any member of our board of directors, the
contract is approved by a majority of our independent directors. Nonetheless,
conflicts may exist in determining whether to renew or terminate these
management contracts and in setting the fees payable under these contracts
because any change in the fees could affect the amounts available to make
payments under the related mortgage revenue bonds.
Mark K. Joseph, our Chairman of the Board and Chief Executive Officer
controls, and Michael Falcone, our President, Chief Operating Officer and a
director, and Thomas R. Hobbs, a Senior Vice President and our Secretary own,
interests in entities that own some of the properties that secure our
investments. As a result, these entities could have interests that do not
coincide with, or even are adverse to, our interests. These entities could
choose to act in accordance with their own interests, which could adversely
affect us. Among the actions these entities could take might be selling a
mortgaged property, thereby causing a redemption event for our investment at a
time and under circumstances that could be disadvantageous to us.
S-20
21
Our management and certain of our affiliates own term growth shares, which
participate in our cash flow. The term growth shares, which will be redeemed
when our preferred shares are fully redeemed, are expected to have no residual
value, but while outstanding receive an aggregate of 2% of our net cash flow.
Holders of term growth shares also receive a greater return on their shares as
our cash flow increases in total, regardless of whether per share cash flow
increases or whether there is a distribution to shareholders. While these shares
remain outstanding, the holders may have conflicts of interest with the holders
of common shares in determining whether redemption of our preferred shares and
term growth shares is in our best interest, particularly due to the limited
residual value of the term growth shares.
Additionally, Mark K. Joseph, Michael Falcone and Gary Mentesana, our
Senior Vice President and Chief Financial Officer, serve on the board of
directors of MuniMae TE Bond Subsidiary. As directors of this subsidiary, they
have fiduciary responsibilities to holders of the subsidiary's preferred shares,
owned by third parties, and the subsidiary's common shares owned by us. There
may be instances where the interests of the subsidiary and its shareholders may
not coincide with, or may even be adverse to, the interests of the holders of
our common shares.
WE MAY BE UNABLE TO SECURITIZE ADDITIONAL ASSETS AND THEREFORE MAY NOT BE ABLE
TO MAKE ADDITIONAL INVESTMENTS.
Our ability to achieve our investment objectives depends largely on our
ability to (i) successfully securitize our mortgage revenue bonds and (ii)
manage our exposure to interest rate risks. Some of our mortgage revenue bonds
may have credit or other characteristics which make them unsuitable for
securitization at a given time. Any failure to consummate securitization and
interest rate swap transactions could reduce our net interest income and have a
material adverse effect on our operations.
------------------------
FORWARD-LOOKING INFORMATION
This prospectus supplement and the accompanying prospectus contain
forward-looking statements. These forward-looking statements are not historical
facts, but rather are based on our current expectations, estimates and
projections about our industry, beliefs and assumptions. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. These
risks and uncertainties are described in "Risk Factors" and elsewhere in this
prospectus supplement and the accompanying prospectus. We caution you not to
place undue reliance on these forward-looking statements, which reflect our
management's view only as of the respective dates of this prospectus supplement
and the accompanying prospectus.
USE OF PROCEEDS
We estimate the net proceeds we will receive from this sale of common
shares, after payment of expenses related to the offering and underwriting
discounts and commissions, will be approximately $82.7 million. We intend to use
the net proceeds of this offering to reduce outstanding notes payable of our
corporate subsidiary; however we may use a portion of the proceeds to fund
future investment activity. If the over-allotment options are exercised in full,
we estimate that the additional net proceeds we will receive, after payment of
expenses related to the offering and the underwriting discounts and commissions,
will be approximately $12.5 million. We intend to use the additional net
proceeds of this offering to reduce outstanding notes payable; however, we may
use a portion of the proceeds to fund future investment activity.
S-21
22
PRICE RANGE OF COMMON SHARES AND DISTRIBUTION HISTORY
The common shares have been publicly traded since August 30, 1996. Since
June 25, 1998, they have been traded under the symbol "MMA" on the NYSE. Prior
to that, the common shares traded on the American Stock Exchange. The table
below sets forth the quarterly high and low closing price per share of the
common shares as reported on the American Stock Exchange and NYSE, respectively,
for the quarters indicated and the distributions we paid with respect to each
quarter.
CLOSING PRICE PER
COMMON SHARE DISTRIBUTION
-------------------- PER COMMON
QUARTER HIGH LOW SHARE
------- -------- -------- ------------
1998:
First Quarter........................................... $21.7500 $19.6250 $.3750
Second Quarter.......................................... 22.1250 20.6250 .3800
Third Quarter........................................... 21.8750 18.3750 .3850
Fourth Quarter.......................................... 19.2500 16.2500 .3900
1999:
First Quarter........................................... 20.0000 17.2500 .3950
Second Quarter.......................................... 20.7500 18.5000 .4000
Third Quarter........................................... 20.9375 20.1250 .4050
Fourth Quarter.......................................... 20.6250 18.2500 .4075
2000:
First Quarter........................................... 20.0000 18.1875 .4125
Second Quarter.......................................... 20.6250 18.8750 .4175
Third Quarter........................................... 21.8750 20.1250 .4200
Fourth Quarter.......................................... 23.5000 20.2500 .4225
2001:
First Quarter (through January 31)...................... 24.3125 22.3750 --
On January 31, 2001, the last reported sales price of the common shares on
the NYSE was $23.07 per share.
On January 18, 2001, our board of directors raised our regular quarterly
distribution from $.4200 to $.4225 per common share payable on February 9, 2001
to shareholders of record on January 29, 2001. This represents an annualized
dividend of $1.69 per common share and an indicated annualized yield of 7.33%
based on a closing price of $23.07 for the common shares on January 31, 2001.
Approximately 92% of our net income for the nine months ended September 30, 2000
was tax-exempt.
S-22
23
THE COMPANY
GENERAL
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. As a result, the tax-exempt income MuniMae derives from certain
investments may be passed through to shareholders. Approximately 92% of our net
income for the nine months ended September 30, 2000 was tax-exempt.
We are in the business of originating, investing in and servicing
investments related to multifamily housing financings. A significant portion of
our investments are mortgage revenue bonds, or interests in mortgage revenue
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. As a result, income from these
investments is exempt from federal income taxation. Multifamily housing
developments, as well as the rent paid by the tenants, secure these investments.
We also originate, invest in and service investments that are related to
multifamily housing financings that are not mortgage revenue bonds issued by any
government or authority. Income from most of these investments is subject to
federal income taxation.
In October 1999 we acquired Midland Financial Holdings, Inc., which is now
our wholly owned corporate subsidiary. Midland is a fully integrated real estate
investment firm specializing in providing financing to the affordable
multifamily housing industry. After the Midland acquisition, we restructured our
operations into two business segments: (1) an investing segment consisting of
subsidiaries holding investments producing primarily tax-exempt interest income
and (2) an operating segment that primarily generates taxable interest income
and, through corporate subsidiaries, fee income by providing servicing, loan
origination and tax credit equity syndication services.
The following table sets forth the total income and the net income for each
business segment for the nine months ended September 30, 2000:
INVESTING OPERATING
(000S) (000S)(1)
--------- ---------
Total Income............................................ $32,096 $38,606
Net Income.............................................. $21,733 $ 2,318
---------------
(1) Segment figures exclude the adjustment to arrive at consolidated total and
net income of ($1.626) million which is related to origination fees on
purchased investments which are deferred and amortized into income over the
life of the investment.
Through Midland, we provide construction and permanent debt financing, tax
credit equity syndication, mortgage servicing and asset management services.
Midland's primary activities are:
- Originating loans. Midland acts as a Fannie Mae Delegated Underwriter
and Servicer, an approved FHA lender and an issuer of GNMA
mortgage-backed securities. There are only 25 licensed Delegated
Underwriters and Servicers and only they can originate loans on behalf of
Fannie Mae.
- Syndicating equity and debt investments. Midland syndicates equity
investments in low income housing tax credits and syndicates debt and
equity financing in affordable multifamily housing. Midland has
originated over $400 million in equity investments in 34 private
placements, investing in more than 300 affordable housing properties,
making us one of the nation's leading sponsors of syndication programs
originating equity for affordable housing transactions.
- Investment advisory services. One of Midland's subsidiaries is a
registered investment adviser. Through it we advise pension funds and
direct their investments in real estate finance investments. We currently
manage $160 million in pension fund money through a trust. We advise
Midland REIT, which is owned by three pension funds unrelated to us. This
entity was formed to make
S-23
24
equity investments into multifamily housing projects for which we may
also provide the debt financing.
Midland's net assets represented 4% of our net assets as of September 30,
2000 based on fair market value, and the income from Midland represented 11% of
our net income before income taxes for the nine months ended September 30, 2000.
Net assets are calculated as total balance sheet assets less the sum of total
balance sheet liabilities and preferred shareholders' equity in TE Bond
Subsidiary. Net income before income taxes is calculated as total income less
total income allocable to preferred shareholders in TE Bond Subsidiary.
We utilize our unique combination of multifamily housing development and
tax-exempt investment expertise to select and aggressively manage our
investments and to develop financing opportunities. We have been investing in
mortgage bonds and arranging financing for over 50 years. At September 30, 2000,
we owned a portfolio of investments secured directly or indirectly by 667
properties, which contained a total of 63,618 units and which were located in 45
states, the District of Columbia and the U.S. Virgin Islands.
Our senior management team, led by Mark K. Joseph, Chairman and Chief
Executive Officer, has an average of 10 years of experience with us and our
affiliates, and an average of 22 years of experience in the real estate
industry. Upon completion of this offering, our management and employees will
own approximately 11% of the outstanding common shares.
HISTORY
We are the successor to the business of the SCA Tax-Exempt Fund Limited
Partnership, a closed-end limited partnership that was merged into us in 1996.
The business of the SCA partnership was limited to the ownership and management
of the original mortgage revenue bond portfolio and the related working capital
loans. In 1995, the SCA partnership's management team, led by our current
chairman and our current president, sought to take advantage of opportunities to
acquire additional tax-exempt mortgage revenue bonds at attractive prices. With
the approval of the equity owners of the SCA partnership, the SCA partnership
merged with MuniMae. The combined entity ceased to solely hold the original pool
of bonds and began acquiring new investments as well as originating and
servicing investments.
In connection with the merger, holders of interests in the SCA partnership
were given the opportunity to elect to exchange their interests for common
shares, preferred shares or preferred capital distribution shares. We structured
the preferred shares to give their holders a security substantially the same as
their original partnership interests -- an interest in the original pool of
bonds. The preferred capital distribution shares give their holders an interest
in the static pool of bonds that reflects the refinancing transactions that
occurred in February 1995, as well as any other refinancings of these bonds that
may occur. We structured the common shares, unlike either the preferred shares
or the preferred capital distribution shares, to enable their holders to
participate in all of our income, including the income from investment of the
proceeds of the February 1995 refinancing, future financings, their pro rata
share of the income from the original bonds and income from our operations going
forward. As a result of the election process, the holders of 8.09% of the
outstanding limited partnership interests received preferred shares, the holders
of 4.29% of the outstanding limited partnership interests received preferred
capital distribution shares and the holders of 86.62% of the outstanding limited
partnership interests received our common shares. Also in connection with the
merger, we issued term growth shares that are allocated an aggregate of 2% of
our net cash flow after allocation to the preferred shares and preferred capital
distribution shares. The holders of the term growth shares are also entitled to
receive their distributions before any distributions are made to the holders of
the common shares.
In 1996, after we made the strategic decision to transform ourselves from
an owner of a static portfolio of participating mortgage revenue bonds to an
active investor that acquires and manages a diversified portfolio of investments
in multifamily housing financings, we embarked on an acquisition growth
strategy. This strategy capitalizes on our management expertise in multifamily
real estate and tax-exempt bond financing, as well as favorable interest rates
and other market conditions. Between January 1,
S-24
25
1997 and September 30, 2000, we have participated in transactions with respect
to approximately $699 million of tax-exempt mortgage revenue bonds. After
subsequent securitization transactions and the limited sale of certain
investments, our balance sheet as of September 30, 2000 reflects retained
interests in the transactions completed as of September 30, 2000 of
approximately $460 million. We will continue to rely on our unique combination
of real estate and tax-exempt investment expertise to prudently manage the risks
associated with the investments.
CAPITAL RAISING AND FUNDING
Since 1996, MuniMae has raised an aggregate of $120 million, before
expenses, through two common share offerings. In May 1999 and June 2000, we
raised an aggregate of $144 million, before expenses, through the sale of
preferred shares of MuniMae TE Bond Subsidiary, LLC, an otherwise wholly owned
subsidiary. The preferred shareholders of the subsidiary have priority on the
income and assets of the subsidiary, which represents 46% of our gross income
for the nine months ended September 30, 2000 and 49% of our gross assets as of
that date. We own the common equity in this subsidiary and our financial
statements include the income derived from this interest. The financial
statements also consolidate the investments held in the subsidiary, and indicate
that we own only a subordinated interest.
BUSINESS AND GROWTH STRATEGIES
One of our primary objectives is to increase distributable tax-exempt cash
flow per common share and raise the value of our common shares. We seek to
achieve our growth objectives by acquiring, servicing and managing a diversified
portfolio of mortgage revenue bonds and other bond related investments. In
particular, our growth plans include:
- Selective acquisitions of new multifamily housing investments at
attractive spreads over our cost of capital;
- Intensive asset management to collect debt service payments on our
investments and to maximize the collection of contingent interest; and
- Balanced funding through the use of equity financing, debt financing and
securitizations of our assets to finance the acquisition of mortgage
revenue bonds and other bond related investments.
Acquisition Strategy
We will continue to pursue acquisition opportunities to the extent that
appropriate investments are available on attractive terms. We believe that
currently there are a substantial number of mortgage revenue bonds and other
real estate investments available at attractive prices in the following
categories:
- Tax-exempt mortgage revenue bonds used to finance development or
rehabilitation of multifamily properties. Of the transactions we have
completed since September 30, 2000, $21.6 million involved the financing
of development or rehabilitation of multifamily properties.
- Tax-exempt bonds issued for construction of multifamily housing owned and
managed by tax-exempt charitable organizations. These properties
generally serve moderate-income families with incomes between 50% and 80%
of a region's median. Of the transactions we have completed since
September 30, 2000, $17.8 million were in this category.
- Other portfolios of tax-exempt bonds and related investments backed by
multifamily housing properties that meet our underwriting criteria and
target risk adjusted returns. Of the transactions we have completed since
September 30, 2000, transactions with an aggregate principal amount of
$19.9 million involved this type of investment.
- Existing mortgage bonds as the underlying mortgages are refinanced. There
are a significant number of mortgage revenue bonds backed by multifamily
properties that were originated in the late 1980s. We believe, in light
of the current interest rate environment, that many of the obligors on
these mortgage revenue bonds are likely to consider refinancing them.
S-25
26
Asset Management Strategy
We believe that our portfolio offers opportunities for growth through our
asset management program, which serves to increase cash flows available for debt
service, particularly from our 27 existing participating investments as of
September 30, 2000. On a portfolio wide basis, we conduct ongoing site visits
and inspections, management agent assessments, budget reviews, market analyses
and monthly and annual operating statement reviews, and also monitor the
establishment and review of capital plans.
Balanced Funding Strategy
We use a combination of equity financing, debt financing and two types of
securitization of our assets to finance the acquisition of investments. We
believe that securitizations provide funds for acquisitions at a low cost
relative to the costs of other forms of financing.
Short term securitizations cause mortgage bonds to be deposited into a
trust. The trust sells short term floating rate interests in the trust, which
have first priority on the cash flow from the deposited mortgage bonds, to third
party investors. We purchase from the trust the right to receive the interest
remaining after the trust makes payments to the holders of the senior interests,
called residual interests. We often engage in interest rate swaps designed to
reduce, but not eliminate, interest rate risks related to such transactions. At
September 30, 2000, approximately $228 million fair value (in addition to the
mortgage revenue bonds which are the subject of securitization) or 24% of our
gross assets were pledged to secure repayment of $311 million in principal
amount of short term floating rate certificates.
Longer term securitizations are structured in a manner similar to short
term securitizations. However, unlike short term securitizations, the interests
sold from the longer term securitization trusts bear interest at a fixed rate or
at a fixed rate for a period of time and then become subject to a remarketing.
We have a $67 million term securitization facility we completed in 1999. At
September 30, 2000, approximately $61 million fair value or 6.4% of our gross
assets were pledged to secure repayment of $67 million in principal amount of
senior trust certificates issued from the securitization facility.
The securitization transactions involve our sale of mortgage revenue bonds
which are placed into a trust that issues floating rate interests that are sold
to a third party. Under generally accepted accounting principles, we reflect on
our balance sheet bonds that are in a trust which has issued floating rate
interests when we retain the right to repurchase the floating rate interests at
our discretion. In these cases, we reflect additional debt on our balance sheet.
When we do not retain the right to repurchase the floating rate interests, we do
not reflect the bond as being held by us on our balance sheet and also do not
reflect additional debt.
We anticipate converting many of our short term securitizations into longer
term facilities to the extent that the secondary market permits. We expect that
the MMACap credit enhancement facility closed with Fannie Mae in December 2000
will facilitate those longer term securitizations in the future. See "Recent
Developments."
Diverse Access to Capital
The acquisition of Midland has enabled us to increase our access to capital
from both pension funds and Fannie Mae and expand our product line to include
investments that generate taxable income, syndication of tax credit equity and
investment advisory services. We have used our expanded product line to create a
full service, one-stop resource of tax-exempt and taxable financing to the
multifamily housing markets and believe we can take advantage of cross-selling
opportunities with our larger customer base.
S-26
27
BUSINESS SEGMENTS AND SOURCES OF INCOME
Our operations consist of two business segments: (1) an investing segment
consisting of subsidiaries holding investments producing primarily tax-exempt
interest income and (2) an operating segment that primarily generates taxable
interest income and, through corporate subsidiaries, fee income by providing
servicing, loan origination and tax credit equity syndication services.
The following table sets forth summary data with respect to the mortgage
bonds and other bond related investments that comprised our investment segment
as of September 30, 2000:
PRO
WEIGHTED FORMA FACE AMOUNT RANGE INTEREST RATE
FACE FAIR AVERAGE ANNUAL (000S) RANGE(5)
AMOUNT VALUE INTEREST INTEREST ------------------ --------------
(000S) (000S) RATE (000S)(4) LOW HIGH LOW HIGH
-------- -------- -------- --------- ------- -------- ----- ------
INVESTMENTS IN MORTGAGE REVENUE
BONDS:
Participating bonds............... $157,735 $150,258 7.66%(2) $12,085 $6,725 $33,900 4.98% 9.51%
Non-participating bonds........... 254,309 241,559(1) 7.11(3) 18,075 25 54,999 5.05 9.50
Participating subordinate bonds... 64,704 60,544 9.31(2) 6,022 1,489 12,415 0.66 22.06
Non-participating subordinate
bonds........................... 12,862 12,309 10.00(3) 1,287 675 5,000 5.00 13.00
-------- -------- ----- -------
TOTAL............................. $489,610 $464,670 7.67% $37,469
======== ======== ===== =======
PRO FORMA
FACE FAIR ANNUAL
AMOUNT VALUE INTEREST
(000S) (000S) (000S)(4)
-------- -------- ---------
INVESTMENTS IN RESIDUAL BOND RELATED
INVESTMENTS....................... $ 4,955 $(1,485) $8,585
======== ======== ======
---------------
(1) Aggregate fair value of the non-participating bonds includes the fair values
of two mortgage revenue bonds that we have securitized resulting in $24
million of corresponding short term debt on our balance sheet. These bonds
continue to be reflected on our balance sheet because the accounting for
these transactions is partially dependent on certain call provisions which
enable us to retain effective control over these mortgage revenue bonds.
(2) Weighted average interest rate of participating bonds is derived by
annualizing September 30, 2000 year-to-date aggregate interest paid on all
participating bonds and dividing by the aggregate face amount of all
participating bonds as of September 30, 2000.
(3) Weighted average interest rate of non-participating bonds is derived by
summing the product of the face amount times the interest rate of each
non-participating bond and dividing the total by the aggregate face amount
of all non-participating bonds.
(4) Pro forma annual interest represents year-to-date aggregate interest income
as of September 30, 2000 annualized. Interest income from our residual
interests may vary substantially as interest rates rise and fall. See "Risk
Factors -- We may suffer adverse consequences from changing interest rates
and the effectiveness of our hedging strategies."
(5) With respect to participating mortgage revenue bonds, low and high interest
rates are derived by annualizing September 30, 2000 year-to-date aggregate
interest paid and dividing by the face amount as of September 30, 2000. With
respect to non-participating mortgage revenue bonds, low and high interest
rates are based upon the stated base rates in the mortgage revenue bonds.
The following is a general description of the terms of the investments held
by our investment segment and is qualified in its entirety by the more detailed
description contained in our annual report on Form 10-K for the year ended
December 31, 1999, as amended, and subsequent quarterly reports on Form 10-Q
each of which are incorporated by reference in this prospectus supplement.
S-27
28
MORTGAGE REVENUE BONDS
MuniMae's principal investments are mortgage revenue bonds. The proceeds of
the bonds were used to make mortgage loans for the construction, acquisition or
refinancing of multifamily housing developments throughout the United States.
Our rights and the specific terms of the mortgage revenue bonds are defined by
the various loan documents that were negotiated at the time of creation of the
loans and the issuance of the mortgage revenue bonds. Most of the underlying
housing developments qualify as "qualified residential rental properties" under
Section 142(d) of the Internal Revenue Code or, in the case of tax-exempt
charitable organization obligors, Section 145 of the Internal Revenue Code, both
of which require that a specified percentage of rental units of these
developments be rented to persons whose incomes do not exceed certain local
median income levels. Accordingly, the mortgage revenue bonds are "qualified
bonds" within the meaning of Section 141(e) of the Internal Revenue Code, and
based upon the opinions issued by bond counsel or special tax counsel at the
time of initial issuance of the mortgage revenue bonds, interest paid on the
mortgage revenue bonds is excludable from gross income for federal income tax
purposes.
Participating Senior Mortgage Revenue Bonds. We have 13 participating
senior mortgage revenue bonds as of September 30, 2000. These bonds have
contingent interest features that allow us to participate in the growth of the
underlying property. These participating bonds provide for the payment of
contingent interest from available cash flow of the property in addition to the
base interest. The terms of the contingent interest to be received on a bond are
specific to that bond.
Our ability to collect contingent interest is dependent upon the level of
project cash flow and sale or repayment proceeds. Five participating mortgage
bonds, with respect to base interest, and 13, with respect to contingent
interest, are currently on non-accrual status for accounting purposes which
means that income is recognized only as and to the extent cash is collected.
Non-Participating Senior Mortgage Revenue Bonds. We have 30
non-participating mortgage revenue bonds as of September 30, 2000. These bonds
provide for the payment of a fixed rate of interest and do not contain
contingent interest features.
Participating Subordinate Mortgage Revenue Bonds. We have fourteen
participating bond investments which are subordinated to senior holders as of
September 30, 2000. The participating subordinate mortgage bonds are held in a
trust. We own all of the custodial receipts related to the underlying
participating subordinate bonds. Certain of the participating bonds are
subordinated in priority and right of payment to the payment of senior bonds and
demand notes. These bonds bear interest at either 16% or the greater of 3% or
the amount of available cash flow not exceeding 16%. All the participating
subordinate bonds are payable only to the extent of available cash flow from the
projects. Income is recognized only as and to the extent cash is collected for
all 14 participating subordinate bonds.
Non-Participating Subordinate Mortgage Revenue Bonds. We have seven
non-participating subordinate mortgage revenue bonds that provide for payment of
interest at rates that are fixed as of September 30, 2000. The payment of
principal and interest 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.
BOND RELATED INVESTMENTS
We engage in a number of short term and longer term securitization
transactions in which we cause bonds to be deposited into a trust. The trust
sells short term floating rate interests or fixed rate interests in the trust,
which have first priority on the cash flow from the deposited mortgage bonds, to
third party investors. We purchase from the trust the right to receive the
interest remaining after the trust makes payments to holders of the senior
interests, called a residual interest. The residual interests we own are subject
to call provisions upon the occurrence of certain events. We may pledge
additional mortgage revenue bonds to secure repayment of the senior interests.
We may also enter into hedging transactions to limit our exposure to rising
short term interest rates. Interest rate swaps are contracts exchanging a
counterparty's obligation to pay a floating rate for our obligation to pay a
fixed rate. We have an
S-28
29
unrealized net loss on our hedge arrangements aggregating approximately $1.7
million for the nine months ended September 30, 2000. We also, and may continue
to, directly purchase residual interests in trusts holding mortgage revenue
bonds that we have not previously owned directly. We have 26 residual
investments as of September 30, 2000.
OPERATING SEGMENT
The following table sets forth summary data with respect to our operating
segment as of September 30, 2000:
FEE INCOME FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 2000
(000S)
-----------------------
Loan origination fees(1)................................. $ 6,455
Loan servicing fees(2)................................... 4,163
-------
Total.......................................... $10,618
=======
---------------
(1) Brokerage fees derived from tax credit equity syndication fund
originations are allocated to origination fees. Segment figure excludes
adjustment to arrive at consolidated loan origination fees of ($1.626)
million which is related to origination fees on purchased investments
which are deferred and amortized into income over the life of the
investment.
(2) Fees for servicing existing tax credit equity syndication funds which
totaled $1.4 million through September 30, 2000 are not included in
servicing fees.
We earn loan origination and loan servicing fees on transactions with
respect to investments that we hold in our portfolio and on transactions with
respect to investments we originate and service for third parties. We earn
syndication and brokerage fees in connection with creating and servicing tax
credit equity syndication funds.
S-29
30
MANAGEMENT
The following table sets forth certain information with respect to our
directors and executive officers as of December 31, 2000:
NAME AGE POSITION HELD WITH THE COMPANY
---- --- -----------------------------------------------------------
Mark K. Joseph................. 62 Chairman of the Board, Chief Executive Officer and Director
Michael L. Falcone............. 39 President, Chief Operating Officer and Director
Thomas R. Hobbs................ 60 Senior Vice President and Secretary
Gary A. Mentesana.............. 36 Senior Vice President and Chief Financial Officer
Robert J. Banks................ 56 Senior Vice President and Director
Keith J. Gloeckl............... 50 Senior Vice President
Earl W. Cole, III.............. 47 Senior Vice President
Richard A. Monfred............. 40 Vice President
James K. Lowe.................. 50 Vice President
Angela A. Barone............... 40 Vice President
Michael W. Walton.............. 32 Vice President
Sheila R. Gibson............... 31 Controller
Charles Baum................... 59 Director
Richard O. Berndt.............. 58 Director
Robert S. Hillman.............. 61 Director
William L. Jews................ 49 Director
Douglas A. McGregor............ 58 Director
Carl W. Stearn................. 68 Director
MARK K. JOSEPH is our Founder, Chairman of the Board, Chief Executive
Officer and a Director. He served as the president and a director of the
managing general partner of SCA Tax-Exempt Fund Limited Partnership. He has been
in the real estate business for over three decades. He is also the founder and
chairman of the Shelter Group, a privately held real estate development and
management company.
MICHAEL L. FALCONE is our President and Chief Operating Officer. As
chairman of the operations committee, Mr. Falcone has managed our day-to-day
operations since 1996.
THOMAS R. HOBBS is a Senior Vice President and our Secretary. He worked for
the SCA partnership prior to its merger with us. Mr. Hobbs is involved in the
structuring and purchasing of tax-exempt mortgage revenue bond investments.
GARY A. MENTESANA is a Senior Vice President and Chief Financial Officer.
Mr. Mentesana is responsible for our financial operations and manages our
capital market activities. He worked for the SCA partnership prior to its merger
with us. Mr. Mentesana is a certified public accountant.
ROBERT J. BANKS is a Senior Vice President and a Director. Mr. Banks joined
Midland in 1973 and has been the chairman of the board and chief executive
officer of the Midland companies since 1993. Mr. Banks is responsible for the
strategic planning and business development of Midland.
KEITH J. GLOECKL is a Senior Vice President. Mr. Gloeckl has been president
of Midland Mortgage Investment Corporation and chief operating officer of all
the Midland companies since 1993. Mr. Gloeckl is primarily responsible for the
day-to-day operations of Midland.
EARL W. COLE, III is a Senior Vice President and directs our portfolio
management and loan servicing operations. He served in a similar capacity for
the managing general partner of SCA Tax-Exempt Fund Limited Partnership from
1989 to 1996.
S-30
31
RICHARD A. MONFRED is a Vice President and is responsible for originating
tax-exempt multifamily bonds on a national basis. Mr. Monfred joined us in 1998.
JAMES K. LOWE is a Vice President and is responsible for our special
projects. Mr. Lowe has more than 25 years of experience in real estate
operations, due diligence and market analysis. Mr. Lowe joined us in 1997.
ANGELA A. BARONE is a Vice President. Prior to the merger of the SCA
partnership with us, Ms. Barone served in a similar capacity for the SCA
partnership. Ms. Barone is a certified public accountant.
MICHAEL W. WALTON is a Vice President and is responsible for new business
development for MuniMae. Mr. Walton joined us in 1997.
SHEILA R. GIBSON is our Controller. Ms. Gibson has overall responsibility
for financial and tax reporting, SEC and stock exchange compliance and
management of our temporary investments. Ms. Gibson joined us in 1995.
CHARLES BAUM has been a Director since 1996. Mr. Baum is Chairman and Chief
Executive Officer of the Morgan Group, Elkhart, Indiana, a position he has held
since August 1992. The Morgan Group provides transportation and other services
to the manufactured housing and recreational vehicle industries.
RICHARD O. BERNDT has been a Director since 1996. Mr. Berndt is the
Managing Partner of the law firm of Gallagher, Evelius & Jones located in
Baltimore, Maryland. Mr. Berndt has extensive experience in corporate and real
estate law.
ROBERT S. HILLMAN has been a Director since 1996. Recently retired, Mr.
Hillman was a member of the law firm of Whiteford, Taylor and Preston, L.L.P.,
which has offices in Baltimore, Maryland and Washington, D.C. Formerly the
Executive Partner of the 135-attorney firm, Mr. Hillman has extensive experience
in municipal finance, real estate, labor and employment law.
WILLIAM L. JEWS has been a Director since 1996. Mr. Jews is President and
Chief Executive Officer of Blue Cross/Blue Shield of Maryland which employs
approximately 3,200 people, insures 1.4 million people and has annual revenues
of approximately $1.9 billion.
DOUGLAS A. MCGREGOR has been a Director since 1999. Mr. McGregor is vice
chairman and chief operating officer for the Rouse Company. Mr. McGregor has
extensive experience in real estate development and management.
CARL W. STEARN has been a Director since 1996. Mr. Stearn formerly served
as Chairman and Chief Executive Officer of Provident Bankshares Corporation and
Chief Executive Officer of Provident Bank of Maryland, a community bank with
$3.7 billion in assets. Mr. Stearn retired from the Provident Bankshares
Corporation and Provident Bank of Maryland in April 1998.
Upon completion of the offering, our management and employees will own
approximately 11% of the outstanding common shares.
S-31
32
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the federal income tax
consequences which are material to a typical common shareholder of MuniMae who
is a United States citizen or resident and is based on the federal income tax
law, consisting of the Internal Revenue Code of 1986, as amended, Treasury
Regulations issued under the Code, administrative interpretations of the Code
and judicial interpretations of the Code. No attempt has been made to comment on
all federal income tax matters affecting MuniMae or its common shareholders. The
discussion does not purport to deal with federal income or other tax
consequences applicable to an investment by certain categories of common
shareholders, including, without limitation, tax-exempt organizations, dealers
in securities, banks, insurance companies, Subchapter S corporations, real
estate investment trusts, and persons who are not citizens or residents of the
United States and is not tax advice. In the opinion of Clifford Chance Rogers &
Wells LLP, our counsel for this offering, the following discussion reflects the
federal income tax considerations which are material to a common shareholder. No
ruling on the federal, state or local tax considerations relevant to the
issuance of the common shares, the debt characterization of the tax-exempt
mortgage revenue bonds, the tax-exempt character of interest on the tax-exempt
mortgage revenue bonds or other investments or the classification of MuniMae as
a partnership has been, or will be, requested from the Internal Revenue Service
or from any other tax authority. Moreover, no assurance can be given that the
conclusions reached by our counsel will be accepted by the Internal Revenue
Service or, if challenged by the Internal Revenue Service, sustained in court.
This summary is based on current legal authority and there is no assurance that
legislative or administrative changes or court decisions may not occur which
would significantly modify the statements and opinions expressed herein.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS ABOUT THE FEDERAL,
STATE, LOCAL AND FOREIGN INCOME TAX CONSEQUENCES TO THEM PRIOR TO PURCHASING THE
COMMON SHARES.
GENERAL
Partnership Status of MuniMae. Based upon and subject to our
representations and discussions set forth below, MuniMae will be classified as a
partnership for federal income tax purposes. Under the Treasury Regulations that
are effective as of January 1, 1997, in the case of a "business entity" that was
in existence prior to January 1, 1997, the claimed classification of the entity
will be respected for all periods prior to January 1, 1997 if (i) the entity had
a reasonable basis for its claimed classification; (ii) the entity and all
members of the entity recognized the federal income tax consequences of any
change in the entity's classification within six months prior to January 1,
1997; and (iii) neither the entity nor any member was notified in writing on or
before May 8, 1996, that the classification of the entity was under examination
(in which case the entity's classification will be determined in the
examination). Based on our representations that the Internal Revenue Service did
not examine the classification of MuniMae or its predecessor as a partnership on
or before May 8, 1996, and based upon its review of MuniMae's certificate of
formation and operating agreement and the limited partnership agreement of
MuniMae's predecessor, our counsel has advised us that in its opinion MuniMae
and its predecessor satisfy the foregoing requirements. However, taxation of
MuniMae as a partnership further depends upon its satisfying the "qualifying
income" exception for publicly traded partnerships described below.
Publicly Traded Partnership Rules. MuniMae is a "publicly traded
partnership" because its common shares are traded on the NYSE. A publicly traded
partnership is generally taxable as a corporation unless 90% or more of its
gross income is "qualifying income." Qualifying income includes interest,
dividends, real property rents, and gains from the sale or disposition of real
property or capital assets held for the production of interest or dividends, and
certain other items. Our counsel has advised us that, although the issue is not
free from doubt, tax-exempt interest constitutes qualifying income for this
purpose. In this regard, we have represented to our counsel that, in all
relevant prior years of MuniMae's, and its predecessor's, existence at least 90%
of its gross income was qualifying income and we have covenanted to conduct
MuniMae's operations in a manner, such that it will continue to satisfy the
qualifying income exception. See "RISK FACTORS -- Publicly Traded Partnership
Status." In addition, under the relevant
S-32
33
provisions of the federal income tax law, income from notional principal
contracts, such as interest rate swaps, caps and floors, should be included in
qualifying income if the property, income or cash flow that measures the amounts
to which MuniMae is entitled under such contracts would give rise to qualifying
income if held or received directly by MuniMae.
On the other hand, interest, including tax-exempt interest, will not be
treated as qualifying income if such interest is derived in the active conduct
of a lending, banking or similar business. We have represented and covenanted
that MuniMae acts as an investor with respect to its investments, and has not
and will not engage in the active conduct of a lending, banking or similar
financial business. If, for any reason, more than 10% of its gross income is
attributable to non-qualifying income, including interest income derived from
the conduct of a lending, banking or similar financial business, MuniMae will be
taxable as a corporation rather than as a partnership for federal income tax
purposes. See "RISK FACTORS -- Limitations on Business Activities." Based upon,
and subject to, the foregoing representations and covenants and based upon its
review of MuniMae's investments and operational activities as we reported, our
counsel has advised us that, although the issue is not free from doubt, MuniMae
and its predecessor have been and are properly treated as partnerships for
federal income tax purposes.
If MuniMae becomes taxable as a corporation in any taxable year in the
future for federal income tax purposes, its income, losses and deductions and
other tax items will be reported only on its tax return rather than being passed
through to its common shareholders, term growth shares, preferred shareholders
and preferred capital distribution shareholders. In addition, MuniMae will be
required to pay federal income tax at corporate rates on any portion of its net
income that does not constitute tax-exempt income. In this regard, a portion of
its tax-exempt income may be included in determining its alternative minimum tax
liability. The imposition of any such tax will reduce the amount of cash
available to be distributed to its common shareholders, term growth
shareholders, preferred shareholders and preferred capital distribution
shareholders. In addition, distributions from MuniMae to its common
shareholders, term growth shares, preferred shareholders and preferred capital
distribution shareholders will be ordinary dividend income taxable to the
shareholders as portfolio income to the extent the distributions represent
MuniMae's earnings and profits, including tax-exempt net income, as well as any
taxable income (reduced by any federal income tax thereon) that it may have.
MuniMae will not be able to deduct the payment of those dividends.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS RELATING TO MUNIMAE AND ITS
SHAREHOLDERS
Taxation of MuniMae and Its Shareholders. A partnership is not subject to
federal income tax. Assuming that MuniMae is classified as a partnership for
federal income tax purposes, it will not be subject to federal income tax.
Instead, each shareholder is required to include on the shareholder's personal
income tax return the shareholder's distributive share of MuniMae's income,
gain, loss, deduction and other tax items, regardless of whether any money is,
in fact, distributed to such shareholder. Thus, a shareholder may, for example,
be required to report income, without the current receipt of cash, if MuniMae
does not make cash distributions while generating taxable income from its
operations. Consequently, a shareholder's tax liability with respect to his or
her share of MuniMae's taxable income may exceed the cash actually distributed
in a given taxable year.
Although MuniMae does not pay federal income tax on its income, it must
file a federal information tax return on an Internal Revenue Service Form 1065
with respect to its income, gain, loss, deduction and other tax items arising
from its operations. In addition, MuniMae must provide each shareholder with
information as to such shareholder's distributive share of its income, gain,
loss, deduction and other tax items on a Schedule K-1 to the Internal Revenue
Service Form 1065 after the close of each of its fiscal years. In preparing such
information, MuniMae will utilize various accounting and reporting conventions,
some of which are discussed herein, to determine each shareholder's allocable
share of its income, gain, loss, deduction and other tax items.
MuniMae's allocation provisions will be recognized for federal income tax
purposes only if they meet certain requirements under the federal income tax
law. There is no assurance that the use of such
S-33
34
conventions will result in allocations that conform to such requirements. In
addition, there is no assurance that the Internal Revenue Service will not
challenge the use of such allocations and conventions. Any such challenge could
result in substantial expenses to MuniMae and shareholders, as a result of
contesting such contentions, as well as an increase in tax liability to
shareholders as a result of adjustments to their allocable share of MuniMae's
income, gain, loss, deduction and other tax items. See "Tax Returns, Audits,
Interest and Penalties."
Tax-Exempt Income. MuniMae expects that a significant portion of its
revenues will consist of tax-exempt income. There are risks that certain amounts
of income that we will report as tax-exempt may not qualify for such treatment.
See "RISK FACTORS."
Allocation of Income and Loss. Article 4 of MuniMae's operating agreement
provides rules for allocating its taxable and tax-exempt income, gain, loss,
deductions (including non-deductible expenses) and other tax items. The relevant
provisions of Article 4 of the operating agreement generally allocate to holders
of common shares all of MuniMae's items of income, gain, loss, deductions and
other tax items, other than items of income gain, loss and deductions
attributable to the SCATEF Assets, as the term is defined in the operating
agreement, which are used to fund most or all distributions in respect of
preferred shares and preferred capital distribution shares. Additional items of
income, gain, loss, deduction and other tax items, including tax-exempt
interest, are allocated to the holders of preferred shares and preferred capital
distribution shares to the extent that the items attributable to the SCATEF
Assets are insufficient to account for the distributions payable to such holders
under Article 5 of the operating agreement.
MuniMae's allocation provisions will be recognized for federal income tax
purposes only if they are considered to have "substantial economic effect" and
are not retroactive allocations. If any allocation of a tax item fails to
satisfy the substantial economic effect requirement, the item will be allocated
among the shareholders based on their respective interests in MuniMae,
determined on the basis of all of the relevant facts and circumstances. Such a
determination could result in the income, gains, losses, deductions, or other
tax items allocated under the operating agreement being reallocated among the
shareholders differently from the original allocation. Such a reallocation,
however, would not alter the distribution of cash flow under the operating
agreement.
The MuniMae operating agreement permits shareholders' capital accounts to
be increased or decreased to reflect the revaluations of assets, at fair market
value, on MuniMae's books in connection with a contribution from, or
distribution to, any shareholder of money or other property. In addition,
shareholders' capital accounts are restated to reflect the issuance of
additional common shares at the time of such issuance of additional common
shares.
In addition, the relevant provisions of the federal income tax law and
MuniMae's operating agreement require that MuniMae allocate tax items so as to
take into account variations between the purchase price of common shares
pursuant to this offering and the share of MuniMae's tax basis in its assets,
less debt, if any, allocable to the newly issued common shares. These rules are
complex and there is no assurance MuniMae will be able to comply with them
fully.
When common shares are sold or exchanged by individual shareholders,
MuniMae is required to account for the variation between the basis of the
transferee shareholder in his or her common shares and the transferee
shareholder's share of MuniMae's tax basis in its assets, less the transferee's
share of MuniMae's debt, allocable to the shareholder's common shares. The
Internal Revenue Service has not issued guidance as to how a partnership with
publicly traded shares can comply with these rules. There is no assurance that
the Internal Revenue Service will agree with MuniMae's methods of allocating
income, gain, loss, deduction and other tax items, including tax-exempt interest
and nondeductible expenses, to the holders of common shares, term growth shares,
preferred shares and preferred capital distribution shares or MuniMae's
determination and allocation of adjustments attributable to the differences
between the shareholders' purchase price of common shares and their shares of
MuniMae's tax basis in its assets and the allocation of its expenses. Because,
as a publicly traded partnership, MuniMae may be unable to comply with the
literal requirements of the federal income tax law and, because certain of its
operating agreement's allocations may not have substantial economic effect,
counsel is unable to express an opinion
S-34
35
on these issues. However, MuniMae does not expect that any reasonable
adjustments which may be required by the Internal Revenue Service would
substantially increase the share of MuniMae's taxable income allocable to
shareholders.
Shareholder's Basis in Common Shares. A shareholder's adjusted basis in
common shares is relevant in determining the gain or loss on the sale or other
disposition of common shares and the tax consequences of a distribution from us.
See "Treatment of Cash Distributions to Shareholders." In addition, a
shareholder is entitled to deduct on the shareholder's personal income tax
return, subject to the limitations discussed below, the shareholder's
distributive share of MuniMae's net loss, if any, to the extent of such
shareholder's adjusted basis in the shareholder's common shares.
A shareholder's initial basis in newly issued common shares will be the
shareholder's purchase price for the common shares, increased by the
shareholder's share of items of MuniMae's income, including tax-exempt interest,
and gain, and reduced, but not below zero, by (a) the shareholder's share of
items of MuniMae's loss and deduction, including any nondeductible expenses and
(b) any cash distributions received by such shareholder from MuniMae.
Treatment of Cash Distributions to Shareholders. Cash distributions made
to shareholders will generally be treated as a non-taxable return of capital and
will not generally increase or decrease such shareholders' share of taxable
income or loss from MuniMae. A return of capital generally does not result in
any recognition of gain or loss for federal income tax purposes but reduces a
shareholder's adjusted basis in the shareholder's common shares. Distributions
of cash in excess of a shareholder's adjusted basis in the shareholder's common
shares immediately prior thereto will result in the recognition of gain to the
extent of such excess.
Sale of Common Shares. Gain or loss will be recognized by a shareholder
upon the sale of the common shares acquired in an amount equal to the difference
between the amount realized on the sale and the tax basis of the shareholder
allocable to the common shares. Except to the extent attributable to our
unrealized receivables or inventory, which are not expected to be material, such
gain or loss will be a capital gain or loss if the common shares are held as
capital assets and will be a long term capital gain or loss if the shareholder's
holding period in the common shares is more than one year. In general, an
individual's capital gains are taxed at a rate of 20%, and 10% for individuals
in the 15% tax bracket. With respect to the common shares acquired on or after
January 1, 2001, capital gains are taxed at a rate of 18%, and 8% for
individuals in the 15% tax bracket if the shareholder acquires the common shares
on or after January 1, 2001 and holds them for more than five years.
The Internal Revenue Service takes the position that a partner has a single
aggregate basis in all of the partner's partnership interests and that, to
determine gain or loss upon a sale of a part of such partnership interests, the
portion of the partner's basis allocated to the interests being sold equals the
partner's share of partnership liabilities transferred in the sale plus the
partner's aggregate tax basis, excluding basis attributable to partnership
liabilities, multiplied by the ratio of the fair market value of the interests
sold to the fair market value of all of the partner's partnership interests.
This portion may produce unexpected results if applied to a shareholder who
purchased common shares at more than one price or who owns term growth shares,
preferred shares and/or preferred capital distribution shares in addition to
common shares because the sale may result in significantly different gains or
losses than in the case of a shareholder who held only the common shares being
sold.
Limitation on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest" expense is generally limited to the amount of
such taxpayer's "net investment income." Investment interest expense includes
(i) interest on indebtedness incurred or continued to purchase or carry property
held for investment and that is not part of a passive activity, (ii) a
partnership's interest expense attributed to portfolio income under the rules
governing passive activities, and (iii) the portion of interest expense incurred
or continued to purchase or carry an interest in a passive activity, such as a
shareholder's interest in MuniMae, to the extent attributed to portfolio income
under the passive loss rules. Net investment income includes gross income from
property held for investment, gain attributable to the disposition of property
held for investment, and amounts treated as gross portfolio income pursuant to
the
S-35
36
passive loss rules less deductible expenses, other than interest, directly
connected with the production of investment income.
A shareholder would treat as investment interest the shareholder's
allocable portion of MuniMae's total interest expense, if any, or of any margin
account or other interest expense incurred to purchase or carry a common share,
that is attributable to our gross portfolio income less deductible expenses
directly connected with such portfolio income. We currently do not expect that
MuniMae will incur any significant amount of indebtedness as part of its
investment strategy. However, there can be no assurance that MuniMae will not
change or otherwise modify its strategy and incur significant amounts of
indebtedness in the future. The portion of a shareholder's allocable share of
MuniMae's interest expense, or of any margin account or other interest expense
incurred to purchase or carry a common share, that is attributable to MuniMae's
passive income is subject to the passive loss limitations described above.
Limitations on Deductibility of Losses. It is not anticipated that MuniMae
will generate any tax losses. A corporate shareholder generally will be entitled
to deduct its distributive share of any losses of MuniMae to the extent of the
shareholder's tax basis of its common shares at the end of the year in which
such losses occur. However, shareholders who are individuals, trusts, estates,
personal service companies and certain closely held C corporations may be
subject to limitations on deducting losses of MuniMae.
Deductibility of Interest Connected with Tax-Exempt Income. Federal income
tax law generally disallows any deduction for interest paid by a taxpayer on
indebtedness incurred or continued for the purpose of purchasing or carrying a
tax-exempt obligation. A purpose to carry tax-exempt obligations will be
inferred whenever a taxpayer owns tax-exempt obligations and has outstanding
indebtedness which is neither directly connected with personal expenditures nor
incurred in connection with the active conduct of a trade or business. The
Internal Revenue Service may take the position that a shareholder's allocable
portion of any interest MuniMae paid on its borrowings and/or any interest paid
by the shareholder on indebtedness incurred to purchase an interest in MuniMae
should be viewed in whole or in part as incurred to enable such shareholder to
continue carrying such tax-exempt obligations and, therefore, that the deduction
of any such interest by such shareholder should be disallowed in whole or in
part. We do not expect that MuniMae will incur any significant amount of
indebtedness to purchase or carry tax-exempt investments. However, a risk exists
that the Internal Revenue Service may take the position that short term or
longer term interests in the securitizations trust are debt. MuniMae has
received opinions of counsel to the effect that such interests are not debt for
federal income tax purposes. However, if the Internal Revenue Service takes the
position that the short term or longer term interests are debt and is successful
in maintaining this position in a court, interest paid to the holders of such
interests will not be deductible to MuniMae, as the holder of the residual
interest.
Alternative Minimum Tax. Unless grandfathered under the applicable
provisions of the federal income tax law, interest on the mortgage revenue bonds
generally is an item of tax preference for purposes of the alternative minimum
tax. To the extent interest on any of the mortgage revenue bonds MuniMae owns is
such an item of tax preference, a portion of the interest income allocable to
common shareholders also will be a tax preference item.
Other Federal Income Tax Considerations. Federal income tax law provides
certain provisions that could result in other tax consequences as a result of an
ownership of common shares or the inclusion in certain computations including,
without limitation, those related to the corporate alternative minimum tax and
environmental tax, of interest that is excluded from gross income.
Ownership of tax-exempt obligations may result in collateral tax
consequences to certain taxpayers, including, without limitation, financial
institutions, property and casualty insurance companies, certain foreign
corporations doing business in the United States, certain S corporations with
excess passive income, individual recipients of social security or railroad
retirement benefits and individuals otherwise eligible for the earned income
credit. Prospective purchasers of common shares should consult a tax adviser as
to the applicability of any such collateral consequences.
S-36
37
MuniMae's Expenses. MuniMae has incurred or will incur various expenses in
connection with its ongoing administration and operation. Payments for services
generally are deductible if the payments are ordinary and necessary expenses,
are reasonable in amount and are for services performed during the taxable year
in which paid or accrued. Expenses which are allocable to tax-exempt interest
income, however, are non-deductible to individual shareholders. We have adopted
accounting policies for allocating expenses between our operating segment and
our investment segment. There is no assurance that such policies will not be
successfully challenged by the Internal Revenue Service.
To the extent MuniMae's expenses are not disallowed as described in the
previous paragraph, payments for services related to the acquisition of an asset
having a useful life in excess of one year, such as brokerage fees, generally
must be capitalized into the cost basis of the acquired property. The Internal
Revenue Service may not agree with MuniMae's determinations as to the
deductibility of fees and expenses and may require that certain expenses be
capitalized and amortized or depreciated over a period of years. If all or a
portion of such deductions are disallowed on the basis that some of the
foregoing expenses are non-deductible syndication fees or otherwise, MuniMae's
taxable income will be increased, or its losses will be reduced.
An individual's miscellaneous itemized deductions, including the investor's
investment expenses, are deductible only to the extent they exceed 2% of his
adjusted gross income. However, MuniMae can elect to be treated as an "electing
large partnership" under the relevant provisions of the federal income tax law,
and, if it does, the limitation on miscellaneous itemized deductions will apply
at MuniMae's level. In such case, instead of the 2% floor, 70% of MuniMae's
total miscellaneous itemized deductions will be disallowed.
Offering Expenses. Expenses of issuing and marketing our common shares,
generally called syndication expenses, are not allowable deductions to MuniMae
or shareholders. Syndication expenses are defined as expenditures connected with
the issuing and marketing of interests in partnerships. Fees payable to dealer
managers and soliciting dealers, registration fees, printing costs, selling and
promotional material costs and legal fees for securities and tax advice
pertaining to registration of the common shares with the Securities Exchange
Commission are syndication expenses and, therefore, do not qualify for
amortization.
Basis Step-Up Election. MuniMae has elected, under the relevant provisions
of the federal income tax law, to adjust the basis of its partnership property
on the transfer of its common shares, term growth shares, preferred capital
distribution shares and preferred shares by the difference between the
transferee shareholder's basis for the shareholder's shares and the transferee
shareholder's allocable share of the basis of all of MuniMae's property. The
increase or decrease affects the basis of MuniMae's property only with respect
to the transferee shareholder's shares. The procedure for allocating the basis
adjustment is complex, and there is no assurance that the Internal Revenue
Service would not challenge the allocations of the basis step-up among MuniMae's
assets.
Backup Withholding. Distributions to shareholders whose common shares are
held on their behalf by a "broker" may constitute "reportable payments" under
the federal income tax rules regarding "backup withholding." Backup withholding,
however, would apply only if the shareholder (i) failed to furnish his or her
Social Security number or other taxpayer identification number of the person
subject to the backup withholding requirement (e.g., the "broker") or (ii)
furnished an incorrect Social Security number or taxpayer identification number.
If "backup withholding" were applicable to a shareholder, MuniMae would be
required to withhold 31% of each distribution to such shareholder and to pay
such amount to the Internal Revenue Service on behalf of such shareholder.
Foreign shareholders are subject to other requirements.
Issuance of Additional Common Shares. MuniMae is likely to issue new
common shares to additional investors to finance the acquisition of additional
investments. On any issuance of additional common shares, the capital accounts
of existing shareholders will be adjusted to reflect a revaluation of our
property, based on their then fair value, net of liabilities, to which they are
then subject.
S-37
38
Tax Returns, Audits, Interest and Penalties. MuniMae will supply a
Schedule K-l to Internal Revenue Service Form 1065 to each shareholder of record
as of the last day of each month after the end of each calendar year. MuniMae is
not obligated to provide tax information to persons who are not shareholders of
record.
Any shareholder who sells or exchanges a common share will be required to
notify MuniMae of such transaction in writing within 30 days of the transaction
or, if earlier, by January 15 of the calendar year after the year in which the
transaction occurs. The notification is required to include (i) the names and
addresses of the transferor and the transferee; (ii) the taxpayer identification
number of the transferor and, if known, of the transferee; and (iii) the date of
the sale or exchange. A shareholder will not be required to notify MuniMae of a
sale or exchange of a common share if an information return is required to be
filed by a broker with respect to such sale or exchange. Any transferor who
fails to notify MuniMae of a sale or exchange may be subject to a $50 penalty
levied by the Internal Revenue Service for each such failure. MuniMae will treat
any transferor shareholder who provides all of the information requested of the
transferor on the depositary receipt as having satisfied this notification
requirement.
In addition, MuniMae must file an information return notifying the Internal
Revenue Service of any sale or exchange of a common share in which any portion
of the consideration received by the transferor is attributable to certain
properties owned by MuniMae that would result in ordinary income to MuniMae and
report the name and address of the transferee and the transferor who were
parties to such transaction, along with all other information required by
applicable provisions of the federal income tax law, including the fair market
value of the selling shareholder's allocable share of unrealized receivables,
and/or depreciation recapture, if any. MuniMae will not be required to file such
return until it has been notified of the sale or exchange. If MuniMae does not
know the identity of the beneficial owner of the common share, the record holder
of such common share may be treated as the transferor or transferee, as the case
may be. If MuniMae fails to file such a return, it may be subject to a penalty
of $50 levied by the Internal Revenue Service for each such failure up to an
annual maximum of $250,000, with no limit in the case of intentional disregard
of the filing requirement. MuniMae is also required to provide this information
to the transferor and the transferee. If MuniMae fails to furnish any such
information, MuniMae may be subject to a penalty of $50 levied by the Internal
Revenue Service for each such failure up to an annual maximum of $250,000.
However, MuniMae will not be required to file a return upon the sale or exchange
of a common share with respect to which an information return is required to be
filed by a broker.
To the extent MuniMae's tax returns are examined by the Internal Revenue
Service, the tax treatment of MuniMae's income, gain, loss or deductions or
credits will be determined at its level in a unified proceeding, rather than
separate proceedings for each holder of common shares, term growth shares,
preferred shares or preferred capital distribution shares. MuniMae may elect to
be treated as an electing large partnership under the federal income tax law. If
MuniMae makes such election, only it, and not shareholders, will receive notice
of Internal Revenue Service adjustments to MuniMae's tax return. Only MuniMae
will have the right to appeal the adjustments. Under the electing large
partnership provisions, MuniMae may elect to either (i) combine the adjustments
with similar items for the current tax year and pass through the adjustment to
shareholders for such year or (ii) pay a tax on any adjustment at the highest
individual or corporate rate, plus interest and penalties.
In general terms, if MuniMae does not elect to be treated as an electing
large partnership, MuniMae will still be subject to a unified partnership
proceeding, but shareholders owning at least a 1% profits interest in MuniMae
whose names and addresses have been furnished to the Internal Revenue Service
will receive a notice of the commencement of an audit of MuniMae as well as a
notice of the final partnership administrative adjustment. Also, if MuniMae does
not elect electing large partnership status, the tax matters partner, which is
also the Special Shareholder under the operating agreement, would not be able to
settle on behalf of, and bind, shareholders with less than a 1% profits interest
under certain circumstances.
State, Local and Foreign Income Taxes. In addition to the federal income
tax consequences described above, shareholders should consider potential state,
local and foreign tax consequences of an
S-38
39
investment in MuniMae and are urged to consult their individual tax advisors in
this regard. The rules of some states and localities for computing and/or
reporting taxable income may differ from the federal rules. Interest income that
is tax-exempt for federal purposes may be taxable by some states and localities.
Under the tax laws of certain states, MuniMae may be subject to state
income or franchise tax or other taxes that may be applicable to it. Such taxes
will decrease the amount of income available to shareholders. Shareholders are
advised to consult with their tax advisors concerning the tax treatment of
MuniMae, and its effect on the shareholders, under the tax laws of the states
applicable to MuniMae and the shareholders.
Both the substantive features and the filing requirements of state income
taxation of shareholders will vary according to factors which include, but are
not limited to, the following: (i) the status of the shareholder; (ii) whether
the state imposes personal or corporate income taxation or instead imposes a
form of franchise, unincorporated business or occupational taxation; (iii)
whether the state will allow credits or exemptions for income taxes to which a
shareholder is subject in the shareholder's state or other jurisdiction of
residence; (iv) the level of personal exemptions or credits allowed by the state
and whether those exemptions or credits are required to be prorated based on the
ratio of income from sources in the taxing state to total income; and (v)
whether the applicable tax rate structure is applied on the basis of income from
sources in the taxing jurisdiction or on the basis of total income of a
nonresident taxpayer. We may be required to withhold state taxes from
distributions to shareholders in some instances.
THE SUMMARY OF TAX CONSEQUENCES SET FORTH ABOVE IS FOR GENERAL INFORMATION
ONLY AND DOES NOT ADDRESS THE CIRCUMSTANCE OF ANY PARTICULAR SHAREHOLDER.
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON SHARES
INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
S-39
40
UNDERWRITING
We intend to offer the shares through the underwriters named below. Subject
to the terms and conditions described in an underwriting agreement among us and
the underwriters, we have agreed to sell to the underwriters, and the
underwriters severally have agreed to purchase from us, the number of shares
listed opposite their names below.
NUMBER OF
UNDERWRITER SHARES
---------- ---------
Merrill Lynch, Pierce, Fenner & Smith 1,520,000
Incorporated...................................
988,000
UBS Warburg LLC.............................................
646,000
First Union Securities, Inc.................................
646,000
Legg Mason Wood Walker, Incorporated........................
---------
3,800,000
Total..........................................
=========
The underwriters have agreed to purchase all of the shares sold under the
underwriting agreement if any of these shares are purchased. If an underwriter
defaults, the underwriting agreement provides that the purchase commitments of
the non-defaulting underwriters may be increased or the underwriting agreement
may be terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the underwriting agreement, such as the receipt by the underwriters
of officer's certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in whole
or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares to the public at the initial public offering price on the
cover page of this prospectus supplement and to dealers at that price less a
concession not in excess of $.70 per share. The underwriters may allow, and the
dealers may re-allow, a discount not in excess of $.10 per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before our expenses. The information assumes either no exercise or
full exercise by the underwriters of their over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price........................ $23.07 $87,666,000 $100,815,900
Underwriting discount........................ $1.18 $4,484,000 $5,156,600
Proceeds, before expenses, to us............. $21.89 $83,182,000 $95,659,300
The expenses of the offering, not including the underwriting discount, are
estimated at $450,000.
OVER-ALLOTMENT OPTION
We have granted options to the underwriters to purchase up to 570,000
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise these options for 30 days from
S-40
41
the date of this prospectus supplement solely to cover any over-allotments. If
the underwriters exercise these options, each will be obligated, subject to
conditions contained in the underwriting agreement, to purchase a number of
additional shares proportionate to that underwriter's initial amount reflected
in the above table.
NO SALES OF SIMILAR SECURITIES
We have agreed, with exceptions, not to sell or transfer any common shares
for 90 days after the date of this prospectus supplement without first obtaining
the written consent of Merrill Lynch. All of our executive officers and
directors have agreed, with exceptions, not to sell or transfer any common
shares for 45 days after the date of this prospectus supplement without first
obtaining the written consent of Merrill Lynch. Specifically, we and these other
individuals have agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any common shares,
- sell any option or contract to purchase any common shares,
- purchase any option or contract to sell any common shares,
- grant any option, right or warrant for the sale of any common shares,
- lend or otherwise dispose of or transfer any common shares,
- request or demand that we file a registration statement related to the
common shares or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common shares whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common shares and to securities
convertible into or exchangeable or exercisable for or repayable with common
shares. It also applies to common shares owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
NEW YORK STOCK EXCHANGE LISTING
The shares are listed on the New York Stock Exchange under the symbol
"MMA."
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the shares is completed, Securities Exchange
Commission rules may limit underwriters and selling group members from bidding
for and purchasing our common shares. However, the representatives may engage in
transactions that stabilize the price of the common shares, such as bids or
purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common shares in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus supplement, the representatives may reduce that
short position by purchasing shares in the open market. The representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common shares to
stabilize its price or to reduce a short position may cause the price of the
common shares to be higher than it might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition, neither
we nor any of the underwriters makes any representation that the representatives
or the lead managers will engage in these transactions or that these
transactions, once commenced, will not be discontinued without notice.
S-41
42
OTHER RELATIONSHIPS
An affiliate of Merrill Lynch owns 1,250 term growth shares and 128,367
common shares and thus received approximately 2% of our net cash flow for the
nine months ended September 30, 2000. We have also entered into various residual
interest and interest rate swap transactions with Merrill Lynch on terms
generally available in the marketplace.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commission for these transactions.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Clifford Chance Rogers
& Wells LLP, New York, New York, and for the underwriters by Piper Marbury
Rudnick & Wolfe LLP, Baltimore, Maryland. Clifford Chance Rogers & Wells LLP
will rely as to certain matters of Maryland law on the opinion of Piper Marbury
Rudnick & Wolfe LLP.
EXPERTS
The financial statements incorporated in this prospectus supplement by
reference to our Annual Report on Form 10-K, as amended, for the year ended
December 31, 1999, have been so incorporated in reliance on the report (which
contains an explanatory paragraph relating to management's estimates of fair
value of mortgage revenue bonds and other bond-related investments as described
in Note 2 to the financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given its authority as an expert in auditing and
accounting.
S-42
43
PROSPECTUS
$349,304,375
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
COMMON SHARES, PREFERRED SHARES AND WARRANTS
------------------------
Municipal Mortgage and Equity, L.L.C. (the "Company") may from time to time
offer, together or separately, in one or more series: (i) growth shares of
limited liability company interest ("Common Shares"); (ii) preferred shares of
limited liability company interest ("Preferred Shares"); and (iii) warrants or
other rights to purchase Common Shares, Preferred Shares, or any combination
thereof, as may be designated by the Company at the time of the offering
("Warrants"), with an aggregate public offering price of up to $349,304,375, in
amounts, at prices and on terms to be determined at the time of offering. The
Common Shares, Preferred Shares and Warrants (collectively, the "Securities")
may be offered, separately or together, in separate series and in amounts, at
prices and on terms to be set forth in one or more supplements to this
Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable, in the case of Common Shares, the number of
shares and the terms of the offering and sale; (ii) in the case of Preferred
Shares, the number of shares, the specific title, the aggregate amount, any
distribution (including the method of calculating payment of distributions),
seniority, liquidation, redemption, voting and other rights, any terms for any
conversion or exchange into other Securities, the initial public offering price
and any other terms; and (iii) in the case of Warrants, the designation and
number, the exercise price and any other terms in connection with the offering,
sale and exercise of the Warrants. The Common Shares are listed on the New York
Stock Exchange, Inc. ("NYSE") under the symbol "MMA."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a national securities exchange of, the
Securities covered by such Prospectus Supplement, not contained in this
Prospectus.
The Securities may be offered directly to one or more purchasers, through
agents designated from time to time by the Company or to or through underwriters
or dealers. If any agents or underwriters are involved in the sale of any of the
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in an accompanying Prospectus
Supplement. The net proceeds to the Company from such sale will also be set
forth in an accompanying Prospectus Supplement. No Securities may be sold by the
Company without delivery of a Prospectus Supplement describing the method and
terms of the offering of such series of Securities. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is June 30, 1998.
44
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (of which this Prospectus is a part) on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities in respect of which this Prospectus is being
delivered. This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission, and in the exhibits thereto.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Securities, reference is hereby made to the
Registration Statement and such exhibits and schedules, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices listed below.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, as well as such reports, proxy
statements and other information filed with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material also can be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates.
The Company files its reports, proxy statements and other information with the
Commission electronically. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at http://www.sec.gov.
The Common Shares are listed on the NYSE, and reports, proxy statements and
other information concerning the Company can be inspected and copied at the
offices of the New York Stock Exchange at 20 Broad Street, New York, New York
10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company under the Exchange
Act with the Commission and are incorporated by reference in this Prospectus:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1997, as amended by the Company's Form 10-K/A filed on May 29, 1998.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, as amended by the Company's Form 10-Q/A filed on May 29, 1998.
3. The Company's Current Report on Form 8-K filed January 23, 1998.
4. The Company's Current Report on Form 8-K filed January 29, 1998.
5. The Company's Prospectus/Consent Solicitation Statement included in its
Registration Statement on Form S-4 (File No. 33-99088), as declared
effective by the Commission on May 29, 1996, as it relates to the
description of the Company's Common Shares contained under the caption
"Description of Shares" and incorporated by reference into Item 1 of
Form 8-A filed with the Commission on July 25, 1996, pursuant to 12(b)
of the Exchange Act, including all amendments and reports updating such
description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of filing hereof and prior to the date
on which the Company ceases offering and selling Securities pursuant to this
Prospectus shall be deemed to be incorporated by reference in this Prospectus
and to be a part hereof from the dates of filing of such documents. Any
statement contained in a document incorporated or
2
45
deemed to be incorporated by reference herein shall be deemed modified or
superseded for the purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus and the accompanying Prospectus
Supplement are delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated by reference herein by
reference, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference into the Registration Statement to which
this Prospectus relates or into such other documents. Requests for documents
should be directed to Municipal Mortgage and Equity, L.L.C., 218 North Charles
Street, Suite 500, Baltimore, Maryland 21201, Attention: Derek Cole, (410)
962-8044.
THE COMPANY
The Company is a self-advised and self-managed Delaware limited liability
company which, together with its predecessor, has since 1986 been in the
business of originating, investing in and servicing tax-exempt instruments
backed by multifamily housing developments. The Company's investments
principally represent interests in mortgage bonds which have been issued by
state and local governments or their agencies or authorities to finance
multifamily housing developments and other bond related investments (the
"Mortgage Bonds"). The Company owns a portfolio of investments (the
"Investments") secured directly or indirectly by properties (the "Properties")
located in a variety of states. Certain of the Investments are participating
Mortgage Bonds where the amount of the interest payments made to the Company is
based, in part, on property performance, providing the Company the opportunity
to realize greater returns if and to the extent property performance improves.
As a limited liability company, the Company combines the limited liability,
governance and management characteristics of a corporation with outside
directors together with the pass-through income features of a partnership. As a
result, the tax-exempt income derived from the investments may be passed through
to shareholders. Approximately 85% of the Company's interest income in 1997 was
tax-exempt.
The principal executive offices of the Company are located at 218 North
Charles Street, Suite 500, Baltimore, Maryland 21201, and its telephone number
at that location is (410) 962-8044.
3
46
RISK FACTORS
RISKS OF INVESTING IN MORTGAGE BONDS SECURED BY MULTIFAMILY APARTMENT PROPERTIES
One of the major risks of investing in Mortgage Bonds secured by
multifamily residential properties is the possibility that the property securing
a Mortgage Bond (a "Mortgaged Property") will not generate income sufficient to
meet its operating expenses, including debt service on the related Mortgage
Bonds, or that the net proceeds of a sale of such Mortgaged Property will not be
sufficient to repay the related Mortgage Bonds. In that event, delays in
payments on the Mortgage Bonds and/or losses of principal on the Mortgage Bonds
may occur. The factors affecting the operations of each Mortgaged Property and
its potential for appreciation in value include general and local economic or
market conditions, changes in neighborhood characteristics, changes in real
estate taxes, insurance premiums, cost of utilities, changes in the amount of
operating, administrative and maintenance costs relating to the Mortgaged
Property, rental values, rent strikes, collection difficulties, governmental
rules and fiscal policies, vandalism, uninsured losses and competition from
existing and future housing complexes in the vicinity of the Mortgaged
Properties. A significant portion of the Mortgaged Properties have failed in the
past to meet required debt service under the Mortgage Bonds, and a number of the
Mortgage Bonds have been refunded on terms which defer, and in certain
circumstances reduce, the amounts payable thereunder. There can be no assurance
that such defaults and refundings will not occur in the future.
INVESTMENTS IN JUNIOR MORTGAGES
When the Company invests in mortgages (or related bonds) which are junior
to senior mortgages on a particular property, the Company is subject to the
risks of such investment, which include the risks that borrowers may not be able
to make debt service payments on both the senior and the junior mortgages, that
the value of the mortgaged property may be less than the amounts owed under both
mortgages and that debt service collected on the junior mortgages may be lower
than the Company's cost of funds. If any of the above occurred, the Company's
ability to make expected distributions to the Company's shareholders could be
adversely affected.
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by declining property values or
performance, particularly declines in the value or performance of multifamily
properties. Any material decline in property values increases the loan-to-value
ratios of Mortgage Bonds previously issued, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of default. With
respect to a significant portion of the Investments, a decline in performance of
the related underlying multifamily properties will directly affect the Company's
interest income. Significant declines in the late 1980s and early 1990s in the
value of the underlying Properties and in cash flow on the Properties led to
defaults on most of the bonds held by the Company's predecessor and to
restructuring, refinancing or extension of many of such investments. There can
be no assurance that similar problems may not occur in the future. See "-- Risks
of Investing in Mortgage Bonds Secured by Multifamily Apartment Properties."
Each Mortgage Bond owned by the Company is secured by an assignment to the
Company of the related mortgage loan, which in turn is secured by a mortgage on
the underlying property and assignment of rents. Although such Mortgage Bonds
are issued by state or local governments or their agencies or authorities, the
Mortgage Bonds are not general obligations of any state or local government, no
government is liable under the Mortgage Bonds, nor is the taxing power of any
government pledged to the payment of principal or interest under the Mortgage
Bonds. In addition, the underlying mortgage loans are nonrecourse, which means
that the owners of the underlying Properties, which are also the borrowers under
the mortgage loans, are not liable for the payment of principal and interest
under the loans except to the extent of cash flow from, and value of, the
Properties. Accordingly, the sole source of funds for payment of principal and
interest under the Mortgage Bonds is the revenue derived from operation of the
Properties and amounts derived from the sale, refinancing or other disposition
of such Properties.
4
47
RISKS OF SECURITIZATIONS
The Company seeks to enhance its overall return on its Investments and to
purchase additional investments through the securitization of part of its
portfolio of Mortgage Bonds. In a typical securitization, Mortgage Bonds are
sold and deposited into a trust. Short term floating rate interests in the
trust, which have first priority on the cash flow from the Mortgage Bonds, are
sold to third party investors and these interests are paid before the Company's
residual interest described herein. The Company retains the residual cash flow
from the trust and receives the proceeds from the sale of the floating rate
interests less certain transaction costs. The Company will recognize taxable
capital gains (or losses) upon the deposit of Mortgage Bonds in a trust. In the
event the trust cannot meet its obligations, all or a portion of the deposited
Mortgage Bonds may be distributed to the floating rate interest holders or sold
to satisfy such obligations. Therefore, cash flow from these Mortgage Bonds may
not be available to pay any amounts on the residual interest held by the Company
and in the event of the liquidation of the Mortgage Bonds, no payment will be
made to the Company except to the extent that the market value of the Mortgage
Bonds exceeds the amounts due on the other obligations of the trust. Additional
Mortgage Bonds may be pledged to secure repayment of the floating rate
certificates. Upon any default in repayment of such certificates, the pledged
Mortgage Bonds may be subject to foreclosure and sale and the Company may lose
the cash flow therefrom, and/or its ownership interest therein. The Company may
have a limited ability to remedy defaults inside the trust and prevent the loss
of its investment in the residual interest. As a result of these
securitizations, the Company generally owns higher yielding but riskier portions
of bond related investments such as Residual Interest Tax Exempt Securities
receipts ("RITES(R)"). Furthermore, the RITES(R) may be subject to call in
certain circumstances which are beyond the control of the Company. Where the
Mortgage Bonds bear fixed rates of interest, securitization may also create
interest rate risks, as described below. See "-- Interest Rate Risks; Hedging
Risks" below.
The Company relies, in part, on securitizations to fund acquisitions of its
investments. Accordingly, the ability of the Company to achieve its investment
objectives depends on its ability to successfully securitize its Mortgage Bonds
and manage its interest rate exposure. Certain of the Company's Mortgage Bonds
may have credit or other characteristics which make them unsuitable for
securitization at this time. Any failure to consummate securitization and
interest rate swap transactions could reduce the Company's net interest income
and have a material adverse effect on the Company's operations.
INTEREST RATE RISKS; HEDGING RISKS
An increase in market interest rates may lead prospective purchasers of the
Company's existing assets or holders of the Company's debt or equity securities
to demand a higher annual yield than they would have otherwise and could
increase the cost to the Company of borrowing funds for investment in additional
assets, any of which could adversely affect the amount of funds available for
distribution to the holders of Securities. Any increase in market interest rates
also may reduce the market value of the Company's assets and the market value of
the Securities.
The results of the Company's operations depend on, among other things, the
level of net interest income derived from the difference between the return on
the securitized Mortgage Bonds and the short term floating rate payments owed to
the floating rate certificate holders. While the interest rate on the
securitized Mortgage Bonds is fixed, the third party holders of the floating
rate certificates in the securitization are paid interest at a floating rate
that is reset periodically. The Company, as holder of the residual trust
interest, receives the balance of interest on the Mortgage Bonds not used to pay
the third party trust certificates. Rising short term interest rates would
therefore reduce the net interest income available to the Company, and possibly
result in a loss.
To reduce the Company's exposure to rising interest rates, the Company
enters into interest rate swaps, which are contracts exchanging an obligation to
pay a floating rate approximating the rate on the floating rate trust
certificates for an obligation to pay a fixed rate. Net swap payments received
by the Company, if any, will be taxable income, even though the investment being
hedged pays tax-exempt interest. The interest rate swaps are for limited time
periods which generally match the anticipated prepayment date of the underlying
Mortgage Bond. However, there is no certainty that prepayment will occur at the
end of the swap period, and
5
48
the swap period is typically shorter than the term of the underlying bond. There
can be no assurance that the Company will be able to acquire interest rate swaps
at favorable prices, or at all, when the existing arrangements expire, in which
case the Company would be fully exposed to the interest rate risks described
above.
To the extent that, from time to time, the Company repurchases the short
term floating rate interests issued in connection with a securitization
transaction, the Company may elect to keep in place any related swap to the
extent that such swap is expected to be used in the future as a hedge with
respect to another transaction. To the extent that a swap is not terminated at
such time as the Company repurchases short term floating rate interests, the
Company may be exposed to interest rate risks under such swap, particularly in a
declining interest rate environment.
Developing an effective interest rate risk management strategy is complex
and no management strategy can completely insulate the Company from all
potential risks associated with interest rate changes. In addition, hedging
involves transaction costs. In the event the Company hedges against interest
rate risks, the Company may substantially reduce its net income or adversely
affect its financial condition. Furthermore, there can be no assurance that the
Company's interest rate hedging activities will be effective.
In the event that the Company purchases interest rate swaps or other
instruments, the Company must rely for payment under these agreements on the
creditworthiness of the counterparties which to date has been Merrill Lynch
Capital Services, Inc. ("MLCS"). In addition, certain of the owners of the
Properties have entered into interest rate swaps with Credit Suisse Financial
Products under which the Property owner pays the counterparty a variable rate up
to the cap in exchange for the counterparty's obligation to pay a fixed rate. To
the extent that short term interest rates increase, the cash flow on such
Property which may be distributed to the holder of the participating Mortgage
Bond may decrease. There can be no assurance any third party will honor its
payment obligations under the agreements. If the provider of such swap or other
instrument becomes financially unsound or insolvent, the Company may be forced
to unwind such swap or other instrument with such provider and may take a loss
thereon. Further, the Company could suffer the adverse consequences against
which the hedging transaction was intended to protect. No assurance can be given
that the Company can avoid risks of third party insolvency.
The Company may also engage in limited amounts of buying and selling of
other mortgage hedging securities or other hedging products, including, but not
limited to, buying and selling financial futures contracts and options on
financial futures contracts and trading forward contracts in order to hedge
commitments. These types of hedging devices and mortgage instruments are complex
and can produce volatile results. Accordingly, there can be no assurance that
the Company's hedging strategy will have the desired beneficial impact on the
Company's cash flow and on the resulting distribution yield of the Securities.
CONFLICTS OF INTEREST
Affiliates of certain directors and officers of the Company are responsible
for a full range of property management functions for certain Mortgaged
Properties for which they receive property management fees pursuant to
management contracts. The Company's management believes that these contracts
provide for fees which are at or below market rates for property management
fees. These management contracts will continue to be renewed only if (i) such
affiliates are providing such property management services at a price
competitive with the prices which would be charged for such goods and services
by independent parties for comparable goods and services in the same geographic
location, and (ii) in the case of any management contract with any affiliate of
any member of the Company's Board of Directors, such management contract is
approved by the independent directors of the Company. Nonetheless, conflicts may
exist in determining whether to renew or terminate these management contracts,
and in setting the fees payable under such contracts, since any change in such
fees could affect the amounts payable under the related Mortgage Bonds.
Certain entities which control certain Mortgaged Properties are controlled
by Mark K. Joseph, the Chairman of the Board and Chief Executive Officer of the
Company. As a result, such entities could have interests which 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
6
49
the actions such entities could desire to take might be selling a Mortgaged
Property, and thereby causing a redemption event, at a time and under
circumstances which would not be advantageous to the Company.
Management and certain affiliates own Term Common Shares, which participate
in the cash flow of the Company. The Term Common Shares, which will be redeemed
when the preferred equity of the Company issued in 1996 is fully redeemed, are
expected to have little or no residual value, but while outstanding receive an
aggregate of 2% of the net cash flow of the Company. While these shares remain
outstanding, the holders may have conflicts of interest in determining whether
redemption of the preferred equity issued in 1996 and Term Common Shares is in
the best interest of the Company, in particular due to the limited residual
value of the Term Common Shares. Holders of Term Common Shares also receive a
greater return as cash flow increases in total, regardless of whether per share
cash flow increases or there is a distribution to shareholders. See "Description
of Preferred Shares."
DEPENDENCE ON KEY EMPLOYEES
The Company is wholly dependent for the selection, structuring and
monitoring of its Mortgage Bonds and other Investments on the diligence and
skill of its executive officers, many of whom would be difficult to replace.
REGISTRATION UNDER THE INVESTMENT COMPANY ACT
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Investment Company Act
exempts entities that are "primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretation of the staff of the
Securities and Exchange Commission, in order to qualify for this exemption, the
Company must maintain at least 55% of its assets directly in Qualifying
Interests and the balance in real estate-type interests. For example, unless
certain mortgage securities represent all of the certificates issued with
respect to an underlying pool of mortgages, such mortgage securities may be
treated as securities separate from the underlying mortgage loans and, thus, may
not be considered Qualifying Interests for purposes of the 55% requirement.
Similar interpretations mandate that the Company own "whole" bonds in order for
its Mortgage Bonds to be Qualifying Interests. Based on advice of counsel, the
Company believes it meets the 55% test. However, the Company's RITES(R)
interests and certain of its Mortgage Bonds are not Qualifying Interests. The
requirement that the Company maintain 55% of its assets in Qualifying Interests
may inhibit the Company's ability to acquire certain kinds of assets or to
securitize additional interests in the future. If the Company fails to qualify
for exemption from registration as an investment company, its ability to
maintain its financing strategies would be substantially reduced, and it would
be unable to conduct its business as described herein. Such a failure to qualify
could have a material adverse effect on the Company.
LIMITED OPERATING HISTORY DOES NOT PREDICT FUTURE PERFORMANCE
The Company embarked on its acquisition growth strategy in 1996 and,
accordingly, has not yet developed an extensive financial history or experienced
a wide variety of interest rate fluctuations or market conditions. Consequently,
the Company's financial results to date may not be indicative of future results.
Furthermore, there can be no assurance that the Company will receive returns on
its investments sufficient to compensate for interest rate and credit risks
inherent in the Company's investment strategy.
FAILURE TO MANAGE EXPANSION MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's expansion as a result of its investment of the net proceeds
of an offering may cause a significant strain on the Company's financial,
management and other resources. To manage the Company's growth effectively, the
Company must continue to improve and expand its existing resources and
management information systems. If the Company is unable to manage growth
effectively, the Company's financial conditions and results of operations may be
adversely affected.
7
50
INVESTMENTS IN MORTGAGE BONDS AND RITES(R) MAY BE ILLIQUID
The Company's Investments lack a regular trading market and may be
illiquid. In addition, during turbulent market conditions, the liquidity of all
of the Company's Investments may be adversely impacted. There is no limit to the
percentage of the Company's assets that may be invested in illiquid Mortgage
Bonds and RITES(R). In the event the Company required additional cash, the
Company may be required to liquidate its Investments on unfavorable terms which
could substantially reduce the value of the Securities.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances released on, above, under
or in such property. Such laws often impose such liability without regard to
whether the owner knew of, or was responsible for, the presence of such
hazardous or toxic substances. The costs of such removal or remediation could be
substantial and could negatively impact the availability of property cash flow
for payments on the Investments. Phase I environmental site assessments (which
involve inspection without soil sampling or groundwater analysis) have been
conducted by independent environmental consultants ("Phase I Assessments") with
respect to most, but not all, of the Properties. The assessments that have been
completed have not revealed any environmental conditions as of the time such
studies were completed which the Company believes would have a material adverse
effect on its business, assets or results of operations. No assurance can be
given that these Phase I Assessments or the Company's inspections have revealed
all environmental liabilities and problems relating to the Properties or that
nothing has occurred since the completion of such Phase I Assessments.
Management is not aware of any material environmental problems with respect to
the Properties. No assurance can be given that the Properties on which no
environmental assessment was conducted do not contain regulated toxic or
hazardous substances.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, debt, capitalization and distributions, will be
determined by the Company's Board of Directors. Although the Board of Directors
of the Company has no present intention to change the Company's business plan,
the Board of Directors may amend or revise these and certain other policies from
time to time without a vote of the Company's shareholders. Accordingly, the
Company's shareholders will have no control over changes in the policies of the
Company (except for certain policies directly affecting holders of the Company's
preferred shares), and changes in the Company's policies may not fully serve the
interests of all of the Company's shareholders.
PROVISIONS THAT MAY DISCOURAGE CHANGES OF CONTROL
The Company's organizational documents contain provisions that may be
deemed to have an anti-takeover effect, including the staggered terms of the
Company's directors, business combination and fair price provisions and control
share acquisition provisions. The Company has adopted a shareholder rights plan.
Further, the employment agreements of certain of the officers provide them with
substantial payments should their employment terminate as a result of a change
of control. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Company's Board of Directors
and management and in the policies formulated by the Board of Directors and to
discourage an unsolicited takeover of the Company if the Board of Directors
determines that such takeover is not in the best interests of the persons to
which the Board of Directors feels it owes a fiduciary duty, including the
Company's shareholders. These provisions may, however, have the effect of
delaying, deferring or preventing a takeover attempt that a shareholder might
consider to be in the shareholder's best interest, including offers that might
result in a premium over market price for the Common Shares. These provisions
may reduce interest in the Company as a potential acquisition target or reduce
he likelihood of a change in the management or voting control of the Company
without the consent of the then incumbent Board of Directors. In addition, in
the event that certain business combination or share acquisition transactions
occur, and the Company's special shareholder does not
8
51
approve of such transaction, such special shareholder has the right to withdraw
as a shareholder of the Company; and in the event of such withdrawal, (i) the
Company would be obligated to pay the withdrawing special shareholder
$1,000,000, and (ii) a new special shareholder might have to be found in order
to ensure that the Company is not deemed to be taxable as a corporation, any of
which may have an adverse effect on the Company or the Common Shares.
ISSUANCE OF ADDITIONAL SECURITIES
The Company may issue additional securities, including additional preferred
interests in the Company, in the public or private market to obtain funds for
the acquisition of additional assets or may exchange such securities for
additional assets. The ability of the Company to sell or exchange such
securities will depend on conditions then prevailing in the relevant capital
markets and the Company's results of operations, financial condition and
business prospects. The issuance of such additional securities will not be
subject to the approval of the holders of Securities, could affect the timing
and amount of distributions to the holders of Securities, and may affect the
trading price of the Securities. The holders of Securities will not have any
preemptive rights in connection with the issuance of any additional securities
of the Company.
FORWARD-LOOKING STATEMENTS
This Prospectus, the accompanying Prospectus Supplement and the other
reports incorporated by reference contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from results or plans
expressed or implied by such forward-looking statements. Such factors include,
among other things, adverse changes in the real estate markets, risk of default
under the Mortgage Bonds, financial condition and bankruptcy of tenants,
interest rate fluctuations, tax treatment of the Company and its Investments,
environmental/safety requirements, adequacy of insurance coverage, and general
and local economic and business conditions. Although the Company believes that
the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included or incorporated by reference in
this Prospectus or the accompanying Prospectus Supplement will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements, the inclusion of such information, including the
information presented herein and under "The Company," 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.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
The following are ratios of consolidated earnings to combined fixed charges
and preferred dividends for the Company for each of the years ended December 31,
1997, 1996, 1995, 1994 and 1993 and for the three months ended March 31, 1998
and 1997.
THREE
MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------
1997 1996 1995 1994 1993 1998 1997
---- ---- ----- ----- ----- ---- ----
Ratio.................................. 8.9 10.7 507.7 592.1 323.8 9.4 7.6
For purposes of computing this ratio, earnings represent earnings from
continuing operations. Combined fixed charges include management's estimate of
the interest portion of operating lease rentals based on one third of such
rentals. For the periods in which Preferred Shares were outstanding, preferred
dividend requirements represent the share of net income that is allocable to
Preferred Shares, Preferred CD Shares and Term Growth Shares.
9
52
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net cash proceeds from the sale of Securities in
respect of which this Prospectus is being delivered for general corporate
purposes, including new investments and working capital. Pending such uses, the
Company may invest such net proceeds in short term liquid investments. Any
specific allocation of the net proceeds of an offering of Securities to a
specific purpose will be determined at the time of such offering and will be
described in the related Prospectus Supplement.
DESCRIPTION OF COMMON SHARES
The following brief description of the Common Shares does not purport to be
complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Amended and Restated Certificate of Formation and
Operating Agreement (the "Operating Agreement") and By-laws, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
The Operating Agreement does not limit the number of Common Shares which
the Company's Board of Directors may cause the Company to issue. The Company had
14,359,407 Common Shares outstanding at March 31, 1998. The Company will pay
distributions to holders of the Common Shares on a pro rata basis when declared
by its Board of Directors out of funds legally available therefor. Distributions
to the holders of Common Shares are subject to preferences on distributions on
the Company's then Outstanding Preferred Shares (as defined below), and any
other preferred securities which may be issued by the Company in the future.
Holders of Common Shares have no preemptive, conversion, sinking fund or
cumulative voting rights. The shares of Common Shares are not redeemable, except
pursuant to certain anti-takeover provisions adopted by the Company.
The Operating Agreement and By-laws of the Company set forth the
relationship of the shareholders to the Company and to one another and the
manner in which the Company will conduct its operations, much like the articles
and bylaws of a Delaware corporation or the partnership agreement of a Delaware
general or limited partnership. While, as a limited liability company, the
Company is not subject to the Delaware General Corporation Law (the "DGCL"), the
Delaware Limited Liability Company Act permits a limited liability company
agreement to provide, and the Operating Agreement and By-laws of the Company do
provide, that the management of a limited liability company shall be conducted
by a board of directors and officers designated by such board and that the
holders of shares in such limited liability company (as is the case with the
holders of the Common Shares) be afforded substantially all of the rights that
are afforded holders of the common shares issued by a corporation organized
under the DGCL. In all material respects, the fiduciary duties of the directors
and officers of the Company and any duties of shareholders of the Company and
their affiliates are the same as those applicable under the DGCL.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016, telephone
number (908) 272-8511.
DESCRIPTION OF PREFERRED SHARES
Under the Company's Operating Agreement, the Company's Board of Directors
(without any further vote or action by the Company's shareholders) is authorized
to provide for the issuance, in one or more series, of an unlimited amount of
Preferred Shares. The Board of Directors is authorized to fix the number of
shares, the relative powers, preferences and rights, and the qualifications,
limitations or restrictions applicable to each series thereof by resolution
authorizing the issuance of such series.
10
53
OUTSTANDING PREFERRED SHARES
In connection with the merger of its predecessor with the Company in 1996,
the Company issued the original preferred shares (the "Original Preferred
Shares") and Preferred CD Shares (collectively, the "Outstanding Preferred
Shares"). The Company is required to distribute to the holders of the
Outstanding Preferred Shares cash flow attributable to such shares (defined in
the Operating Agreement to be the cash flow derived from a specific pool of 22
Mortgage Bonds (the "Original Bonds")). In addition, the Company is required to
distribute 2% of the Company's net cash flow to the holders of the 2,000 shares
of Term Common Shares.
As of March 31, 1998, there were 22,940 Original Preferred Shares and
11,860 Preferred CD Shares outstanding. The Company does not intend to issue any
shares of the series of Outstanding Preferred Shares. The terms of the
Outstanding Preferred Shares require that no other Preferred Shares be senior in
rank or priority of payment to the Outstanding Preferred Shares with respect to
the cash flow from the Original Bonds.
The description below sets forth certain general terms and provisions of
the Company's Preferred Shares to which a Prospectus Supplement may relate. The
specific terms of any series of Preferred Shares in respect of which this
Prospectus is being delivered (the "Offered Preferred Shares") will be described
in the Prospectus Supplement relating to such Offered Preferred Shares. The
following summary of certain provisions governing the Company's preferred shares
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Operating Agreement and the resolutions of the
Board of Directors relating to each particular series of Offered Preferred
Shares in connection with such Offered Preferred Shares.
If so indicated in the applicable Prospectus Supplement, the terms of any
series of Offered Preferred Shares may differ from the terms set forth below,
except those terms required by the Operating Agreement.
GENERAL
The Offered Preferred Shares, when issued in accordance with the terms of
the Operating Agreement and of the applicable resolutions of the Board of
Directors and as described in the applicable Prospectus Supplement, will be
fully paid and non-assessable.
To the extent not fixed in the Operating Agreement, the relative rights,
preferences, powers, qualifications, limitations or restrictions of the Offered
Preferred Shares of any series will be fixed pursuant to resolutions of the
Board of Directors relating to such series. The Prospectus Supplement relating
to the Offered Preferred Shares of each such series shall specify the terms
thereof, including:
(1) The class, series title or designation and stated value (if any)
for such Offered Preferred Shares;
(2) The maximum number of shares of Offered Preferred Shares in such
series, the liquidation preference per share and the offering price per
share for such Offered Preferred Shares;
(3) The distribution preferences and the distribution rate(s),
period(s) and/or payment date(s) or method(s) of calculation thereof
applicable to such Offered Preferred Shares;
(4) The date from which distributions on such Offered Preferred Shares
will accumulate, if applicable, and whether distributions will be
cumulative;
(5) The provisions for a retirement or sinking fund, if any, with
respect to such Offered Preferred Shares;
(6) The provisions for redemption, if applicable, of such Offered
Preferred Shares;
(7) The voting rights, if any, of shares of such Offered Preferred
Shares;
(8) Any listing of such Offered Preferred Shares for trading on any
securities exchange or any authorization of such Offered Preferred Shares
for quotation in an interdealer quotation system of a registered national
securities association;
11
54
(9) The terms and conditions, if applicable, upon which such Offered
Preferred Shares will be convertible into, or exchangeable for, any other
equity securities of the Company, including the title of any such
securities and the conversion or exchange price therefor;
(10) A discussion of federal income tax considerations applicable to
such Offered Preferred Shares; and
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such Offered Preferred Shares.
Subject to the terms of the Operating Agreement and to any limitations
contained in the resolutions of the Board of Directors pertaining to any series
of Outstanding Preferred Shares, the Company may issue additional series of
Preferred Shares at any time or from time to time, with such powers, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, as the Board of Directors
shall determine, all without further action of the shareholders, including the
holders of any series of Outstanding Preferred Shares of the Company.
DISTRIBUTIONS
Holders of any series of Offered Preferred Shares will be entitled to
receive cash distributions when, as and if declared by the Board of Directors of
the Company out of funds of the Company legally available therefor, at such rate
and on such dates as will be set forth in the applicable Prospectus Supplement.
Each distribution will be payable to holders of record as they appear on the
share ledger of the Company on the record date fixed by the Board of Directors.
Distributions, if cumulative, will be cumulative from and after the date set
forth in the applicable Prospectus Supplement.
LIQUIDATION RIGHTS
The Company's Operating Agreement provides that, in the event of a
liquidation or dissolution of the Company, or a winding up of its affairs,
whether voluntary or involuntary, or in the event of a merger or consolidation
of the Company, no distributions will be made to holders of any class of the
Company's capital shares until after payment or provision for payment of the
debts or liabilities of the Company. The holders of the Outstanding Preferred
Shares have priority on the proceeds derived from the liquidation of the
Original Bonds and to the allocation of items of income and deduction up to the
value of their respective capital accounts. The applicable Prospectus Supplement
will specify the amount and type of distributions to which the holders of any
series of Offered Preferred Shares would be entitled upon the occurrence of any
such event.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Offered
Preferred Shares will be redeemable in whole or in part at the option of the
Company, at the times, at the redemption prices and in accordance with any
additional terms and conditions set forth therein. The Operating Agreement
provides that the Company may not redeem shares of any series until all of the
Outstanding Preferred Shares are redeemed.
VOTING RIGHTS
Except as indicated in the applicable Prospectus Supplement, or except as
expressly required by applicable law, the holders of any series of Offered
Preferred Shares will not be entitled to vote.
CONVERSION
The terms and conditions, if any, on which shares of the Offered Preferred
Shares are convertible into any other class of the Company's securities will be
set forth in the Prospectus Supplement relating thereto. Such terms will include
the designation of the security into which such shares are convertible, the
conversion price, the conversion period, provisions as to whether conversion
will be at the option of the holder or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of the Offered Preferred Shares. In the case of
conversion of the Offered Preferred Shares into
12
55
Common Shares or into any other security of the Company for which there exists
an established public trading market at the time of such conversion, such terms
may include provisions under which the amount of such security to be received by
the holders of the Offered Preferred Shares would be calculated according to the
market price of such security as of a time stated in the Prospectus Supplement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Offered Preferred Shares will be
named in the applicable Prospectus Supplement.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Common Shares, Preferred
Shares or any combination thereof. Warrants may be issued independently,
together with any other Securities offered by a Prospectus Supplement, and may
be attached to or separate from such Securities. Warrants may be issued under
warrant agreements (each, a "Warrant Agreement") to be entered into between the
Company and a warrant agent specified in the applicable Prospectus Supplement
(the "Warrant Agent"). The Warrant Agent will act solely as an agent of the
Company in connection with the Warrants of a particular series and will not
assume any obligation or relationship of agency or trust for or with any holders
or beneficial owners of Warrants. The following sets forth certain general terms
and provisions of the Warrants offered hereby. Further terms of the Warrants and
the applicable Warrant Agreement will be set forth in the applicable Prospectus
Supplement.
The applicable Prospectus Supplement will describe the terms of the
Warrants in respect of which this Prospectus is being delivered, including,
where applicable, the following: (i) the title of such Warrants; (ii) the
aggregate number of such Warrants; (iii) the price or prices at which such
Warrants will be issued; (iv) the designation, number and terms of the Common
Shares, Preferred Shares or combination thereof, purchasable upon exercise of
such Warrants; (v) the designation and terms of the other Securities, if any,
with which such Warrants are issued and the number of such Warrants issued with
each such Security; (vi) the date, if any, on and after which such Warrants and
the related underlying Securities will be separately transferable; (vii) the
price at which each underlying Security purchasable upon exercise of such
Warrants may be purchased; (viii) the date on which the right to exercise such
Warrants shall commence and the date on which such right shall expire; (ix) the
minimum amount of such Warrants which may be exercised at any one time; (x)
information with respect to book-entry procedures, if any; (xi) a discussion of
any applicable federal income tax considerations; and (xii) any other terms of
such Warrants, including terms, procedures and limitations relating to the
transferability, exchange and exercise of such Warrants.
PLAN OF DISTRIBUTION
The Company may sell Securities to or through underwriters or dealers,
directly to other purchasers, or through agents. The Prospectus Supplement with
respect to any Securities will set forth the terms of the offering of the
Securities, including the name or names of any underwriters, dealers or agents,
the price of the offered Securities and the net proceeds to the Company from
such sale, any underwriting discounts or other items constituting underwriters'
compensation, any discounts or concessions allowed or reallowed or paid to
dealers and any national securities exchanges on which such Securities may be
listed.
If underwriters are used in the sale, the Securities will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
price or at varying prices determined at the time of sale. The underwriter or
underwriters with respect to a particular underwritten offering of Securities
will be named in the Prospectus Supplement relating to such offering, and if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such Prospectus Supplement. Unless otherwise set forth
in the Prospectus Supplement, the obligations of the underwriters or agents to
purchase the Securities will be subject to certain conditions precedent and the
underwriters will be obligated to purchase all the Securities if any are
purchased. Any initial
13
56
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.
If a dealer is utilized in the sale of any Securities in respect of which
this Prospectus is delivered, the Company will sell such Securities to the
dealer, as principal. The dealer may then resell such Securities to the public
at varying prices to be determined by such dealer at the time of resale. The
name of the dealer and the terms of the transaction will be set forth in the
Prospectus Supplement relating thereto.
Securities may be sold directly by the Company to one or more institutional
purchasers, or through agents designated by the Company from time to time, at a
fixed price, or prices, which may be changed, or at varying prices determined at
the time of sale. Any agent involved in the offer or sale of the Securities will
be named, and any commissions payable by the Company to such agent will be set
forth, in the Prospectus Supplement relating thereto. Unless otherwise indicated
in the Prospectus Supplement, any such agent will be acting on a best efforts
basis for the period of its appointment.
In connection with the sale of the Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities for whom
they may act as agents in the form of discounts, concessions, or commissions.
Underwriters, agents, and dealers participating in the distribution of the
Securities may be deemed to be underwriters, and any discounts or commissions
received by them from the Company and any profit on the resale of the Securities
by them may be deemed to be underwriting discounts or commissions under the
Securities Act.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Securities, other than the Common Shares, will be a new issue with no
established trading market. Any Common Shares sold pursuant to a Prospectus
Supplement will be listed on the NYSE subject to official notice of issuance.
The Company may elect to list any series of the Securities on an exchange, but
it is not obligated to do so. Any underwriters to whom Securities are sold by
the Company for public offering and sale may make a market in such Securities,
but such underwriters will not be obligated to do so and may discontinue any
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for any Securities.
Under agreements entered into with the Company, underwriters, dealers, and
agents may be entitled to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments that such agents, dealers, or underwriters may be
required to make with respect thereto. Underwriters, dealers, or agents and
their associates may be customers of, engage in transactions with and perform
services for, the Company in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
the Securities shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject. The underwriters and such
other agents will not have any responsibility in respect of the validity or
performance of such contracts.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of Securities offered hereby may not engage in
market making activities with respect to the Securities for a period of two
business days prior to the commencement of such distribution.
14
57
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K of the Company for the year ended December 31,
1997 have been so incorporated in reliance on the report (which contains an
explanatory paragraph relating to management's estimates of fair value of
mortgage revenue bonds and other bond related investments as described in Note 2
to the financial statements) of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Rogers & Wells
LLP, New York, New York.
15
58
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,800,000 SHARES
MUNIMAE
MUNICIPAL MORTGAGE & EQUITY, LLC
COMMON SHARES
---------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------
MERRILL LYNCH & CO.
UBS WARBURG LLC
FIRST UNION SECURITIES, INC.
LEGG MASON WOOD WALKER
INCORPORATED
JANUARY 31, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------