<PAGE> 1
Filed with the Securities and Exchange
Commission pursuant to Rule 424(b)(2)
File No. 333-20945
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 2, 1997)
3,000,000 SHARES
[MUNIMAE LOGO]
COMMON SHARES
Municipal Mortgage and Equity, LLC (the "Company") is a self-advised and
self-managed limited liability company which, together with its predecessor,
since 1986, has been in the business of originating, investing in and servicing
tax-exempt instruments backed by multifamily housing developments. At December
31, 1997, the Company owned a portfolio of 38 mortgage bonds and other bond
related investments (collectively, the "Investments") backed by 36 multifamily
properties containing a total of 9,993 units and located in 11 states. Of the 38
Investments, 24 represent interests in participating mortgage bonds where the
interest payments made to the Company are based, in part, upon property
performance. Pursuant to its acquisition growth strategy, the Company intends to
acquire seven investments for a total acquisition cost of approximately $116
million in the first quarter of 1998, funded, in part, with the proceeds of this
offering.
As a limited liability company, the Company combines the limited liability,
governance and management characteristics of a corporation with the pass-through
income features of a partnership. As a result, the tax-exempt income derived
from the Investments may be passed through to holders of Common Shares.
Approximately 85% of the Company's income in the first nine months of 1997 was
tax-exempt.
All of the growth share interests in the Company (the "Common Shares")
offered hereby (the "Offering") are being offered by the Company. Certain
officers and directors of the Company are expected to acquire 100,000 Common
Shares in the Offering at the price to the public. The Common Shares are listed
on the American Stock Exchange (the "AMEX") under the symbol "MMA." The last
reported sale price of the Common Shares on the AMEX on January 26, 1998 was
$20.625. See "Price Range of Common Shares and Dividend History."
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 OF THIS PROSPECTUS SUPPLEMENT AND
ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES.
------------------------------
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 SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share.................... $20.625 $1.09 $19.535
- ------------------------------------------------------------------------------------------------------------
Total(3)............................ $61,875,000 $3,205,000(4) $58,670,000
============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $360,000.
(3) The Company has granted the Underwriters an option to purchase up to an
aggregate of 450,000 Common Shares to cover over-allotments. If the option
is exercised in full, the total "Price to Public," "Underwriting Discounts
and Commissions" and "Proceeds to Company" will be $71,156,250, $3,695,500
and $67,460,750, respectively. See "Underwriting."
(4) The underwriting discounts and commissions payable in respect of the Common
Shares sold to the officers, directors and related parties of the Company
have been reduced by the amount of the selling concessions. See
"Underwriting."
------------------------------
The Common Shares are offered by the several Underwriters when, as and if
delivered to and accepted by them and subject to various prior conditions,
including their right to reject orders, in whole or in part. It is expected that
delivery of the Common Shares will be made at the offices of Legg Mason Wood
Walker, Incorporated, Baltimore, Maryland, on or about January 30, 1998.
LEGG MASON WOOD WALKER
INCORPORATED
MERRILL LYNCH & CO.
WHEAT FIRST BUTCHER SINGER
January 26, 1998
<PAGE> 2
"38 Investments Backed By Prospectus in 11 States"
Map of the United States with red dots labeled and placed as follows: three in
Baltimore, one in Richmond, one in Norfolk, two in Atlanta, one in Fort Myers,
two in Miami, one in Knoxville, one in Chattanooga, three in Memphis, one in
Springfield (MO), two in St. Louis, three in Kansas City (MO), three in Kansas
City (KS), four in Minneapolis/St. Paul, one in Denver, five in Seattle, one in
Sacramento, one in Salinas and one in San Bernadino.
"Portfolio Units Geographic Distribution"
Multicolor pie chart indicating the following percentages: Washington - 13%,
California - 8%, Colorado - 3%, Florida - 8%; Georgia - 5%, Kansas - 8%;
Maryland - 8%, Minnesota - 11%, Missouri - 18%, Tennesse - 13% and Virginia -
5%.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON SHARES PRIOR TO THE PRICING OF
THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON SHARES, THE
PURCHASE OF COMMON SHARES FOLLOWING THE PRICING OF THE OFFERING TO COVER A
SYNDICATE SHORT POSITION IN THE COMMON SHARES OR FOR THE PURPOSE OF MAINTAINING
THE PRICE OF THE COMMON SHARES AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
Two fold-out pages with color pictures of each of the following
multifamily buildings with these captions: "Indian Lakes Apartments Virginia
Beach, Virginia," "Locarno Apartments Kansas City, Missouri," "Nicollette Ridge
Burnsville, Minnesota," "Newport Village Thornton, Colorado," "Northridge Park
II Salinas, California," "Mallard Cove Everett, Washington," "Southgate
Crossings Columbia Maryland" and "The Meadows Memphis, Tennessee."
<PAGE> 4
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus Supplement and the accompanying Prospectus or
incorporated herein or therein by reference. Unless indicated otherwise, the
information contained in this Prospectus Supplement assumes that the
Underwriters' over-allotment option is not exercised. Unless the context
requires otherwise, all references to the "Company" in this Prospectus
Supplement and the accompanying Prospectus shall be deemed to include the
Company, its predecessor and its subsidiaries. This Prospectus Supplement and
the accompanying Prospectus contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company's actual results could differ
materially from those set forth in the forward-looking statements. See "RISK
FACTORS" for a discussion of certain factors that might cause such a difference.
THE COMPANY
The Company is a self-advised and self-managed limited liability company
which, together with its predecessor, since 1986, has been in the business of
originating, investing in and servicing tax-exempt instruments backed by
multifamily housing developments. The Company's primary objective is to maximize
value for the holders of Common Shares ("Shareholders") through increases in
tax-exempt distributable cash flow per Common Share and appreciation in the
value of its Common Shares. The Company's investments principally represent
interests in tax-exempt mortgage revenue bonds ("Mortgage Bonds") which have
been issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. The Company utilizes its unique
combination of real estate and tax-exempt investment expertise to acquire and
aggressively manage the Mortgage Bonds and the other bond related investments.
At December 31, 1997, the Company owned a portfolio of 38 Mortgage Bonds and
other bond related investments (the "Investments") directly or indirectly
secured by 36 multifamily properties (each, a "Property") containing a total of
9,993 units and located in 11 states. Of the 38 Investments, 24 are
participating Mortgage Bonds where the amount of the interest payments made to
the Company is based, in part, upon 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 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 income in the first nine months
of 1997 was tax-exempt.
In 1995, the Company made the strategic decision to restructure in order to
take advantage of its expertise in multifamily and tax-exempt bond financing and
favorable market conditions for the acquisition of Mortgage Bonds and other
related investments. As a result of that decision, the Company transformed
itself from an owner of a static portfolio of participating Mortgage Bonds to an
active investor which acquires and manages a diversified portfolio of Mortgage
Bonds and other bond related investments. The key elements of the Company's
strategy are:
- - SELECTIVE ACQUISITIONS. The Company seeks external growth by investing in new
Mortgage Bonds and other bond related investments which have characteristics
similar to the Investments and possess attractive returns. Since 1996, the
Company has acquired 16 Mortgage Bonds and other bond related investments for
a total original acquisition cost of $110 million. Subsequent to the
securitization of five Mortgage Bonds in the fourth quarter of 1997 at an
effective annual 10-year cost of approximately 5.2%, the Company retained $54
million of the original acquisition cost. Pursuant to its business plan, the
Company expects to acquire in the first quarter of 1998 an additional seven
investments (the "Pending Acquisitions") for a total acquisition cost of
approximately $116 million, funded in part with the proceeds of this Offering.
Management believes that significant additional acquisition opportunities
currently exist in the marketplace.
- - INTENSIVE ASSET MANAGEMENT. The Company seeks to maximize current and future
cash flow growth through active management of the Investments. To achieve this
goal, the Company has implemented
S-3
<PAGE> 5
strategic asset management plans relating to the participating Mortgage Bonds
(71% of total assets at September 30, 1997) in order to maximize collections
of debt service payments while maintaining the long term economic viability of
the Properties. On a portfolio-wide basis, the Company conducts ongoing site
visits and inspections, management agent assessments, budget reviews, market
analyses and monitoring and monthly and annual operating statement reviews,
and also monitors the establishment and review of capital plans.
The Company's senior management team, led by Mark K. Joseph, its Chairman
and Chief Executive Officer, has an average of 10 years of experience with the
Company and its affiliates and an average of 20 years of experience in the real
estate industry. Upon completion of the Offering, management of the Company will
own 6.1% of the outstanding Common Shares in addition to restricted shares and
stock options representing 4.4% of the outstanding Common Shares.
RECENT ACQUISITIONS
Since the implementation of its acquisition growth strategy in 1996, the
Company has purchased seven Mortgage Bonds and made nine other bond related
investments (together, the "Recent Acquisitions"), for a total initial
acquisition cost of approximately $110 million. The following table sets forth
certain data regarding the Recent Acquisitions:
<TABLE>
<CAPTION>
ORIGINAL
DATE OF ACQUISITION
NAME OF INVESTMENT ACQUISITION COST
-------------------------------------------------------- ------------ ------------
<S> <C> <C>
Riverset II(1).......................................... Jan-96 $ 7,238,000
Locarno................................................. Aug-96 675,000
Independence Ridge...................................... Aug-96 1,045,000
Hunters Ridge/South Pointe.............................. Oct-96 4,368,000
Hidden Valley........................................... Dec-96 1,705,000
Oakbrook................................................ Dec-96 3,242,000
Torries Chase........................................... Dec-96 2,080,000
Charter House(1)........................................ Dec-96 7,752,000
The Crossings........................................... Jan-97 7,055,000
Southgate Crossings(1).................................. Jun-97 11,075,000
Indian Lakes............................................ July-97 3,542,000
Stone Mountain(1)....................................... Oct-97 33,900,000
Southwood(1)............................................ Nov-97 25,800,000
Collateral Account(2)................................... Jun-97 1,000,000
Cinnamon Ridge(3)....................................... Dec-97 n/a
------------
$110,477,000
=============
</TABLE>
- ------------------------------
(1) In the fourth quarter of 1997, these Investments were involved in
securitization transactions resulting in the Company retaining an investment
in the form of RITES(R) with an aggregate face amount of $27.2 million.
Residual Interest Tax-Exempt Securities Receipts ("RITES(R)") represent the
residual interests in the securitizations which were retained or purchased
by the Company. See "THE INVESTMENTS -- Bond Related Investments."
(2) The collateral account is part of a structured finance program developed by
the Federal National Mortgage Association to facilitate the credit
enhancement of Mortgage Bonds for which there is shared risk. The $1.4
million risk-sharing collateral account provides additional security for
these enhanced Mortgage Bonds within a collateralized pool; to the extent
this security is not needed to repay the Mortgage Bonds, it will be
disbursed to the Company following repayment of the Mortgage Bonds.
(3) The Company has entered into a total return swap which replicates the total
return of the Cinnamon Ridge Mortgage Bond financed at a rate of 4.75%.
During the term of the swap, the Company will receive taxable income
approximating .625% of the face amount of the Cinnamon Ridge Mortgage Bond
from the total return swap. The Company is also currently earning a
servicing fee of .125% annually from this Property. In addition, the Company
has made a $120,000 taxable loan. The Company has not entered into a binding
contract to purchase the Cinnamon Ridge Mortgage Bond.
S-4
<PAGE> 6
PENDING ACQUISITIONS
The Company has entered into commitment letters relating to five Pending
Acquisitions for seven investments with a face value of approximately $116
million. These seven acquisitions (six Mortgage Bonds and one investment in
Residual Interest Tax Exempt Securities Receipts ("RITES(R)")) are backed by 14
multifamily properties which have a total of 2,949 units. One of the Pending
Acquisitions involves the acquisition of three existing Mortgage Bonds
collateralized by multifamily properties in southern Florida and St. Louis; one
involves the acquisition of RITES(R) with respect to an existing Mortgage Bond
collateralized by a multifamily property in Denver; and two represent the
initial transactions in an arrangement with Boston Financial Group Limited
Partnership ("Boston Financial"), a syndicator of tax credit equity, whereby the
Company will purchase a Mortgage Bond and Boston Financial will provide tax
credit equity. The last Pending Acquisition involves the purchase of a Mortgage
Bond collateralized by a multifamily property in Universal City, Texas, which
allows the Company to participate in 25% of the net property cash flow in excess
of required debt service obligations. A charitable organization will be the
obligor of this Mortgage Bond. For each of the Pending Acquisitions, there are a
number of closing conditions yet to be satisfied, and there can be no assurance
that any or all of the Pending Acquisitions will be completed. If any of these
transactions are not consummated, the Company intends to locate other comparable
investments in accordance with its 1998 business plan. The Company expects to
use the proceeds from the Offering and additional securitization transactions to
fund the Pending Acquisitions. As a result of securitizations, the Company's
interests in these investments may be converted into RITES(R), with the
expectation by management that yields on the retained interests would be
enhanced relative to the underlying Mortgage Bond return. See "THE
INVESTMENTS -- Bond Related Investments."
The following table sets forth certain data regarding the Pending
Acquisitions:
<TABLE>
<CAPTION>
INITIAL ANTICIPATED
NUMBER INVESTMENT MATURITY INTEREST
LOCATION OF PROPERTY OF UNITS AMOUNT DATE(1) RATE
----------------------------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Denver, CO................... 437 $ 5,720,000 2026 9.450(2)%
San Jose, CA................. 141 8,050,000 2030 7.250
San Jose, CA................. 140 8,000,000 2030 7.250
Miami, FL(3)................. 224 10,400,000 2029 7.416(4)
Miami, FL(3)................. 44 2,300,000 2029 7.416(4)
Miami, FL(3)................. 101 4,650,000 2029 7.416(4)
Miami, FL(3)................. 108 5,075,000 2029 7.416(4)
Miami, FL(3)................. 314 18,025,000 2029 7.416(4)
Miami, FL(3)................. 197 5,575,000 2029 7.416(4)
Miami, FL(3)................. 148 6,050,000 2029 7.416(4)
Miami, FL(3)................. 116 6,475,000 2029 7.416(4)
Lauderdale Lakes, FL......... 315 12,750,000 2029 7.125
St. Louis, MO................ 336 13,200,000 2025 7.125
Universal City, TX........... 328 9,600,000 2029 7.125(5)
-------- ------------
Totals....................... 2,949 $115,870,000
====== ============
</TABLE>
- ------------------------------
(1) The actual maturity dates have not been set, but are anticipated to be as
shown.
(2) This rate represents the anticipated yield on the Denver RITES(R)
investment, which may actually be higher or lower due to volatility in
tax-exempt interest rates.
(3) The Miami Properties collectively secure two of the Mortgage Bonds the
Company plans to acquire. The Mortgage Bonds are pari passu and for purposes
of this Prospectus Supplement are referred to as one Mortgage Bond. The
Series B Mortgage Bond is subject to conversion into a Series A Bond at the
request of the borrower upon the satisfaction of certain conditions by the
borrower.
(4) This represents a weighted average interest rate for the two Mortgage Bonds.
The Series A Mortgage Bond, representing $55,050,000, has an interest rate
of 7.125% and the Series B Mortgage Bond, representing $3,500,000, has an
interest rate of 12.00%.
(5) In addition, the Company is entitled to receive taxable contingent interest
of 25% of the net property cash flow in excess of required debt service
obligations.
S-5
<PAGE> 7
THE INVESTMENTS
The following table sets forth certain data with respect to the Company's
Investments as of September 30, 1997:
<TABLE>
<CAPTION>
BASE
MONTH-YEAR INTEREST MATURITY FACE AMORTIZED UNREALIZED
INVESTMENTS ACQUIRED RATE DATE AMOUNT COST GAIN (LOSS)
- ---------------------------------------------- ----------- -------- --------- ------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
PARTICIPATING MORTGAGE BONDS:
Alban Place................................ Sep-86 7.875% Oct. 2008 $10,065 $ 10,065 $ (667)
Creekside Village(1)....................... Nov-87 7.500 Nov. 2009 11,760 7,396 162
Emerald Hills.............................. Mar-88 7.750 Apr. 2008 6,725 6,725 487
Lakeview Garden(1)......................... Sep-87 7.750 Aug. 2007 9,003 5,674 125
Newport-on-Seven(1)........................ Aug-86 8.125 Aug. 2008 10,125 7,898 675
North Pointe(1)............................ Sep-86 7.875 Aug. 2006 25,185 12,738 3,225
Northridge Park............................ Aug-87 7.500 June 2012 8,815 8,815 (2,006)
Riverset I................................. Aug-88 7.875 Nov. 1999 19,000 19,000 529
Southfork Village.......................... Jan-88 7.875 Jan. 2009 10,375 10,375 1,155
Villa Hialeah(2)........................... Nov-87 7.875 Oct. 2009 10,250 10,250 (2,577)
Willowgreen(1)............................. Nov-86 8.000 Dec. 2010 9,275 6,770 6
The Crossings.............................. Jan-97 8.000 July 2027 7,050 7,050 --
-------- -------
SUBTOTAL PARTICIPATING MORTGAGE BONDS...... 112,756 1,114
-------- -------
MORTGAGE BONDS:
Riverset II(3)............................. Jan-96 9.500 Oct. 2019 7,610 7,228 915
Charter House(3)........................... Dec-96 7.450 July 2026 7,635 7,711 153
Hidden Valley.............................. Dec-96 8.250 Jan. 2026 1,700 1,700 51
Oakbrook................................... Dec-96 8.200 July 2026 3,195 3,227 64
Torries Chase.............................. Dec-96 8.150 Jan. 2026 2,070 2,070 96
Southgate Crossings(3)..................... Jun-97 8.000 June 2027 11,060 11,060 --
-------- -------
SUBTOTAL MORTGAGE BONDS.................... 32,996 1,279
-------- -------
PARTICIPATING SUBORDINATE MORTGAGE BONDS:
Barkley Place(1)(4)........................ Feb-95(5) 16.000 Jan. 2030 3,480 2,445 880
Gilman Meadows(4).......................... Feb-95(5) 3.000 Jan. 2030 2,875 2,530 859
Hamilton Chase(4).......................... Feb-95(5) 3.000 Jan. 2030 6,250 4,140 788
Mallard Cove I(4).......................... Feb-95(5) 3.000 Jan. 2030 1,670 798 288
Mallard Cove II(4)......................... Feb-95(5) 3.000 Jan. 2030 3,750 2,429 516
Meadows(1)(4).............................. Feb-95(5) 16.000 Jan. 2030 3,635 3,716 862
Montclair(4)............................... Feb-95(5) 3.000 Jan. 2030 6,840 1,691 3,056
Newport Village(4)......................... Feb-95(5) 3.000 Jan. 2030 4,175 2,973 2,100
Nicollet Ridge(4).......................... Feb-95(5) 3.000 Jan. 2030 12,415 6,075 494
Steeplechase Falls(1)(4)................... Feb-95(5) 16.000 Jan. 2030 5,300 5,852 2,386
Whispering Lake(4)......................... Feb-95(5) 3.000 Jan. 2030 8,500 4,779 1,939
Riverset II................................ Jan-96 10.000 Oct. 2019 1,489 -- 955
-------- -------
SUBTOTAL PARTICIPATING SUBORDINATE MORTGAGE
BONDS..................................... 37,428 15,123
-------- -------
SUBORDINATE MORTGAGE BONDS:
Independence Ridge......................... Aug-96 12.500 Dec. 2015 1,045 1,045 11
Locarno.................................... Aug-96 12.500 Dec. 2015 675 675 3
-------- -------
SUBTOTAL SUBORDINATE MORTGAGE BONDS........ 1,720 14
-------- -------
OTHER BOND RELATED INVESTMENTS:
RITES(R):
Hunters Ridge/South Pointe................ Oct-96 n/a n/a 3,560 4,264 147(6)
Indian Lakes.............................. Jul-97 n/a n/a 3,360 3,536 112(6)
-------- -------
Total RITES(R).......................... 7,800 259
Purchase Commitment (Stone Mountain)....... n/a n/a n/a n/a -- 170
Collateral Account(7)...................... Jun-97 n/a n/a n/a 1,359 --
-------- -------
SUBTOTAL OTHER BOND RELATED INVESTMENTS.... 9,159 429
-------- -------
TOTAL INVESTMENTS....................... $194,059 $17,959
======== =======
<CAPTION>
INTEREST
INCOME FACE
FOR THE AMOUNT OF
NINE MONTHS OBLIGATIONS
ENDED SENIOR
FAIR SEPTEMBER 30, TO THE
INVESTMENTS VALUE 1997 INVESTMENTS
- ---------------------------------------------- --------- ------------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
PARTICIPATING MORTGAGE BONDS:
Alban Place................................ $ 9,398 $ 595 --
Creekside Village(1)....................... 7,558 573 --
Emerald Hills.............................. 7,212 391 --
Lakeview Garden(1)......................... 5,799 347 --
Newport-on-Seven(1)........................ 8,573 520 --
North Pointe(1)............................ 15,963 1,040 --
Northridge Park............................ 6,809 496 --
Riverset I................................. 19,529 1,122 --
Southfork Village.......................... 11,530 689 --
Villa Hialeah(2)........................... 7,673 605 --
Willowgreen(1)............................. 6,776 455 --
The Crossings.............................. 7,050 433 --
-------- -------
SUBTOTAL PARTICIPATING MORTGAGE BONDS...... 113,870 7,266
-------- -------
MORTGAGE BONDS:
Riverset II(3)............................. 8,143 548 --
Charter House(3)........................... 7,864 427 --
Hidden Valley.............................. 1,751 105 --
Oakbrook................................... 3,291 197 --
Torries Chase.............................. 2,166 127 --
Southgate Crossings(3)..................... 11,060 271 --
-------- -------
SUBTOTAL MORTGAGE BONDS.................... 34,275 1,675
-------- -------
PARTICIPATING SUBORDINATE MORTGAGE BONDS:
Barkley Place(1)(4)........................ 3,325 277 $ 5,350
Gilman Meadows(4).......................... 3,389 188 4,000
Hamilton Chase(4).......................... 4,928 334 7,625
Mallard Cove I(4).......................... 1,086 61 800
Mallard Cove II(4)......................... 2,945 174 2,700
Meadows(1)(4).............................. 4,578 243 3,000
Montclair(4)............................... 4,747 429 8,500
Newport Village(4)......................... 5,073 252 6,250
Nicollet Ridge(4).......................... 6,569 224 7,925
Steeplechase Falls(1)(4)................... 8,238 444 12,650
Whispering Lake(4)......................... 6,718 360 8,900
Riverset II................................ 955 -- --
-------- -------
SUBTOTAL PARTICIPATING SUBORDINATE MORTGAGE
BONDS..................................... 52,551 2,986
-------- -------
SUBORDINATE MORTGAGE BONDS:
Independence Ridge......................... 1,056 99 7,805
Locarno.................................... 678 64 4,345
-------- -------
SUBTOTAL SUBORDINATE MORTGAGE BONDS........ 1,734 163
-------- -------
OTHER BOND RELATED INVESTMENTS:
RITES(R):
Hunters Ridge/South Pointe................ 4,411(6) 262 8,220
Indian Lakes.............................. 3,648(6) 86 6,720
-------- -------
Total RITES(R).......................... 8,059 348
Purchase Commitment (Stone Mountain)....... 170 n/a n/a
Collateral Account(7)...................... 1,359 -- --
-------- -------
SUBTOTAL OTHER BOND RELATED INVESTMENTS.... 9,588 348
-------- -------
TOTAL INVESTMENTS....................... $212,018 $12,438
======== =======
</TABLE>
- ------------------------------
(1) These bonds do not currently receive full payment of the stated base
interest rate.
(2) As a result of declining property performance, the Company has entered into
workout negotiations with the borrower which are anticipated to result in a
non-cash charge to the Company's fourth quarter operating statement of a
portion of the unrealized loss at September 30, 1997.
(3) In the fourth quarter of 1997, these Investments were involved in
securitization transactions resulting in the Company retaining an investment
in the form of RITES(R) with an aggregate face amount of $6.7 million.
(4) The underlying bonds are held in a trust; the Company owns all of the
custodial receipts related to the underlying bonds.
(5) These Mortgage Bonds were originally purchased by the Company in 1986, 1987
and 1988 and were refunded by the Company in February 1995.
(6) Unrealized gain (loss) and fair value include unrealized loss on swap
arrangements of $350,000 for Hunters Ridge/South Pointe and $130,000 for
Indian Lakes.
(7) The collateral account is part of a structured finance program developed by
the Federal National Mortgage Association to facilitate the credit
enhancement of Mortgage Bonds for which there is shared risk. The $1.4
million risk-sharing collateral account provides additional security for
these enhanced Mortgage Bonds within a collateralized pool; to the extent
this security is not needed to repay the Mortgage Bonds, it will be
disbursed to the Company following repayment of the Mortgage Bonds.
S-6
<PAGE> 8
The Company also has investments in certain taxable loans made in
connection with certain of the Properties, with an aggregate book value of
approximately $11.3 million at September 30, 1997. In addition, the Company
conducts origination and mortgage servicing activities which generated taxable
fee income of $1,086,000 during the first nine months of 1997 and $560,000 in
1996. The Company has entered 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. The
Company has unrealized loss on such swap arrangements aggregating approximately
$480,000 at September 30, 1997.
THE OFFERING
<TABLE>
<S> <C>
Common Shares offered.......... 3,000,000
Common Shares outstanding after
the Offering(1)(2)........... 14,200,728
Use of proceeds................ To fund the Pending Acquisitions, for future investment
activity and for general corporate purposes. See "Use of
Proceeds."
AMEX symbol.................... "MMA"
</TABLE>
- ------------------------------
(1) The Company also had 23,966 Preferred Shares, 12,718 Preferred CD Shares and
2,000 Term Common Shares issued and outstanding as of December 31, 1997. See
"THE COMPANY -- General."
(2) Excludes 824,405 Common Shares reserved for issuance pursuant to the
Company's 1996 Share Incentive Plan and Non-Employee Directors' Plan; the
Company has awarded options relating to 702,470 of such Common Shares.
DISTRIBUTIONS
On January 2, 1998, the Company's Board of Directors raised the Company's
regular quarterly dividend from $0.3650 to $0.3700 per Common Share payable on
January 22, 1998 to Shareholders of record on January 12, 1998. This represents
an annualized dividend of $1.48 per Common Share and an indicated annualized
yield of 7.2% based on a closing price of $20.625 for the Common Shares on
January 26, 1998. Approximately 85% of the Company's income in the first nine
months of 1997 was tax-exempt.
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<PAGE> 9
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data for the Company and
its predecessor. The following information should be read in conjunction with
the financial statements and notes thereto included or incorporated by reference
herein. The financial data as of and for the years ended December 31, 1996, 1995
and 1994 have been derived from audited financial statements incorporated by
reference herein.
The financial data at September 30, 1997 and for the nine months ended
September 30, 1997 and September 30, 1996 are derived from unaudited
consolidated financial statements incorporated by reference herein. The
unaudited financial information includes all adjustments (consisting of normal
recurring adjustments) that the Company's management considers necessary for
fair presentation of the financial position and results of operations for these
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the entire year ended
December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest on investments............... $ 12,438 $ 10,422 $ 13,859 $ 13,363 $ 16,894
Interest on working capital loans,
demand notes and other loans........ 2,569 602 1,343 211 486
Interest on short term investments.... 550 522 1,096 366 210
Net gain on sale of Series A bond
receipts............................ -- -- -- 623 --
Equity investment in MLP II
Acquisition LP...................... -- 2,141 2,141 3,150 --
Other income.......................... 792 87 231 -- --
---------- ---------- ---------- -------- --------
Total revenues........................ 16,349 13,774 18,670 17,713 17,590
Total expenses(1)..................... 2,441 6,985 7,802 4,509 4,379
---------- ---------- ---------- -------- --------
Net income............................ $ 13,908 $ 6,789 $ 10,868 $ 13,204 $ 1,330(2)
========== ========== ========== ======== ========
Net income allocated to Common Shares
(subsequent to July 31, 1996)....... $ 12,130 $ 2,753 $ 6,275 n/a n/a
========== ========== ==========
Net income per Common Share
(subsequent to July 31, 1996)....... $ 1.09 $ 0.25 $ 0.56 n/a n/a
========== ========== ==========
Weighted average shares outstanding
(subsequent to July 31, 1996)....... 11,124,513 11,144,380 11,122,705 n/a n/a
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------
AS
ACTUAL ADJUSTED(3)
---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $233,532 $291,842
Total liabilities..................... $ 1,927 $ 1,927
Total shareholders' equity............ $231,605 $289,915
</TABLE>
- ------------------------------
(1) Total expenses includes other than temporary impairments related to
investments in Mortgage Bonds of approximately $4.0 million for the nine
months ended September 30, 1996 and the year ended December 31, 1996 and
approximately $2.0 million for the year ended December 31, 1994.
(2) After cumulative effect of change in accounting for Mortgage Bonds resulting
in an $11.9 million charge which was attributable to operations prior to
January 1, 1994.
(3) Reflects the issuance of 3,000,000 Common Shares by the Company in the
Offering, and the retention of the net proceeds as cash pending investment
as described under "Use of Proceeds."
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<PAGE> 10
RISK FACTORS
In addition to the other information contained in this Prospectus
Supplement and the accompanying Prospectus, the following risk factors, and
those in the accompanying Prospectus under "RISK FACTORS," should be carefully
considered in evaluating the Company and its business before purchasing any of
the Common Shares offered hereby.
REAL ESTATE MARKET CONDITIONS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
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. Since
a significant portion of the Investments represents direct or indirect interests
in participating Mortgage Bonds, 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 Original Bonds and to restructuring, refinancing or extension of
many of such investments. Five of the Original Bonds continue to be in default.
There can be no assurance that similar problems may not occur in the future. See
"RISK FACTORS -- Risks of Investing in Mortgage Bonds Secured by Multifamily
Apartment Properties" in the accompanying Prospectus.
Each Mortgage Bond 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 the 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 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.
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, the Company's Mortgage
Bond is 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. In certain circumstances, 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. Furthermore,
the RITES(R) may be subject to call in certain circumstances which are beyond
the control of the Company. Where
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<PAGE> 11
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
The value of the Company's fixed rate Investments will change as interest
rates in general fluctuate. When interest rates decline, the value of the
Company's portfolio can be expected to rise. Conversely, when interest rates
rise, the value of its portfolio can be expected to decline.
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 the swap period is typically shorter than the term
of the third party floating rate trust certificates. 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.
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., an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"); Merrill Lynch is a representative of the
Underwriters in this Offering. See "UNDERWRITING." 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.
S-10
<PAGE> 12
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 dividend yield of the Common Shares.
TAX RISKS
Publicly Traded Partnership Status. The Company operates as a partnership
for federal income tax purposes, which permits the Company to pass through its
items of income and deduction to Shareholders, including its tax-exempt income.
The listing of the Common Shares on the AMEX causes the Company to be treated as
a "publicly traded partnership" for federal income tax purposes. A publicly
traded partnership is generally taxable as a corporation unless 90 percent or
more of its gross income is "qualifying" income (which includes interest,
dividends, real property rents, gains from the sale or other disposition of real
property, gain from the sale or other disposition of capital assets held for the
production of interest or dividends, and certain other items). Rogers & Wells,
counsel to the Company, has advised the Company that, although the issue is not
free from doubt, tax-exempt interest income constitutes qualifying income for
this purpose. Company management has represented that in all relevant prior
years of the Company's (and its predecessor's) existence that at least 90
percent of its gross income was qualifying income and has covenanted to conduct
the Company's operations in a manner such that at least 90 percent of its gross
income, including tax-exempt interest, will constitute qualifying income. Based
upon and subject to the foregoing representation and the discussion below
entitled "FEDERAL INCOME TAX CONSIDERATIONS -- General," in the opinion of
Rogers & Wells, although the issue is not free from doubt, the Company (and its
predecessor) has been and is properly treated as a partnership for federal
income tax purposes. If for any reason less than 90 percent of the Company's
gross income constitutes qualifying income, items of income and deduction would
not pass through to the Shareholders and the Shareholders would be treated for
federal income tax purposes as stockholders in a corporation. The Company would
be required to pay income tax at regular corporate rates on any portion of its
net income that did not constitute tax-exempt income. Distributions by the
Company to the Shareholders would constitute ordinary dividend income taxable to
such holders to the extent of the Company's earnings and profits, which would
include its tax-exempt income, as well as any taxable income it might have, and
the payment of these dividends would not be deductible by the Company. See
"FEDERAL INCOME TAX CONSIDERATIONS -- General -- Publicly Traded Partnership
Rules."
Tax-Exemption of the Mortgage Bonds. On the date of initial issuance of
all but one of the Mortgage Bonds, bond counsel or special tax counsel rendered
its opinion to the effect that, based on the law in effect on the date of
issuance, interest on the Mortgage Bond is excludable from gross income for
federal income tax purposes, except with respect to any Mortgage Bond during any
period in which it is held by a "substantial user" of the Property or a "related
person." Such opinions were conditioned on compliance with state and local usury
laws. With respect to one Mortgage Bond, bond counsel rendered its opinion that,
based on the law in effect on the date of issuance, base interest is excludable
from gross income for federal income tax purposes, except with respect to any
period in which it is held by a substantial user of the Property or a related
person. The Company believes that the contingent interest payable on such
Mortgage Bond is taxable. The Internal Revenue Code of 1986, as amended (the
"Code"), establishes certain requirements which must be met subsequent to the
issuance and delivery of Mortgage Bonds in order that interest on such Mortgage
Bonds remain excluded from gross income for federal income tax purposes. Among
these continuing requirements are restrictions on the investment and use of
proceeds on the Mortgage Bonds and, for Mortgage Bonds the proceeds of which are
loaned to a charitable organization (as described in Section 501(c)(3) of the
Code), the continued exempt status of such charitable organization obligor.
Failure to comply with the continuing requirements of the Code may cause
interest on such bonds to be includable in gross income for purposes of federal
income tax retroactive to the date of issuance, regardless of when such
noncompliance occurs. Each issuer of the Mortgage Bonds and the conduit borrower
of the Mortgage Bonds has covenanted in the Arbitrage Compliance Agreement or
similar document with respect to such Mortgage Bonds to comply with certain
procedures and guidelines as designed to insure satisfaction with the continuing
requirements of the
S-11
<PAGE> 13
Code. Rogers & Wells 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 (or
base interest) on the Mortgage Bonds, and has not independently verified whether
any events or circumstances have occurred or intervened since the original
issuance of the Mortgage Bonds that would adversely affect such opinion of bond
counsel or special tax counsel. However, as of the date of this Prospectus
Supplement, none of the Company, its affiliates or Rogers & Wells will have
knowledge of any events that may adversely affect the tax-exempt status of the
Mortgage Bonds, including any notice that the Internal Revenue Service (the
"IRS") considers interest on any of the Mortgage Bonds to be includable in gross
income.
Prior to the refunding of eleven of the Original Bonds in 1995, the
obligors on such Original Bonds failed to make timely debt service payments,
resulting in defaults on such Original Bonds. In addition, the obligors on five
of the Original Bonds which were not refunded have defaulted on their
obligations and continue to be in default. Although it has not completed
foreclosure proceedings in any cases, the Company's management believes that it
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 IRS may treat the Company's actions to exercise, or not to
exercise, its rights under one or more of the mortgages of the defaulted
Mortgage Bonds as constituting a material modification and, therefore, conclude
that such Mortgage Bonds were reissued for federal income tax purposes. If the
IRS were successful in maintaining this position, interest on such Mortgage
Bonds probably would be taxable for federal income tax purposes. The Company has
been advised by counsel that the Company's actions (or failures to act) taken in
connection with the default of certain Mortgage Bonds would not, under
then-published rulings, decisions, statutes and regulations, result in a
reissuance of such Mortgage Bonds. Rogers & Wells has not passed upon, and does
not assume responsibility for, but rather has assumed the correctness of,
counsel's advice to the Company on this issue. Unlike a ruling from the IRS,
however, the advice of counsel has no binding effect or official status of any
kind, and no assurances can be given that the conclusions reached will not be
contested by the IRS or, if contested, will be sustained by a court. The Company
will contest any adverse determination by the IRS on this issue. Any such
contest will result in the incurrence of additional expenses by the Company.
Treatment of Mortgage Bonds as Equity. Interest payable on certain of the
Mortgage Bonds depends upon the cash flow from the Properties and proceeds from
the sale of the Properties. If the Mortgage Bonds were determined to involve an
equity investment in the respective Properties because of this feature, all or
part of the interest on the Mortgage Bonds, including base interest, would not
qualify as tax-exempt interest for federal income tax purposes. Prior to the
acquisition of the Original Bonds, the Company received opinions of counsel to
the effect that, based upon certain assumptions described in such opinions, more
likely than not, each Original Bond will be treated for federal income tax
purposes as representing indebtedness and that no portion of such Mortgage Bond
or any payments receivable thereunder will be considered (i) an equity interest
in the conduit Borrower, (ii) an equity interest in a venture between the
conduit borrower and the Company or (iii) an ownership interest in the
Properties. The Company received similar opinions with respect to each of the 12
Participating Subordinate Mortgage Bonds. With respect to five of the Original
Bonds which have defaulted, but were not refunded as part of the Financing (as
herein defined), the Company has not received any updated opinions of counsel
with respect to the issue of whether the underlying Mortgage Bonds should be
treated as equity. The original opinions issued with respect to certain of these
Mortgage Bonds indicated that the Mortgage Bonds were, more likely than not,
indebtedness, but included a qualification that no opinion was expressed with
respect to the characterization of the Mortgage Bonds as indebtedness or equity
under circumstances of a default. Unlike a ruling from the IRS, 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 IRS or, if contested, will be sustained by a court. The Company
will contest any adverse determination by the IRS on this issue. Any such
contest will result in the incurrence of additional expenses by the Company.
A number of the opinions rendered at the time of the issuance of the
Original Bonds were rendered by Piper & Marbury L.L.P., counsel for the
underwriters ("Piper & Marbury"), who was then acting as counsel
S-12
<PAGE> 14
for the Company. Except as described in the preceding sentence, none of the
opinions described in the preceding paragraph were rendered by Rogers & Wells or
Piper & Marbury, and neither has passed on or assumes any responsibility for the
opinions of other counsel on this issue. Moreover, neither Rogers & Wells nor
Piper & Marbury 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. The Company has been making additional
investments in Mortgage Bonds and related assets and entering into hedging
transactions, such as interest rate swaps. Such investments may produce income
that is subject to federal income taxation and not "qualifying income" for
purposes of the publicly traded partnership rules. In addition, the Company's
Investments may include investments in Mortgage Bonds that need to be
restructured and remarketed. The Company could recognize a taxable gain (or
loss) upon any such restructuring and remarketing of the Mortgage Bonds even
though such restructuring does not result in any cash proceeds. In addition,
various conditions would have to be met to insure that the restructuring and
remarketing of the Mortgage Bonds would not cause the loss of the tax-exempt
status of interest on such bonds. Any taxable income produced by other assets or
taxable gain recognized upon the restructuring and remarketing of new
investments in Mortgage Bonds will be allocated solely to the Shareholders and
not to the owners of either the Preferred Shares or the Preferred CD Shares.
Taxable Income. The Company currently invests primarily in tax-exempt
investments; however, the Company will hold and may invest in some assets and
engage in certain operations that generate income that is not exempt from
federal income tax. Further, as described above, the IRS may seek to
recharacterize a portion of the Company's tax-exempt income as taxable income. A
Shareholder's distributive share of such income will be taxable to the
Shareholder, regardless of whether an amount of cash equal to such distributive
share is actually distributed. Further, although the Company believes it to be
unlikely, Shareholders may owe taxes relating to their investments in the
Company that exceed distributions made by the Company. See "FEDERAL INCOME TAX
CONSIDERATIONS."
Limitations on Business Activities. As stated above, the Company will not
be taxable as a corporation under the publicly traded partnership rules provided
it continues to satisfy the 90 percent 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. Company management has represented
and covenanted that it is acting as an investor with respect to its Investments
and that it has not and will not engage in a lending, banking or similar
business. If for any reason more than 10 percent of the Company's gross income
is derived from non-qualified sources, including interest derived from the
conduct of a lending, banking or similar financial business, the Company will be
taxable as a corporation rather than as a partnership for federal income tax
purposes, with the attendant negative consequences to the Company and the
Shareholders described above. See "-- Publicly Traded Partnership Status."
Substantial User Limitation. Interest on a Mortgage Bond, other than a
Mortgage Bond, the proceeds of which are loaned to a charitable organization,
will not be excluded from the gross income during any period in which the
Company is a "substantial user" of the corresponding Property or a "related
person" to a "substantial user." A "substantial user" of a Property would
include the conduit borrower, and any other person or entity who uses the
Property on other than a de minimis basis. The Company would be a related person
to a substantial user for this purpose if, among other things, a substantial
user were also a holder of Preferred Shares, Preferred CD Shares or Common
Shares, the Dissolution Shareholder, the Special Shareholder, or any person who
is a parent, child or spouse of any of the foregoing. A partner of a conduit
borrower or owner of a Property, among other people, will, for this purpose, be
a "related person" to a "substantial user" of the Property. The Company has
received opinions and/or advice with respect to most of its Mortgage Bonds to
the effect that the Company is not a substantial user or a related person
thereto. There exist certain levels of direct or indirect common ownership
between the Company and certain of the obligors of the Mortgage Bonds which were
considered when the Company received opinions and/or advice that it is not a
related person of a substantial user of the facilities financed by such Mortgage
Bonds. Rogers & Wells has not passed upon, nor assumed any responsibility for,
but rather, except as provided in the next paragraph,
S-13
<PAGE> 15
has assumed the correctness of such opinions and/or advice. However, based upon
discussions with Company management, as of the date of this Prospectus
Supplement, Rogers & Wells will not have knowledge of any facts or events that
would adversely affect the conclusions underlying such opinions and/or advice.
As of the date of the Offering, three of the officers of the Company own,
directly or indirectly, collectively more than 50 percent of the profits and/or
capital interests in partnerships which are the obligors on 16 Mortgage Bonds
owned by the Company (the "Affected Partnerships"). The Company has represented
that none of its officers and directors (including any family members or
otherwise related parties) own, in the aggregate, as of immediately after the
consummation of the Offering, more than five percent of the Company's capital or
profits interests. In the opinion of Rogers & Wells, based upon the
representation of the Company and the assumptions and qualifications discussed
below, upon the consummation of the Offering, the Company will not, by virtue of
any equity investment in the Company by any of the directors or officers of the
Company, be treated as a related person of any substantial user of any of the
facilities financed with the proceeds of a Mortgage Bond relating to an Affected
Partnership. In issuing the foregoing opinion, Rogers & Wells has assumed that
the representation of the Company is true and correct and has not made any
independent determination as to the equity ownership of the Company or the
Affected Partnerships. The foregoing opinion assumes that the Mortgage Bonds
will be treated as indebtedness for federal income tax purposes, interest on
such Mortgage 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 the Company is not treated as a
substantial user of the Property for any reason. Unlike a ruling from the IRS,
however, the opinion of Rogers & Wells has no binding effect or official status
of any kind, and no assurances can be given that the conclusion reached will not
be contested by the IRS or, if contested, will be sustained by a court.
The Company will contest any adverse determination by the IRS on the
substantial user issue. Any such contest will result in the incurrence of
additional expenses by the Company. The issue of whether the Company will be
treated as a related person for these purposes is a highly factual inquiry which
ultimately depends upon the direct and indirect ownership of the Company.
Because the Common Shares are publicly traded, there can be no assurance that
the Company will not be treated as a related person to a substantial user at a
future time.
Allocation of Taxable and Tax-Exempt Income. The Company will use various
accounting and reporting conventions to determine each Shareholder's allocable
share of income, gain, loss and deduction. The Company'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 IRS will agree with the Company's various accounting
methods, conventions and allocation provisions, particularly the Company's
allocation of adjustments attributable to differences between the purchase price
of Common Shares and their shares of the Company's tax basis in its assets.
Because as a publicly traded partnership the Company may be unable to comply
with the literal requirements of the applicable Treasury regulations and because
certain of the Company's allocations may not have "substantial economic effect,"
Rogers & Wells is unable to express an opinion of these issues. However, the
Company does not expect that any reasonable adjustments which may be required by
the IRS would substantially increase the income allocable to Shareholders. See
"FEDERAL INCOME TAX CONSIDERATIONS -- Certain Income Tax Considerations Relating
to the Company and the Shareholders -- Allocation of Income and Loss."
CERTAIN CONFLICTS
Management and certain affiliates, as well as an affiliate of Merrill
Lynch, which is a representative of the Underwriters in this Offering, 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
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 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
S-14
<PAGE> 16
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 "UNDERWRITING" and "RISK FACTORS -- Conflicts
of Interest" in the accompanying Prospectus.
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 this 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.
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 Common Shares.
S-15
<PAGE> 17
MARKET FOR COMMON SHARES MAY BE LIMITED AND MARKET PRICE MAY FLUCTUATE
The Common Shares are traded on the AMEX. There can be no assurance that
the price at which the Common Shares sell in the public market after the closing
of this Offering will not be lower than the price at which they are sold by the
Underwriters or that an active and liquid market for the Company's Common Shares
will be maintained. The Company's growth in net income per Common Share will be
derived in part from any positive spread between the yield on the Company's
Investments and the Company's cost of capital. Such positive spread will not
necessarily be greater in high interest rate environments than in low interest
rate environments. However, in periods of high interest rates, the net income of
the Company, and therefore the dividend yield on the Common Shares, may be less
attractive compared with alternative investments, which could negatively impact
the price of the Common Shares. If the dividend yield on the Company's Common
Shares declines, or if prevailing market interest rates rise, the market price
of the Common Shares may be adversely affected. Accordingly, fluctuations in
interest rates could have a material adverse effect on the trading market for
the Common Shares.
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. On 27 of the 36 Properties, Phase I
environmental site assessments (which involve inspection without soil sampling
or groundwater analysis) have been conducted by independent environmental
consultants ("Phase I Assessments") and 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. Some of the Phase I Assessments are as many as four years old. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and acquisition activities with the
proceeds from its prior equity offering, the proceeds from the Financing and
securitizations and cash provided from its Investments. See "THE COMPANY." The
Company expects to meet its cash needs in the short term, which consist
primarily of operating expenses and dividends on the Common Shares and other
equity, from operating cash flow.
In addition, the Company's business plan anticipates making additional
investments during 1998, including the Pending Acquisitions which will cost
approximately $116 million. At September 30, 1997, the Company had cash and cash
equivalents of approximately $8.2 million available for investment, which on a
pro forma basis, would have been approximately $66 million giving effect to the
Offering but before completion of the Pending Acquisitions. In order to complete
the Pending Acquisitions and make additional investments, the Company will be
required to obtain debt, securitization or equity financing beyond the proceeds
of this Offering. The Company currently has no commitments with respect to such
financing, and there can be no assurance that any such financing will be
available when needed. If financing is not available, the Company will not be
able to complete the Pending Acquisitions or other acquisitions in its business
plan.
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Prospectus 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,
S-16
<PAGE> 18
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 Supplement or the accompanying Prospectus 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 -- Business and Growth
Strategies," 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.
S-17
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Shares offered
hereby, after payment of expenses related to the Offering and underwriting
discounts and commissions, are estimated to be approximately $58.3 million. The
Company intends to use the entire amount of such net proceeds to fund, in part,
the Pending Transactions, if they are completed, and otherwise for future
investment activity and for general corporate purposes. Pending such uses, the
Company intends to invest the net proceeds in short term interest bearing
securities, which may include P-FLOATs(R) relating to RITES(R) held by the
Company. See "THE INVESTMENTS -- Bond Related Investments."
PRICE RANGE OF COMMON SHARES AND DIVIDEND HISTORY
The Common Shares began trading on the AMEX on August 30, 1996 under the
symbol "MMA." The table below sets forth the quarterly high and low closing
price per share of the Common Shares as reported on the AMEX for the quarters
indicated and the dividends paid by the Company with respect to each such
period. Prior to 1997, the Company paid a semiannual dividend. In 1997, the
Company switched to a quarterly dividend.
<TABLE>
<CAPTION>
CLOSING PRICE
PER COMMON SHARE
------------------------
QUARTER ENDED HIGH LOW DIVIDENDS PAID
- ----------------------------------------------- -------- -------- --------------
<S> <C> <C> <C>
1996:
Third Quarter(1)............................. $16.000 $14.125 --
Fourth Quarter............................... 16.750 13.875 $.6325(2)
1997:
First Quarter................................ 17.875 15.500 .3450
Second Quarter............................... 17.375 16.250 .3500
Third Quarter................................ 19.875 17.000 .3650
Fourth Quarter............................... 20.875 19.000 .3700
1998:
First Quarter (through January 26)........... 20.875 19.625 --
</TABLE>
- ------------------------------
(1) Beginning August 30, 1996.
(2) This amount represents a $0.0700 distribution for the one month ended July
31, 1996 from the Company's predecessor and a $0.5625 distribution for the
five months ended December 31, 1996 from the Company.
On January 26, 1998, the last reported sales price of the Common Shares on
the AMEX was $20.625 per share. On November 3, 1997, the Company had 11,023
Shareholders of record.
On January 2, 1998, the Company's Board of Directors raised the Company's
regular quarterly dividend from $0.3650 to $0.3700 per Common Share payable on
January 22, 1998 to Shareholders of record on January 12, 1998. This represents
an annualized dividend of $1.48 per Common Share and an indicated annualized
yield of 7.2% based on a closing price of $20.625 for the Common Shares on
January 26, 1998. Approximately 85% of the Company's income in the first nine
months of 1997 was tax-exempt.
The Company has a policy of distributing not less than 80% of the cash flow
allocable to Common Shares. However, this policy may be changed at any time by
the Board of Directors and future distributions by the Company will be at the
discretion of the Board of Directors and will depend on the Company's financial
condition, capital requirements and such other factors as the Board of Directors
deems relevant.
S-18
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company, as of
September 30, 1997, and its adjusted capitalization after giving effect to the
Offering. The information set forth in the table should be read in conjunction
with the financial information included or incorporated by reference elsewhere
in this Prospectus Supplement.
<TABLE>
<CAPTION>
September 30, 1997
------------------------
AS
ACTUAL ADJUSTED(1)
-------- ------------
(in thousands)
<S> <C> <C>
SHAREHOLDERS' EQUITY
Unrealized gain on Investments available for sale, net.............. $ 17,959 $ 17,959
Preferred Shares(2)................................................. 17,729 17,729
Preferred CD Shares(2).............................................. 6,794 6,794
Term Common Shares.................................................. 99 99
Common Shares, net of treasury shares of $923 and unearned
compensation of $148............................................. 189,024 247,334
-------- --------
TOTAL SHAREHOLDERS' EQUITY AND TOTAL CAPITALIZATION.............. $231,605 $289,915
======== ========
</TABLE>
- ------------------------------
(1) Reflects the issuance of 3,000,000 Common Shares pursuant to this Offering
and the application of the net proceeds therefrom. Also reflects the
deduction of aggregate estimated underwriting discounts and commissions and
expenses of the Offering in the amount of $3,565,000.
(2) The Company completed a tender offer for certain of its outstanding
Preferred and Preferred CD shares in January 1998, in which it purchased a
portion of those shares for approximately $1,046,000.
S-19
<PAGE> 21
THE COMPANY
GENERAL
The Company is a self-advised and self-managed limited liability company
which, together with its predecessor, since 1986, has been in the business of
originating, investing in and servicing tax-exempt instruments backed by
multifamily housing developments. The Company's primary objective is to maximize
Shareholder value through increases in tax-exempt distributable cash flow per
Common Share and appreciation in the value of its Common Shares. 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
Company utilizes its unique combination of real estate and tax-exempt investment
expertise to select and aggressively manage its Investments. At December 31,
1997, the Company owned a portfolio of 38 Investments secured directly or
indirectly by 36 Properties containing a total of 9,993 units and located in 11
states. Of the 38 Investments, 24 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 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 income in the first nine months
of 1997 was tax-exempt.
The Company is the successor to the business of the SCA Tax-Exempt Fund
Limited Partnership (the "Partnership"), a closed-end limited partnership that
was merged into the Company in 1996 (the "Merger"). The Partnership commenced
operations in 1986 when approximately $264 million was invested in the 22
Original Bonds and related working capital loans. The business of the
Partnership was limited to the ownership and management of the Original Bond
portfolio and the related working capital loans. Because the Partnership's
management believed that additional investment opportunities existed to purchase
Mortgage Bonds at attractive prices, the Partnership raised gross proceeds of
$67.7 million through the sale of multifamily mortgage revenue bond receipts
(the "Receipts") in February 1995 (the "Financing"). The Receipts are
collateralized by a pool of 11 of the Partnership's original Mortgage Bonds all
of which related to properties that defaulted on their original debt
obligations. In the Financing, 11 bonds were refunded by the issuers and a
Series A Bond and a Series B Bond were exchanged for each of the Original Bonds.
The aggregate principal amount of the Series A Bonds and the Series B Bonds was
$67.7 million and $58.9 million, respectively. Subsequently, the Merger was
proposed and consummated. Following the Merger, the Company has used the
proceeds of the Financing and securitizations to make additional investments in
Mortgage Bonds and similar assets.
In connection with the Merger, holders of interests in the Partnership were
given the opportunity to elect to exchange their interests for Common Shares,
Preferred Shares, and/or Preferred Capital Distribution Shares (the "Preferred
CD Shares"). The Preferred Shares were structured to give their holders a
security substantially the same as their original Partnership interests, as if
the Financing had not occurred and without giving effect to future financings.
Thus, holders of Preferred Shares participate in their share of income from the
22 Original Bonds as they existed immediately prior to the Financing. The
Preferred CD Shares give their holders the income they would have received from
their original Partnership interests, and provide for a distribution of their
pro rata share of the proceeds of the Financing as well as future financings
with respect to the 22 Original Bonds. The Common Shares, unlike either the
Preferred Shares or the Preferred CD Shares, were structured to enable their
holders to participate in all of the income from investment of the proceeds of
the Financing, as well as future financings, in addition to their pro rata share
of the income from the Original Bonds. 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 CD Shares, and the holders of 86.62% of the
outstanding limited Partnership interests received Common Shares of the Company.
S-20
<PAGE> 22
In 1995, the Company, having made the strategic decision described above,
transformed itself from an owner of a static portfolio of participating Mortgage
Bonds to an active investor which acquires and manages a diversified portfolio
of Mortgage Bonds and other bond related investments. To achieve this objective
the Company embarked on an acquisition growth strategy in 1996 which capitalizes
on the Company's management expertise in multifamily real estate and tax-exempt
bond financing as well as favorable interest rates and other market conditions.
Since 1996, the Company has acquired 16 Mortgage Bonds and bond related
investments for a total original acquisition cost of $110 million. Subsequent to
the securitization of five Mortgage Bonds in the fourth quarter of 1997 at an
effective annual 10-year cost of approximately 5.2%, the Company has retained
$54 million of the original acquisition cost. The Company will continue to rely
on its unique combination of real estate and tax-exempt investment expertise to
prudently manage the risks associated with the Investments. Pursuant to its
acquisition growth strategy, the Company has entered into commitment letters to
acquire an additional seven investments, for a total acquisition cost of
approximately $116 million. The Pending Acquisitions are expected to close in
the first quarter of 1998 and be funded with the proceeds of the Offering and
additional securitizations.
The Company's senior management team, led by Mark K. Joseph, Chairman and
Chief Executive Officer, has an average of 10 years of experience with the
Company and its affiliates, and an average of 20 years of experience in the real
estate industry. Upon completion of the Offering, management of the Company will
own 6.1% of the outstanding Common Shares in addition to restricted shares and
stock options representing 4.4% of the outstanding Common Shares.
BUSINESS AND GROWTH STRATEGIES
The Company's primary objective is to maximize shareholder value through
increases in distributable tax-exempt cash flow per Common Share and
appreciation in the value of its Common Shares. The Company seeks to achieve its
growth objectives by acquiring, servicing and managing diversified portfolios of
Mortgage Bonds and other bond related investments. In particular, the Company's
growth plans include:
- Selective acquisitions of new Mortgage Bonds and other bond related
investments at attractive spreads over its cost of capital; and
- Intensive asset management to collect debt service payments as and when
due under the Company's Mortgage Bonds and to maximize the collection of
contingent interest.
ACQUISITION STRATEGY
The Company will continue to pursue acquisition opportunities to the extent
that appropriate tax-exempt instruments are available on attractive terms that
are expected to enhance value for Shareholders. The Company believes that
currently there are a substantial number of Mortgage Bonds and similar
investments available at attractive prices in the following categories:
- Existing Mortgage Bonds as the underlying mortgages are refinanced.
Twelve of the 16 Recent Acquisitions and two of the Pending Acquisitions
represent the refinancing of existing Mortgage Bonds. There are a
significant number of Mortgage Bonds backed by multifamily properties
which were originated in the late 1980s. The Company believes, in light
of the current interest rate environment, that many of the obligors on
these Mortgage Bonds are likely to consider refinancing them. According
to Muller Data Corporation, there are over $20 billion of Mortgage Bonds
eligible to be refinanced over the next two years.
- Tax-exempt bonds issued for the benefit of charitable organization
obligors which own and manage multifamily housing. These properties
generally serve moderate-income families with incomes between 50% and 80%
of a region's median. In addition to two of the Recent Acquisitions, one
of the Pending Acquisitions involves the purchase of a Mortgage Bond, the
proceeds of which will be loaned to a charitable organization.
S-21
<PAGE> 23
- Tax-exempt bonds used to finance development or rehabilitation of
multifamily properties. Two of the Pending Acquisitions represent the
initial transactions in an arrangement with Boston Financial. Under this
program, the Company will provide Mortgage Bond financing and Boston
Financial will provide tax credit equity for the development or
rehabilitation of multifamily properties.
- Other portfolios of tax-exempt bonds and related investments backed by
multifamily housing properties which meet the Company's underwriting
criteria and target risk adjusted returns.
The Company intends to raise capital for additional investments through
securitizations, which may be replaced by either equity or debt as market
conditions permit. The Company expects to finance its acquisition strategy
described above through a financing strategy that:
- takes advantage of attractive financing available in the tax-exempt
securities markets;
- minimizes negative exposure to fluctuations of interest rates; and
- maintains maximum flexibility to manage the Company's short term cash
needs.
The Company believes that its access to programs for the securitization of
tax-exempt instruments will allow it to finance its acquisition of new Mortgage
Bonds and other bond related investments at a low cost relative to the
investments thereby generating attractive spreads which benefit the
Shareholders. This securitization program involves placing a bond in a trust,
and selling short term floating rate interests in the trust to third parties.
The Company typically receives the net proceeds from the sale of the floating
rate interests and retains the residual interest in the trust. To the extent
these transactions create interest rate risks, the Company engages in interest
rate swaps designed to reduce, but not eliminate such risks.
In the fourth quarter of 1997, the Company completed securitization
transactions with respect to five Mortgage Bonds with a weighted average base
interest rate of 7.9%, for an aggregate of approximately $59 million at a
weighted average annual 10-year cost of approximately 5.2%. In addition, the
Company intends to enter into a number of securitization transactions, the
proceeds of which, along with the Offering proceeds, will be utilized to fund
the Pending Acquisitions.
ASSET MANAGEMENT STRATEGY
The Company believes that its portfolio of Mortgage Bonds offers
opportunities for growth through the Company's asset management program, which
serves to increase cash flows available for debt service, particularly from its
24 existing participating Mortgage Bonds. On a portfolio wide basis, the Company
conducts ongoing site visits and inspections, management agent assessments,
budget reviews, market analyses and monitoring and monthly and annual operating
statement reviews, and also monitors the establishment and review of capital
plans. The occupancy of the Properties increased from 93.9% at December 31, 1996
to 96.2% at September 30, 1997 and the average monthly rental rate per unit
increased from $626 to $640 for the same periods. See "THE INVESTMENTS."
S-22
<PAGE> 24
THE INVESTMENTS
The following table sets forth certain data with respect to the Company's
Investments as of September 30, 1997:
<TABLE>
<CAPTION>
BASE
MONTH-YEAR INTEREST MATURITY FACE AMORTIZED UNREALIZED
INVESTMENTS ACQUIRED RATE DATE AMOUNT COST GAIN (LOSS)
- ---------------------------------------------- ---------- -------- --------- ------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
PARTICIPATING MORTGAGE BONDS:
Alban Place................................ Sep-86 7.875% Oct. 2008 $10,065 $ 10,065 $ (667)
Creekside Village(1)....................... Nov-87 7.500 Nov. 2009 11,760 7,396 162
Emerald Hills.............................. Mar-88 7.750 Apr. 2008 6,725 6,725 487
Lakeview Garden(1)......................... Sep-87 7.750 Aug. 2007 9,003 5,674 125
Newport-on-Seven(1)........................ Aug-86 8.125 Aug. 2008 10,125 7,898 675
North Pointe(1)............................ Sep-86 7.875 Aug. 2006 25,185 12,738 3,225
Northridge Park............................ Aug-87 7.500 June 2012 8,815 8,815 (2,006)
Riverset I................................. Aug-88 7.875 Nov. 1999 19,000 19,000 529
Southfork Village.......................... Jan-88 7.875 Jan. 2009 10,375 10,375 1,155
Villa Hialeah(2)........................... Nov-87 7.875 Oct. 2009 10,250 10,250 (2,577)
Willowgreen(1)............................. Nov-86 8.000 Dec. 2010 9,275 6,770 6
The Crossings.............................. Jan-97 8.000 July 2027 7,050 7,050 --
-------- -------
SUBTOTAL PARTICIPATING MORTGAGE BONDS...... 112,756 1,114
-------- -------
MORTGAGE BONDS:
Riverset II(3)............................. Jan-96 9.500 Oct. 2019 7,610 7,228 915
Charter House(3)........................... Dec-96 7.450 July 2026 7,635 7,711 153
Hidden Valley.............................. Dec-96 8.250 Jan. 2026 1,700 1,700 51
Oakbrook................................... Dec-96 8.200 July 2026 3,195 3,227 64
Torries Chase.............................. Dec-96 8.150 Jan. 2026 2,070 2,070 96
Southgate Crossings(3)..................... Jun-97 8.000 June 2027 11,060 11,060 --
-------- -------
SUBTOTAL MORTGAGE BONDS.................... 32,996 1,279
-------- -------
PARTICIPATING SUBORDINATE MORTGAGE BONDS:
Barkley Place(1)(4)........................ Feb-95(5) 16.000 Jan. 2030 3,480 2,445 880
Gilman Meadows(4).......................... Feb-95(5) 3.000 Jan. 2030 2,875 2,530 859
Hamilton Chase(4).......................... Feb-95(5) 3.000 Jan. 2030 6,250 4,140 788
Mallard Cove I(4).......................... Feb-95(5) 3.000 Jan. 2030 1,670 798 288
Mallard Cove II(4)......................... Feb-95(5) 3.000 Jan. 2030 3,750 2,429 516
Meadows(1)(4).............................. Feb-95(5) 16.000 Jan. 2030 3,635 3,716 862
Montclair(4)............................... Feb-95(5) 3.000 Jan. 2030 6,840 1,691 3,056
Newport Village(4)......................... Feb-95(5) 3.000 Jan. 2030 4,175 2,973 2,100
Nicollet Ridge(4).......................... Feb-95(5) 3.000 Jan. 2030 12,415 6,075 494
Steeplechase Falls(1)(4)................... Feb-95(5) 16.000 Jan. 2030 5,300 5,852 2,386
Whispering Lake(4)......................... Feb-95(5) 3.000 Jan. 2030 8,500 4,779 1,939
Riverset II................................ Jan-96 10.000 Oct. 2019 1,489 -- 955
-------- -------
SUBTOTAL PARTICIPATING SUBORDINATE MORTGAGE
BONDS..................................... 37,428 15,123
-------- -------
SUBORDINATE MORTGAGE BONDS:
Independence Ridge......................... Aug-96 12.500 Dec. 2015 1,045 1,045 11
Locarno.................................... Aug-96 12.500 Dec. 2015 675 675 3
-------- -------
SUBTOTAL SUBORDINATE MORTGAGE BONDS........ 1,720 14
-------- -------
OTHER BOND RELATED INVESTMENTS:
RITES(R):
Hunters Ridge/South Pointe................ Oct-96 n/a n/a 3,560 4,264 147(6)
Indian Lakes.............................. Jul-97 n/a n/a 3,360 3,536 112(6)
-------- -------
Total RITES(R).......................... 7,800 259
Purchase Commitment (Stone Mountain)....... n/a n/a n/a n/a -- 170
Collateral Account(7)...................... Jun-97 n/a n/a n/a 1,359 --
-------- -------
SUBTOTAL OTHER BOND RELATED INVESTMENTS.... 9,159 429
-------- -------
TOTAL INVESTMENTS....................... $194,059 $17,959
======== =======
<CAPTION>
INTEREST
INCOME FACE
FOR THE AMOUNT OF
NINE MONTHS OBLIGATIONS
ENDED SENIOR
FAIR SEPTEMBER 30, TO THE
INVESTMENTS VALUE 1997 INVESTMENTS
- ---------------------------------------------- --------- ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
PARTICIPATING MORTGAGE BONDS:
Alban Place................................ $ 9,398 $ 595 --
Creekside Village(1)....................... 7,558 573 --
Emerald Hills.............................. 7,212 391 --
Lakeview Garden(1)......................... 5,799 347 --
Newport-on-Seven(1)........................ 8,573 520 --
North Pointe(1)............................ 15,963 1,040 --
Northridge Park............................ 6,809 496 --
Riverset I................................. 19,529 1,122 --
Southfork Village.......................... 11,530 689 --
Villa Hialeah(2)........................... 7,673 605 --
Willowgreen(1)............................. 6,776 455 --
The Crossings.............................. 7,050 433 --
-------- -------
SUBTOTAL PARTICIPATING MORTGAGE BONDS...... 113,870 7,266
-------- -------
MORTGAGE BONDS:
Riverset II(3)............................. 8,143 548 --
Charter House(3)........................... 7,864 427 --
Hidden Valley.............................. 1,751 105 --
Oakbrook................................... 3,291 197 --
Torries Chase.............................. 2,166 127 --
Southgate Crossings(3)..................... 11,060 271 --
-------- -------
SUBTOTAL MORTGAGE BONDS.................... 34,275 1,675
-------- -------
PARTICIPATING SUBORDINATE MORTGAGE BONDS:
Barkley Place(1)(4)........................ 3,325 277 $ 5,350
Gilman Meadows(4).......................... 3,389 188 4,000
Hamilton Chase(4).......................... 4,928 334 7,625
Mallard Cove I(4).......................... 1,086 61 800
Mallard Cove II(4)......................... 2,945 174 2,700
Meadows(1)(4).............................. 4,578 243 3,000
Montclair(4)............................... 4,747 429 8,500
Newport Village(4)......................... 5,073 252 6,250
Nicollet Ridge(4).......................... 6,569 224 7,925
Steeplechase Falls(1)(4)................... 8,238 444 12,650
Whispering Lake(4)......................... 6,718 360 8,900
Riverset II................................ 955 -- --
-------- -------
SUBTOTAL PARTICIPATING SUBORDINATE MORTGAGE
BONDS..................................... 52,551 2,986
-------- -------
SUBORDINATE MORTGAGE BONDS:
Independence Ridge......................... 1,056 99 7,805
Locarno.................................... 678 64 4,345
-------- -------
SUBTOTAL SUBORDINATE MORTGAGE BONDS........ 1,734 163
-------- -------
OTHER BOND RELATED INVESTMENTS:
RITES(R):
Hunters Ridge/South Pointe................ 4,411(6) 262 8,220
Indian Lakes.............................. 3,648(6) 86 6,720
-------- -------
Total RITES(R).......................... 8,059 348
Purchase Commitment (Stone Mountain)....... 170 n/a n/a
Collateral Account(7)...................... 1,359 -- --
-------- -------
SUBTOTAL OTHER BOND RELATED INVESTMENTS.... 9,588 348
-------- -------
TOTAL INVESTMENTS....................... $212,018 $12,438
======== =======
</TABLE>
- ------------------------------
(1) These bonds do not currently receive full payment of the stated base
interest rate.
(2) As a result of declining property performance, the Company has entered into
workout negotiations with the borrower which are anticipated to result in a
non-cash charge to the Company's fourth quarter operating statement of a
portion of the unrealized loss at September 30, 1997.
(3) In the fourth quarter of 1997, these Investments were involved in
securitization transactions resulting in the Company retaining an investment
in the form of RITES(R) with an aggregate face amount of $6.7 million.
(4) The underlying bonds are held in a trust; the Company owns all of the
custodial receipts related to the underlying bonds.
(5) These Mortgage Bonds were originally purchased by the Company in 1986, 1987
and 1988 and were refunded by the Company in February 1995.
(6) Unrealized gain (loss) and fair value include unrealized loss on swap
arrangements of $350,000 for Hunters Ridge/South Pointe and $130,000 for
Indian Lakes.
(7) The collateral account is part of a structured finance program developed by
the Federal National Mortgage Association to facilitate the credit
enhancement of Mortgage Bonds for which there is shared risk. The $1.4
million risk-sharing collateral account provides additional security for
these enhanced Mortgage Bonds within a collateralized pool; to the extent
this security is not needed to repay the Mortgage Bonds, it will be
disbursed to the Company following repayment of the Mortgage Bonds.
S-23
<PAGE> 25
The following is a general description of the terms of the Company's
Investments and is qualified in its entirety by the more detailed description
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and subsequent Quarterly Reports on Form 10-Q, each of which
are incorporated by reference herein.
MORTGAGE BONDS
The proceeds of the Mortgage Bonds held by the Company were used to make
mortgage loans for the construction, acquisition or refinancing of multifamily
housing developments throughout the United States. The Company's rights and the
specific terms of the Mortgage Bonds are defined by the various loan documents
which were negotiated at the time of creation of the loans and the issuance of
the Mortgage Bonds. The underlying housing developments qualify as "qualified
residential rental properties" under Section 142(d) of the Code or, in the case
of charitable organization obligors, Section 145 of the 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 Bonds are "qualified bonds" within the meaning
of section 141(e) of the Code, and based upon the opinions issued by bond
counsel or special tax counsel at the time of initial issuance of the Mortgage
Bonds, interest paid on the Mortgage Bonds is exempt from federal income taxes.
The Company's rights under all of the Mortgage Bonds held by it are defined
by the terms of the related mortgage loans, which are assigned to the Company to
secure the payment of principal and interest under the Mortgage Bonds. These
assignments include assignments of mortgages on the underlying properties and of
rents.
Participating Mortgage Bonds. The participating Mortgage Bonds are
collateralized by nonrecourse participating first mortgage loans on multifamily
housing developments. Prepayment is prohibited for the first seven years of the
mortgage loan except for The Crossings Property, where prepayment is prohibited
for the first 12 years. The Company may also require prepayment of the mortgage
loan upon the occurrence of an event which would cause significant risk that the
interest on the bonds would be includable in gross income for federal income tax
purposes.
The 11 participating Original Bonds (i) bear interest at base rates
reflecting market conditions at the time the Company purchased each bond and
(ii) provide for contingent interest up to a maximum of 16%. Each loan provides
for contingent interest in an amount equal to the difference between the stated
base rate and 16%. Contingent interest is payable from 100% of the project's
cash flow until the Company's aggregate non-compounded interest rate equals the
base interest rate plus 1.5% to 2.5%, as the case may be, on each mortgage loan.
Remaining cash flow is divided between the property owner and the Company until
the Company reaches the 16% limit. With respect to the Mortgage Bond for The
Crossings, base interest is paid at 8% and contingent interest and contingent
principal amortization is payable pari passu from 50% of the project's cash flow
in excess of base interest up to 16%.
To the extent the aggregate interest for any year does not equal 16%, the
difference is deferred until the Property is sold or the loan is repaid. The
ability of the Company 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 all 12, with respect to
contingent interest, are on non-accrual status for accounting purposes whereby
income is recognized as and to the extent cash is collected.
Mortgage Bonds. The Mortgage Bonds bear interest at rates that are fixed
as stated in each bond.
Participating Subordinate Bonds. The participating subordinate Mortgage
Bonds are held in a trust. The Company owns all of the custodial receipts
related to the underlying 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 as and to the extent cash is collected for all 12
participating subordinate bonds.
S-24
<PAGE> 26
Subordinate Bonds. Subordinate bonds provide for payment of interest at
rates which are fixed. Payment is, however, subordinated to senior obligations.
BOND RELATED INVESTMENTS
In a number of securitization transactions, the Company has deposited
Mortgage Bonds in a trust sponsored by Merrill Lynch and purchased an interest
in such trust, called RITES(R) (Residual Interest Tax-Exempt Securities
Receipts). In this program, a tax-exempt bond is placed in a trust and two types
of securities are sold by the trust, P-FLOATs(R) (Putable Floating Option
Tax-Exempt Receipts) and RITES(R). The trust is securitized into P-FLOATs(R),
which are senior securities which bear interest at a floating rate that is reset
periodically to result in the sale of the P-FLOATs(R) at par, and RITES(R),
which receive the remaining interest on the deposited bond after payment of the
interest on the P-FLOATs(R) and related securitization fees. The Company may
pledge additional Mortgage Bonds to secure repayment of the P-FLOATs(R). The
RITES(R) are subject to call provisions upon the occurrence of certain events.
The Company also purchases interest rate swaps as a hedging strategy to limit
its exposure to rising short term interest rates. Interest rate swaps 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.
Such swaps generally cover the period until the date on which the Company
expects the underlying Mortgage Bond to be prepaid although there is no
certainty that prepayment will coincide with the termination of the swap. The
Company has unrealized loss on such swap arrangements aggregating approximately
$480,000 at September 30, 1997. The Company also has, and may continue to,
directly purchase residual interests in a trust holding Mortgage Bonds which the
Company has not previously owned directly.
OTHER INVESTMENTS
The Company also has made loans with an aggregate book value of
approximately $11.3 million at September 30, 1997 in connection with various
Properties. The proceeds of these loans were used for construction financing,
purchasing interest rate swaps and payment of accrued interest. Interest on such
loans is subject to income taxation.
These loans include parity working capital loans which relate to the 11
Original Bonds not subject to the Financing. The terms of these loans are
identical to those of the related bonds. Interest on these 11 Original Bonds and
their related parity working capital is allocated pari passu. The Company also
owns demand notes, which represent obligations from the borrowers benefitting
from the Financing. The demand notes, which bear interest at the applicable
federal rate, are senior to the 11 participating subordinate Mortgage Bonds with
respect to interest and scheduled principal amortization.
The Company also has invested in a collateral account owned by MMACap, LLC,
a 99.9% subsidiary of the Company, which is part of a structured finance program
developed by the Federal National Mortgage Association to facilitate the credit
enhancement of Mortgage Bonds for which there is shared risk. The $1.4 million
risk-sharing collateral account provides additional security for these enhanced
Mortgage Bonds within a collateralized pool.
The Company has entered into a total return swap which replicates the total
return of the Cinnamon Ridge Mortgage Bond financed at a rate of 4.75%. During
the term of the swap, the Company will receive taxable income approximating
.625% of the face amount of the Mortgage Bond from the total return swap. The
Company is also currently earning a servicing fee of .125% annually from this
Property. In addition, the Company has made a $120,000 taxable loan. The Company
has not entered into a binding contract to purchase the Cinnamon Ridge Mortgage
Bond.
The Company may make investments or enter into activities in the future
which will generate taxable income. In addition, the Company conducts
origination and mortgage servicing activities which generated taxable fee income
of $1,086,000 during the first nine months of 1997 and $560,000 in 1996.
S-25
<PAGE> 27
THE PROPERTIES
The Investments and the related loans are typically secured by multifamily,
garden-style apartments. The Properties are geographically diversified in the
Eastern United States, Midwest and West Coast. The following table sets forth
certain data regarding the Properties underlying the Investments. These
Investments reflect the holdings of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
AVG. MONTHLY RENT
OCCUPANCY PER APARTMENT UNIT
---------------------------- -----------------------------
MONTH MONTH NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
MONTH/YEAR APARTMENT SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
APARTMENT COMMUNITY LOCATION ACQUIRED UNITS 1997 1996 1997 1996
- --------------------- ------------------- ----------- --------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PARTICIPATING
MORTGAGE BONDS:
Alban Place.......... Frederick, MD Sep-86 194 97.4% 92.8% $ 738 $ 754
Creekside Village.... Sacramento, CA Nov-87 296 93.6 95.9 471 468
Emerald Hills........ Issaquah, WA Mar-88 130 95.4 100.0 819 760
Lakeview............. Miami, FL Sep-87 180 92.2 94.4 621 619
Newport On Seven..... St. Louis Park, MN Aug-86 167 97.6 94.0 850 834
North Pointe......... San Bernardino, CA Sep-86 540 95.7 93.1 586 585
Northridge Park II... Salinas, CA Aug-87 128 99.2 90.6 803 753
Riverset I........... Memphis, TN Aug-88 352 97.7 95.5 638 620
Southfork Village.... Lakeville, MN Jan-88 200 98.5 98.5 812 795
Villa Hialeah........ Hialeah, FL Nov-87 245 92.2 92.2 600 613
Willowgreen.......... Tacoma, WA Nov-86 241 94.6 94.6 523 517
The Crossings........ Lithonia, GA Jan-97 200 95.5 92.0 662 643
-----
SUBTOTAL............ 2,873
-----
MORTGAGE BONDS:
Hidden Valley........ Kansas City, MO Dec-96 82 92.7 91.5 484 539
Oakbrook............. Topeka, KS Dec-96 170 91.8 91.2 430 431
Torries Chase........ Olathe, KS Dec-96 99 91.9 90.9 430 430
-----
SUBTOTAL............ 351
-----
PARTICIPATING
SUBORDINATE
MORTGAGE BONDS:
Barkley Place........ Ft. Myers, FL Feb-95 156 94.9 96.8 1,719 1,633
Gilman Meadows....... Issaquah, WA Feb-95 125 99.2 94.4 790 764
Hamilton Chase....... Chattanooga, TN Feb-95 300 99.3 96.3 587 582
Mallard Cove I....... Everett, WA Feb-95 63 100.0 96.8 552 493
Mallard Cove II...... Everett, WA Feb-95 135 97.0 97.0 669 600
Meadows.............. Memphis, TN Feb-95 200 95.5 94.5 550 542
Montclair............ Springfield, MO Feb-95 159 98.7 95.0 1,554 1,483
Newport Village...... Thornton, CO Feb-95 220 100.0 97.7 676 656
Nicollet Ridge....... Burnsville, MN Feb-95 339 99.1 99.7 765 722
Steeplechase Falls... Knoxville, TN Feb-95 450 95.8 90.2 584 584
Whispering Lake...... Kansas City, MO Feb-95 384 97.1 98.2 570 548
Riverset II.......... Memphis, TN Jan-96 148 99.3 95.3 634 617
-----
SUBTOTAL............ 2,679
-----
SUBORDINATE MORTGAGE
BONDS:
Independence Ridge... Independence, MO Aug-96 336 98.5 97.9 469 454
Locarno.............. Kansas City, MO Aug-96 110 99.1 100.0 734 721
-----
SUBTOTAL............ 446
-----
OTHER BOND RELATED
INVESTMENTS:
Hunters Ridge........ St. Louis, MO Oct-96 198 91.1 89.7 624 618
South Pointe......... St. Louis, MO Oct-96 192 95.5 90.4 593 592
Indian Lakes......... Virginia Beach, VA Jul-97 296 94.6 90.6 637 630
Riverset II.......... Memphis, TN Jan-96 -- -- -- -- --
Charter House........ Lenexa, KS Dec-96 280 99.3 93.6 509 482
Stone Mountain....... Stone Mountain, GA Oct-97 722 95.0 95.0 656 664
Southgate
Crossings........... Columbia, MD Jun-97 215 98.6 96.2 751 733
Southwood............ Richmond, VA Nov-97 1,286 94.6 88.5 462 452
Poplar Glen.......... Columbia, MD Jun-97 191 94.8 95.8 743 726
Cinnamon Ridge....... Egan, MN Dec-97 264 100.0 97.0 746 726
-----
SUBTOTAL............ 3,644
-----
9,993
TOTAL............. =====
WEIGHTED AVERAGE.... 96.2% 93.9% $ 640 $ 626
</TABLE>
S-26
<PAGE> 28
MANAGEMENT
The directors and executive officers of the Company as of January 1, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH THE COMPANY
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Mark K. Joseph................ 59 Chairman of the Board, Chief Executive Officer and
Director
Michael L. Falcone............ 36 President and Chief Operating Officer
Thomas R. Hobbs............... 57 Senior Vice President and Secretary
Gary A. Mentesana............. 33 Senior Vice President and Chief Financial Officer
Mary K. Reilly................ 46 Senior Vice President
Earl W. Cole, III............. 44 Vice President
Jesse M. Chancellor........... 41 Vice President
Angela A. Barone.............. 37 Controller
Charles Baum.................. 55 Director
Richard O. Berndt............. 55 Director
Robert S. Hillman............. 58 Director
William L. Jews............... 45 Director
Carl W. Stearn................ 64 Director
</TABLE>
MARK K. JOSEPH is the Founder, Chairman of the Board, Chief Executive
Officer and a director of the Company. He served as the President and a director
of the managing general partner of the Partnership since 1986. 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 the President and Chief Operating Officer of the
Company (having previously served as its Executive Vice President). As Chairman
of the Operations Committee, Mr. Falcone has managed the day-to-day operations
of the Company since the Merger.
THOMAS R. HOBBS is a Senior Vice President and Secretary of the Company.
Mr. Hobbs serves as Chairman of the Credit Committee and directs the
administrative, board relations and investor services operations of the Company.
GARY A. MENTESANA is a Senior Vice President and Chief Financial Officer of
the Company. Mr. Mentesana is responsible for the financial operations of the
Company. He manages the capital market activities of the Company. Mr. Mentesana
is a certified public accountant.
MARY K. REILLY is a Senior Vice President of the Company. Ms. Reilly has
primary responsibility for the underwriting and acquisition of new bond assets
for the portfolio.
EARL W. COLE, III is a Vice President of the Company. Mr. Cole directs the
asset management and loan servicing operations of the Company. He served in a
similar capacity for the managing general partner of the Partnership from 1989
to 1996.
JESSE M. CHANCELLOR is a Vice President of the Company. Mr. Chancellor is
responsible for originating tax-exempt multifamily bonds on a national basis.
ANGELA A. BARONE is the Controller of the Company. Ms. Barone has overall
responsibility for financial and tax reporting, Security and Exchange Commission
and stock exchange compliance and management of the Company's temporary
investments. Ms. Barone is a certified public accountant.
CHARLES BAUM has been a director of the Company since 1996. Mr. Baum is
Chairman and Chief Executive Officer of the Morgan Group, Elkhart, Indiana, a
position he has held since August of 1992. The Morgan Group provides
transportation and other services to the manufactured housing and recreational
vehicle industries.
RICHARD O. BERNDT has been a director of the Company 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.
S-27
<PAGE> 29
ROBERT S. HILLMAN has been a director of the Company since 1996. Mr.
Hillman is 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 of the Company 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.
CARL W. STEARN has been a director of the Company since 1996. Mr. Stearn is
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.
Upon completion of the Offering, management of the Company will own 6.1% of
the outstanding Common Shares in addition to restricted shares and stock options
representing 4.4% of the outstanding Common Shares. Certain officers and
directors of the Company are expected to acquire 100,000 Common Shares in the
Offering at the price to the public.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the federal income tax
considerations which are material to a typical Shareholder who is a United
States citizen or resident and is based upon the Code, judicial decisions,
final, temporary and proposed Treasury regulations ("Regulations") and
administrative rulings and pronouncements of the IRS. No attempt has been made
to comment on all federal income tax matters affecting the Company or the
Shareholders. The discussion does not purport to deal with federal income or
other tax consequences applicable to an investment by certain categories of
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 Rogers & Wells, the following
discussion reflects the federal income tax considerations which are material to
a typical Shareholder. No ruling on the federal, state or local tax
considerations relevant to the issuance of the Common Shares, the debt
characterization of the Mortgage Bonds, the tax-exempt character of interest on
the Mortgage Bonds or other Investments or the classification of the Company as
a partnership has been, or will be, requested from the IRS or from any other tax
authority. Moreover, no assurance can be given that the conclusions reached by
Rogers & Wells will be accepted by the IRS or, if challenged by the IRS,
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 the Company. Based upon and subject to the
representations of the Company and discussion set forth below, the Company will
be classified as a partnership for federal income tax purposes. Under
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 tax
consequences of any change in the entity's classification within sixty months
prior to January 1, 1997; (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 the representations of the Company that the IRS
did not examine the classification of the Company or its predecessor as a
partnership on or before May 8, 1996 and based upon its review of the Company's
Certificate of Formation and Operating Agreement (the
S-28
<PAGE> 30
"Operating Agreement") and the limited partnership agreement of the Company's
predecessor, Rogers & Wells has advised the Company that in its opinion the
Company and its predecessor satisfy the foregoing requirements. However,
taxation of the Company as a partnership further depends upon its satisfying the
"qualifying income" exception for publicly traded partnerships described below.
Publicly Traded Partnership Rules. The Company is a "publicly traded
partnership" because its Common Shares are traded on the AMEX. A publicly traded
partnership is generally taxable as a corporation unless 90 percent or more of
its gross income is "qualifying income." Qualifying income includes interest,
dividends, real property rents, gains from the sale or disposition of real
property, gains from the sale or other disposition of capital assets held for
the production of interest or dividends, and certain other items. Rogers & Wells
has advised the Company that, although the issue is not free from doubt,
tax-exempt interest constitutes qualifying income for this purpose. See "RISK
FACTORS -- Tax Risks -- Publicity Traded Partnership Status." In addition, under
Regulations proposed on December 19, 1997, 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 the partnership is entitled under such contracts would give rise to
qualifying income if held or received directly by the partnership. Company
management has represented that in all relevant prior years of the Company's
(and its predecessor's) existence that at least 90 percent of its gross income
was qualifying income and has covenanted to conduct the Company's operations in
a manner such that the Company will continue to satisfy the qualifying income
exception.
Interest, including tax-exempt interest, will not be treated as qualifying
income for these purposes if such interest is derived in the conduct of a
financial or insurance business. Company management has represented and
covenanted that the Company acts as an investor with respect to its Investments,
and has not and will not engage in the active conduct of a lending or banking or
similar financial business. If for any reason more than 10 percent of the
Company's gross income is attributable to non-qualifying income, including
interest income derived from the conduct of a lending, banking or similar
financial business, the Company would be taxable as a corporation rather than as
a partnership for federal income tax purposes. See "RISK FACTORS -- Tax
Risks -- Limitations on Business Activities." Based upon and subject to the
foregoing representations and covenants and based upon its review of the
Company's Investments and operational activities as reported by Company
management, in the opinion of Rogers & Wells, although the issue is not free
from doubt, the Company (and its predecessor) has been and is properly treated
as a partnership for federal income tax purposes.
If the Company in any taxable year were taxable as a corporation for
federal income tax purposes, income and deductions of the Company will be
reported only on its tax return rather than being passed through to the
Shareholders, the Preferred Shareholders and Preferred CD Shareholders and the
Company would be required to pay income tax at corporate rates on any portion of
its net income that did not constitute tax-exempt income. In this regard, a
portion of the Company's tax-exempt income may be included in determining its
alternative minimum tax liability. The imposition of any such tax would reduce
the amount of cash available to be distributed to the Shareholders, the owners
of the Preferred Shares and the owners of the Preferred CD Shares. In addition,
distributions from the Company to the Shareholders, the owners of the Preferred
Shares and the owners of the Preferred CD Shares would be ordinary dividend
income taxable to such shareholders as portfolio income to the extent of the
Company's earnings and profits, which would include its tax-exempt income as
well as any other taxable income it might have. Payments of such dividends would
not be deductible by the Company.
CERTAIN INCOME TAX CONSIDERATIONS RELATING TO THE COMPANY AND THE SHAREHOLDERS
Taxation of the Company and the Shareholders. A partnership itself is not
subject to any federal income tax. Assuming the Company is classified as a
partnership for tax purposes, the Company itself will not be subject to federal
income tax and each Shareholder will be required to report on his or her
personal income tax return his or her distributive share of Company income,
gain, loss, deduction and items of tax preference and will be subject to tax on
his or her distributive share of the Company's taxable income, regardless of
whether any portion of that income is, in fact, distributed to such Shareholder.
Thus, Shareholders may be required to accrue income, without the current receipt
of cash if the Company does not make cash
S-29
<PAGE> 31
distributions while generating taxable income from operations. Consequently, a
Shareholder's tax liability with respect to his or her share of Company taxable
income may exceed the cash actually distributed in a given taxable year.
The Company must file a federal information tax return on Form 1065. The
Company will provide information as to each Shareholder's distributive share of
the Company's income, gain, loss, deduction and items of tax preference on a
Schedule K-1 supplied to such Shareholder after the close of the Company's
fiscal year. In preparing such information, the Company will utilize various
accounting and reporting conventions, some of which are discussed herein, to
determine each Shareholder's allocable share of income, gain, loss and
deduction. There is no assurance that the use of such conventions will produce a
result that conforms to the requirements of the Code, Regulations or IRS
administrative pronouncements and there is no assurance that the IRS will not
successfully contend that such conventions are impermissible. Any such
contentions could result in substantial expenses to the Company and the
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 the Company's income, gain, loss and deduction. See "-- Tax Returns,
Audits, Interest and Penalties."
Tax-Exempt Income. The Company expects that a significant portion of its
revenues will constitute tax-exempt income. There are risks that certain amounts
of income that the Company will report as tax-exempt may not qualify for such
treatment. See "RISK FACTORS -- Tax Risks."
Allocation of Income and Loss. Article 4 of the Operating Agreement
allocates the Company's Profits and Losses (as defined in the Operating
Agreement) and corresponding items of taxable and tax-exempt income, gain, loss
and deductions (including nondeductible expenses). The allocations generally
allocate to holders of Common Shares all of the Company's items of income, gain,
loss and deductions other than items of income gain, loss and deduction
attributable to the SCATEF Assets (as defined in the Operating Agreement), which
are used to fund most or all distributions in respect of the Preferred Shares
and Preferred CD Shares. Additional items of income, gain, loss or deduction
(including tax-exempt interest) are allocated to the holders of Preferred Shares
and Preferred CD Shares to the extent 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.
The Company'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 an item fails to
satisfy the "substantial economic effect" requirement, the item will be
allocated among the Shareholders based on their respective "interests in the
Company," determined on the basis of all of the relevant facts and
circumstances. Such a determination could result in the income, gains, losses,
deductions, or credits allocated under the Operating Agreement being reallocated
among the Shareholders. Such a reallocation, however, would not alter the
distribution of cash flow under the Operating Agreement.
The Operating Agreement permits shareholders' capital accounts to be
increased or decreased to reflect the revaluations of property (at fair market
value) on the Company's books in connection with a contribution or distribution
of money or other property. Capital accounts will be restated to reflect the
issuance of additional Common Shares.
In addition, the Regulations and the Operating Agreement require that the
Company 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 the
Company's tax bases of its assets (less debt) allocable to the newly issued
Common Shares. These rules are complex and their is no assurance the Company
will be able to comply with them fully.
When Common Shares are sold or exchanged, the Company is required to
account for the variation between the basis of the transferees in the Common
Shares and the transferee's share of the tax bases of the Company's assets (less
the transferee's share of the Company's debt) allocable to his or her Common
Shares. The IRS has not issued guidance as to how a Company with publicly traded
shares can comply with these rules.
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There is no assurance the IRS will agree with the Company's methods of
allocating income, gain, loss and deduction (including tax-exempt interest and
nondeductible expenses) to the holders of Common Shares, Preferred Shares and
Preferred CD Shares or the Company's determination and allocation of adjustments
attributable to differences between the purchase price of Common Shares and
their shares of the Company's tax basis in its assets. Because as a publicly
traded partnership the Company may be unable to comply with the literal
requirements of the Regulations and because certain of the Operating Agreement's
allocations may not have "substantial economic effect", Counsel is unable to
express an opinion on these issues. However, the Company does not expect that
any reasonable adjustments which may be required by the IRS would substantially
increase the share of the Company'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 the
Company. See "-- Treatment of Cash Distributions to Shareholders from the
Company." In addition, a Shareholder is entitled to deduct on his personal
income tax return, subject to the limitations discussed below, his distributive
share of the Company's net loss, if any, to the extent of such Shareholder's
adjusted basis in his Common Shares.
A Shareholder's initial basis in newly issued Common Shares will be his
purchase price for the Common Shares, increased by his share of items of Company
income (including tax-exempt interest) and gain, and reduced, but not below
zero, by (a) his share of items of Company loss and deduction (including any
nondeductible expenses), and (b) any cash distributions received by such
Shareholder from the Company.
Treatment of Cash Distributions to the Shareholders from the Company. Cash
distributions made to the 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 the Company. 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 his Common
Shares. Distributions of cash in excess of a Shareholder's adjusted basis in his
Common Shares immediately prior thereto will result in the recognition of gain
to the extent of such excess.
Sale of the 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
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 capital
assets in the hands of the holder thereof and will be a long term capital gain
or loss if the Shareholder's holding period in the Common Shares is more than
eighteen months. In general, an individual's long term capital gains are taxed
at a maximum rate of 20 percent (ten percent for individuals in the 15 percent
tax bracket). A 28 percent maximum tax rate applies to individuals selling
capital assets that were held more than 12 months but not more than 18 months. A
lower rate of 18 percent (eight percent for individuals in the 15 percent tax
bracket) applies to sales after December 31, 2000, provided that the individual
Shareholder has held the Common Shares which are sold for more than five years.
It is the position of the IRS 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 Preferred Shares and/or Preferred CD 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.
Limitations on Deductibility of Losses. It is not anticipated that the
Company will generate any tax losses. A corporate Shareholder generally will be
entitled to deduct its distributive share of any losses of the Company to the
extent of the 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 the Company.
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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 passive
loss rules 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 the Company) 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
passive loss rules less deductible expenses (other than interest) directly
connected with the production of investment income.
A Shareholder would treat as investment interest his allocable portion of
the Company'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 the Company's gross portfolio income less deductible expenses
directly connected with such portfolio income. The Company does not expect to
incur any significant amount of indebtedness as part of its investment strategy.
The portion of a Shareholder's allocable share of interest expense of the
Company, or of any margin account or other interest expense incurred to purchase
or carry a Common Share, that is attributable to the Company's passive income is
subject to the passive loss limitations described above.
Deductibility of Interest Connected with Tax-Exempt Income. The Code
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 IRS might take the position that
a Shareholder's allocable portion of any interest paid by the Company on its
borrowings and any interest paid by the Shareholder on indebtedness incurred to
purchase an interest in the Company 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. The Company does not
expect to incur any significant amount of indebtedness to purchase or carry
tax-exempt investments, however a risk exists that the IRS may take the position
that the P-FLOATs(R) sold as part of the securitizations are debt. The Company
has received opinions of counsel to the effect that the P-FLOATs(R) are not debt
for federal income tax purposes. However, if the IRS was successful in
maintaining this position, interest paid to the holders of P-FLOATs(R) may not
be deductible.
Alternative Minimum Tax. Unless grandfathered, interest on the Mortgage
Bonds generally is an item of tax preference for purpose of the alternative
minimum tax ("AMT"). To the extent interest on any of the Mortgage Bonds owned
by the Company is such an item of tax preference, a portion of the interest
income allocable to a holder of Common Shares interest also will be a tax
preference item.
Other Federal Income Tax Considerations. The Code contains certain
provisions that could result in other tax consequences as a result of ownership
of the 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.
Company Expenses. The Company 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. The Company anticipates that a
substantial portion of its ordinary expenses will be allocable to tax-exempt
interest income. The Code prohibits the deduction of any expense otherwise
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<PAGE> 34
allowable under Code Section 212 which is allocable to tax-exempt interest
income. The Company allocates its expenses in proportion to the amount of
tax-exempt income and taxable income that it receives. Shareholders who are
individuals will not be permitted to deduct the portion of the Company's
expenses related to tax-exempt income in calculating their federal income tax
liability.
To the extent the Company'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 IRS may
not agree with the Company's determinations as to the deductibility of fees and
expenses and might require that certain expenses be capitalized and amortized or
depreciated over a period of years. If all or a portion of such deductions were
to be disallowed, on the basis that some of the foregoing expenses are
non-deductible syndication fees or otherwise, the Company's taxable income would
be increased or its losses would be reduced.
An individual's miscellaneous itemized deductions, including his investment
expenses, are deductible only to the extent they exceed 2% of his adjusted gross
income. Under the Taxpayer Relief Act of 1997, if the Company elects to be
treated as an "electing large partnership" under the Code, the limitation on
miscellaneous itemized deductions will apply at the Company level. Instead of
the 2% floor, 70% of the Company's total miscellaneous itemized deductions are
disallowed.
Offering Expenses. Expenses of issuing and marketing Common Shares in the
Company ("syndication expenses") are not allowable deductions to the Company or
any Shareholder. 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 Commission are
syndication expenses and, therefore, do not qualify for amortization.
Section 754 Election. The Company has elected under Section 754 of the
Code to adjust the basis of partnership property on the transfer of Preferred
Shares, Preferred CD Shares and Common Shares by the difference between the
transferee's basis for his shares and the transferee's allocable share of the
basis of all property of the Company. The increase or decrease affects the basis
of the Company's property only with respect to the transferee holder of shares.
The procedure for allocating the basis adjustment is complex and there is no
assurance that the IRS would not challenge the allocations of the step-up among
the Company'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 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, the Company would be required to
withhold 31% of each distribution to such Shareholder and to pay such amount to
the IRS on behalf of such Shareholder.
Issuance of Additional Common Shares. The Company 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 the existing Shareholders will be adjusted to reflect a revaluation of the
Company's property (based on their then fair market value, net of liabilities,
to which they are then subject).
Tax Returns, Audits, Interest and Penalties. The Company will supply
Schedules K-1 to Form 1065 to each Shareholder of record as of the last day of
each month after the end of each calendar year. The Company is not obligated to
provide tax information to persons who are not such Shareholders of record.
Any Shareholder who sells or exchanges a Common Share will be required to
notify the Company of such transaction in writing within 30 days of the
transaction (or, if earlier, by January 25 of the calendar year after the year
in which the transaction occurs). The notification is required to include (i)
the names and addresses
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<PAGE> 35
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 the Company 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 the Company of a sale or exchange may be subject to a $50 penalty for
each such failure. The Company 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, the Company must file a return notifying the IRS of any sale
or exchange of a Common Share of which the Company has notice 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
Regulations, including the fair market value of the selling Shareholder's
allocable share of unrealized receivables (including depreciation recapture, if
any). If the Company 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 the Company fails to file such
a return, it may be subject to a penalty of $50 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). The Company is also required to provide this
information to the transferor and the transferee. If the Company fails to
furnish any such information, it may be subject to a penalty of $50 per failure
up to an annual maximum of $250,000. However, the Company would 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 the Company's tax returns are examined by the IRS, the tax
treatment of the Company's income, gain, loss or deductions or credits will be
determined at the Company level in a unified proceeding, rather than separate
proceedings for each holder of Common Shares, Preferred Shares, or Preferred CD
Shares. The Company may elect to be treated as an "electing large partnership"
under the Code. If the Company makes such election, only the Company (and not
the Shareholders) will receive notice of IRS adjustments to the Company's
return. Only the Company has the right to appeal the adjustments. Under the
electing large partnership provisions, the Company may elect to either (i)
combine the adjustments with similar items for the current tax year and pass
through the adjustment to the 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 the Company does not elect to be treated as an
electing large partnership, the Company will still be subject to a unified
partnership proceeding, but Shareholders owing at least a one percent profits
interest in the Company whose name and address is furnished to the IRS would
receive notice of the commencement of an audit of the Company as well as notice
of the final partnership administrative adjustment. Also, if the Company 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 that a one percent 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 investment in the Company 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, the Company may be subject to state
income or franchise tax or other taxes that may be applicable to the Company.
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 the Company, and its effect on Shareholders, under the tax laws of
the states applicable to the Company and the Shareholders.
Both the substantive features and the filing requirements of state income
taxation of Shareholders will vary according to several factors which include
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 his state or other jurisdiction of residence; (iv) the level of personal
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<PAGE> 36
exemptions or credits allowed by the state and whether those exemptions or
credits are required to be prorated in the ratio of income sourced in the taxing
state to total income; and (v) whether the applicable tax rate structure is
applied on the basis of income sourced in the taxing jurisdiction or on the
basis of total income of a nonresident taxpayer. The Company may be required to
withhold state taxes from distributions to Shareholders in some instances.
THE SUMMARY 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.
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<PAGE> 37
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom Legg Mason Wood Walker, Incorporated, Merrill Lynch
and Wheat, First Securities, Inc. are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company the
following number of Common Shares at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus Supplement:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Legg Mason Wood Walker, Incorporated................................. 654,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................... 653,000
Wheat, First Securities, Inc. ....................................... 653,000
BT Alex. Brown Incorporated.......................................... 60,000
Credit Lyonnaise Securities (USA) Inc. .............................. 60,000
Donaldson, Lufkin & Jenrette Securities Corporation.................. 60,000
A.G. Edwards & Sons, Inc. ........................................... 60,000
Goldman, Sachs & Co. ................................................ 60,000
Lehman Brothers Inc. ................................................ 60,000
Morgan Stanley & Co. Incorporated.................................... 60,000
Salomon Smith Barney................................................. 60,000
J.C. Bradford & Co. ................................................. 40,000
EVEREN Securities, Inc. ............................................. 40,000
Ferris, Baker Watts, Inc. ........................................... 40,000
Janney Montgomery Scott Inc. ........................................ 40,000
McDonald & Company Securities, Inc. ................................. 40,000
Morgan Keegan & Company, Incorporated................................ 40,000
Pennsylvania Merchant Group Ltd...................................... 40,000
Piper Jaffray Inc.................................................... 40,000
Raymond James & Associates, Inc. .................................... 40,000
The Robinson-Humphrey Company, LLC................................... 40,000
Scott & Stringfellow, Inc. .......................................... 40,000
Stifel, Nicolaus & Company, Incorporated............................. 40,000
Sutro & Co. Incorporated............................................. 40,000
Tucker Anthony Incorporated.......................................... 40,000
---------
Total........................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations to purchase the
Common Shares are subject to the satisfaction of certain conditions precedent
and that if any of the foregoing Common Shares are purchased by the Underwriters
pursuant to the Underwriting Agreement, all such Common Shares must be so
purchased.
The Company has been advised by the Underwriters that they propose to offer
the Common Shares directly to the public initially at the initial offering price
set forth on the cover page of this Prospectus Supplement and to certain dealers
at such public offering price less a concession not in excess of $.65 per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $.10 per Common Share to certain other underwriters or to certain
other brokers or dealers. After the public offering, the public offering price,
the concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters. Certain members of management of the Company are
expected to purchase 100,000 Common Shares in the Offering at the price to the
public.
The Company has granted to the Underwriters an option to purchase up to an
additional 450,000 Common Shares to cover over-allotments, if any, at the public
offering price, less the underwriting discounts and commissions set forth on the
cover page of this Prospectus Supplement. The Underwriters may exercise
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<PAGE> 38
this option at any time up to 30 days after the date of this Prospectus
Supplement. To the extent that the Underwriters exercise this option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of Common Shares that the number of Common Shares to be purchased by
it shown on the foregoing table bears to 3,000,000, and the Company will be
obligated, pursuant to that option to sell such Common Shares to the
Underwriters. If purchased, the Underwriters will sell such additional Common
Shares on the same terms as those on which the 3,000,000 Common Shares are being
offered.
The Company and certain of the Company's directors, officers and affiliated
parties have agreed that they will not, without the prior written consent of
Legg Mason Wood Walker, Incorporated offer for sale, contract to sell, sell or
otherwise issue or dispose of, directly or indirectly, any Common Shares other
than Common Shares issued by the Company pursuant to the Company's Non-Employee
Directors' Plan and 1996 Share Incentive Plan, or sell or grant options, rights
or warrants with respect to any Common Shares (other than the grant of options
pursuant to the Company's Option Plan), for a period of 90 days in the case of
the Company and for a period of 180 days in the case of the Company's directors,
officers and affiliated parties following the consummation of the Offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments the Underwriters may be required to make in respect thereof.
Certain of the Underwriters and their affiliates have from time to time
performed, and may continue to perform in the future, various investment
banking, financial advisory and other commercial services for the Company, for
which they received, and will in the future receive, customary compensation. An
affiliate of Merrill Lynch owns 1,250 Term Common Shares of the Company and
128,367 Common Shares and thus received approximately 2.3% of the net cash flow
of the Company for the nine months ended September 30, 1997. The Company has
also entered into various RITES(R) and interest swap transactions with Merrill
Lynch, on terms generally available in the marketplace. See "RISK
FACTORS -- Interest Rate Risks; Hedging Risks," "-- Certain Conflicts" and "THE
INVESTMENTS -- Bond Related Investments."
Until the distribution of the Common Shares is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase Common Shares. As an exception to these rules,
in connection with the Offering, certain Underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Shares. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M promulgated by the Commission pursuant to which such
persons may bid for or purchase Common Shares for the purpose of pegging, fixing
or maintaining the market price of the Common Shares.
The Underwriters may also create a short position for the account of the
Underwriters by selling more Common Shares in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Shares in the open market following completion of the Offering to cover
all or a portion of such position. The Underwriters also may elect to reduce any
short position by exercising all or part of the over-allotment option described
herein.
In addition, the Representatives, on behalf of the Underwriters, also may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby they may reclaim from an Underwriter (or any selling group member
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Shares that are distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
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<PAGE> 39
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Undertakers makes any representations that the
Underwriters will engage in such transaction, or that such transactions once
commenced, will not be discontinued without notice.
The Common Shares are listed on the AMEX under the symbol "MMA."
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,
1996 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, New York, New York, and for the Underwriters by Piper & Marbury L.L.P.,
Baltimore, Maryland. Rogers & Wells will rely as to certain matters of Maryland
law on the opinion of Piper & Marbury L.L.P.
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<PAGE> 40
PROSPECTUS
$250,000,000
MUNICIPAL MORTGAGE AND EQUITY, LLC
COMMON SHARES
------------------------------
Municipal Mortgage and Equity, LLC (the "Company") may offer from time to
time its growth share limited liability company interests (the "Common Shares"),
with an aggregate public offering price of up to $250,000,000, in amounts, at
prices and on terms to be determined at the time of offering and set forth in
one or more supplements to this Prospectus (each a "Prospectus Supplement").
The Common Shares may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or
through dealers or underwriters. If any agents of the Company or any dealers or
underwriters are involved in the offering of Common Shares in respect of which
this Prospectus is being delivered, the names of such agents, dealers or
underwriters and any applicable purchase price, fee, commission or discount will
be set forth, or will be calculable from the information set forth, in the
accompanying Prospectus Supplement, together with the net proceeds to the
Company. See "Plan of Distribution." This Prospectus may not be used to
consummate sales of Common Shares unless accompanied by a Prospectus Supplement
describing the method and terms of the offering of such Common Shares.
The Common Shares are traded on the American Stock Exchange under the
symbol "MMA." Any Common Shares sold pursuant to a Prospectus Supplement will be
listed on such exchange, subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON SHARES.
------------------------------
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 2, 1997.
<PAGE> 41
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 Common Shares 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 Common Shares, 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 American Stock Exchange, and reports, proxy
statements and other information concerning the Company can be inspected and
copied at the offices of the American Stock Exchange at 86 Trinity Place, New
York, New York 10006.
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, 1996.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
3. The Company's Current Report on Form 8-K dated January 2, 1997, filed
with the Commission pursuant to the Exchange Act.
4. 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 Common Shares 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 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
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<PAGE> 42
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, LLC, 218 North Charles
Street, Suite 500, Baltimore, Maryland 21201, Attention: Milissa Lindkvist,
(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 invested primarily
in tax-exempt instruments, such as whole tax-exempt mortgage revenue bonds
("Mortgage Bonds"), portions of such bonds (including junior positions),
participating mortgages and securities of other entities which primarily hold
tax-exempt mortgage revenue bonds. At March 31, 1997, the Company owned a
portfolio of 31 Mortgage Bonds secured by 30 multifamily properties (each, a
"Property") having a total of 6,629 units.
As a result of a 1996 reorganization, the Company succeeded to the business
of SCA Tax Exempt Fund Limited Partnership, became self-advised and
self-managed, and commenced implementation of its new business plan, which
contemplates additional investments in mortgage revenue bonds and related
assets.
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.
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<PAGE> 43
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 a 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 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
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
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 Properties. A
significant portion of the 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. In addition, changes in property
operating cash flow will have a greater effect on the Company in those instances
where contingent or participating interest is payable on a Mortgage Bond.
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 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.
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 it 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); 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 a 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
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<PAGE> 44
premium over market price for the Common Shares. These provisions may reduce
interest in the Company as a potential acquisition target or reduce the
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 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 Common Shares, could affect the timing
and amount of distributions to the holders of Common Shares, and may affect the
trading price of the Common Shares. The holders of Common Shares will not have
any preemptive rights in connection with the issuance of any additional
securities of the Company.
CONFLICTS OF INTEREST
Affiliates of certain directors and officers of the Company are also
responsible for a full range of property management functions for certain
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 Properties are controlled by Mark K.
Joseph, the Chairman of the Board and Chief Executive Officer of the Company. In
addition, Michael L. Falcone, the President and Chief Operating Officer of the
Company, also has a minority interest in certain entities involved with the
Properties. 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 the actions such entities could desire to
take might be selling a Property, thereby causing a redemption event, at a time
and under circumstances which would not be advantageous to the Company.
ADVERSE EFFECTS OF CHANGES IN INTEREST RATES
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 Common Shares. Any increase in market interest
rates also may reduce the market value of the Company's assets and the market
value of the Common Shares.
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<PAGE> 45
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net cash proceeds from the sale of Common Shares in
respect of which this Prospectus is being delivered for general corporate
purposes, including new investments, working capital, and repayment of
indebtedness. 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 the Common Shares 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
11,092,591 Common Shares outstanding at March 31, 1997. 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 Series I Preferred Shares, Series II Preferred
Shares, Series I Preferred Capital Distribution Shares, Series II Preferred
Capital Distribution Shares, Term Common Shares, and any other preferred
securities which may be issued by the Company in the future. At March 31, 1997,
the Company had outstanding 16,329 Series I Preferred Shares, 7,637 Series II
Preferred Shares, 8,909 Series I Preferred Capital Distribution Shares, 3,809
Series II Preferred Capital Distribution Shares and 2,000 Term Common Shares.
Holders of Common Shares have no preemptive, conversion, sinking fund or
cumulative voting rights. The 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 stock 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.
PLAN OF DISTRIBUTION
The Company may sell Common Shares to one or more underwriters or dealers
for public offering and sale by them or may sell Common Shares to investors
directly or through agents. The Prospectus Supplement
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<PAGE> 46
with respect to the Common Shares offered thereby describes the terms of the
offering of such Common Shares and the method of distribution of the Common
Shares offered thereby and identifies any firms acting as underwriters, dealers
or agents in connection therewith.
The Common Shares may be distributed from time to time in one or more
transactions at a fixed price or prices (which may be changed), at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at prices determined as specified in the
Prospectus Supplement. In connection with the sale of the Common Shares,
underwriters, dealers or agents may be deemed to have received compensation from
the Company in the form of underwriting discounts, concessions or commissions
and may also receive commissions from purchasers of the Common Shares for whom
they may act as agent. Underwriters may sell the Common Shares to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent. Certain of the underwriters, dealers
or agents who participate in the distribution of Common Shares may engage in
other transactions with, or perform other services for, the Company in the
ordinary course of business.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Common Shares, and any discounts, concessions
or commissions allowed by underwriters to dealers, are set forth in the
Prospectus Supplement. Underwriters, dealers and agents participating in the
distribution of Common Shares may be deemed to be underwriters, and any
discounts or commissions received by them and any profit realized by them on the
resale of the Common Shares may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement.
Underwriters and their controlling persons, dealers and agents may be
entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including liabilities
under the Securities Act.
The Common Shares are traded on the American Stock Exchange. Any Common
Shares sold pursuant to a Prospectus Supplement will be listed on such exchange,
subject to official notice of issuance. In order to comply with the securities
laws of certain states, if applicable, Common Shares will be sold in such
jurisdictions only through registered or licensed brokers and dealers.
EXPERTS
The consolidated financial statements of the Company incorporated in this
Prospectus by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, have been so incorporated in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Rogers &
Wells, New York, New York.
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<PAGE> 47
Color pictures of each of the following multifamily buildings with these
captions: "Whispering Lake Kansas City, Missouri," "Riverset Memphis,
Tennessee" and "Newport-on-Seven St. Louis Park, Minnesota."
<PAGE> 48
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL, OR SOLICITATION OF AN OFFER TO BUY, BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN THE PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY OR THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary........ S-3
Summary Financial Data............... S-8
Risk Factors......................... S-9
Use of Proceeds...................... S-18
Price Range of Common Shares and
Dividend History................... S-18
Capitalization....................... S-19
The Company.......................... S-20
The Investments...................... S-23
The Properties....................... S-26
Management........................... S-27
Federal Income Tax Considerations.... S-28
Underwriting......................... S-36
Experts.............................. S-38
Legal Matters........................ S-38
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PROSPECTUS
Available Information................ 2
Incorporation of Certain Documents by
Reference.......................... 2
The Company.......................... 3
Risk Factors......................... 4
Use of Proceeds...................... 6
Description of Common Shares......... 6
Plan of Distribution................. 6
Experts.............................. 7
Legal Matters........................ 7
</TABLE>
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3,000,000 SHARES
[MUNIMAE LOGO]
COMMON SHARES
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PROSPECTUS SUPPLEMENT
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JANUARY 26, 1998
LEGG MASON WOOD WALKER
INCORPORATED
MERRILL LYNCH & CO.
WHEAT FIRST BUTCHER SINGER
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