SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
AMENDMENT NO. 3 TO
RULE 13e-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF
1934 AND RULE 13e-3 (ss.240.13e-3) THEREUNDER)
---------
METROPOLITAN REALTY CORPORATION
(NAME OF THE ISSUER)
METROPOLITAN REALTY CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS OF SECURITIES)
---------
CUSIP NO. 592279103
(CUSIP NUMBER OF CLASS OF SECURITIES)
BARBARA A. BLUFORD, ESQ.
BODMAN, LONGLEY & DAHLING LLP
100 RENAISSANCE CENTER
34TH FLOOR
DETROIT, MICHIGAN 48243
(313) 259-7777
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO
RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING
STATEMENT)
This statement is filed in connection with (check the appropriate
box):
a. [ ] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [ X ] The filing of a registration statement under the Securities Act
of 1933.
c. [ ] A tender offer.
d. [ ] None of the above.
<PAGE>
CALCULATION OF FILING FEE
- -----------------------------------------------------------------------------
TRANSACTION VALUATION * AMOUNT OF FILING FEE
- -----------------------------------------------------------------------------
$36,431,192 $12,562.48
- -----------------------------------------------------------------------------
*For purposes of calculating fee only.
Based upon $8.25 cash per share for 4,415,902 shares.
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or schedule and
the date of its filing.
Amount paid: $12,562.48 Filing party: Metropolitan Realty Company, L.L.C.
Form or registration no.: S-4 Date filed.: November 21, 1995
<PAGE>
INTRODUCTION
This Amendment No. 3 to Rule 13e-3 Transaction Statement on Schedule
13E-3 ("Schedule 13E-3") relates to the proposed restructuring of Metropolitan
Realty Corporation, a Michigan corporation ("MRC"), which will be accomplished
by (1) the transfer of the assets of MRC to, and the assumption of the
liabilities of MRC by, Metropolitan Realty Company, L.L.C., a Delaware limited
liability company ("MRC, LLC"), in exchange for Class A limited liability
company membership interests (the "Class A Membership Interests") of MRC, LLC,
(2) dissolving MRC, and (3) distributing the Class A Membership Interests to
certain of MRC's shareholders upon liquidation (the "Restructuring") pursuant
to the Agreement and Plan of Dissolution and Restructuring by and between MRC
and MRC, LLC (the "Restructuring Agreement"). The beneficial holders of fewer
than 50,000 shares of MRC's common stock, $0.01 par value ("Common Stock")
will receive a cash payment equal to the book value of their shares as of
September 30, 1995 ($9.03 per share) in lieu of membership interests in MRC,
LLC. Upon consummation of the Restructuring, shareholders of MRC will, with
certain exceptions, become holders of Class A Membership Interests of MRC,
LLC. The Restructuring will be upon the terms and subject to the conditions
set forth in the Proxy Statement/Prospectus and the appendices thereto forming
a part of the registration statement on Form S-4 under the Securities Act of
1933 which has been filed by MRC,LLC with the Securities and Exchange
Commission concurrently herewith (the "Proxy Statement/Prospectus"), a copy of
which is attached hereto as Exhibit "A" and incorporated by this reference.
This Rule 13e-3 Transaction Statement is intended to satisfy the reporting
requirements of Section 13(e) of the Securities Exchange Act of 1934, as
amended.
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE
TRANSACTION.
(a) The name of the issuer is Metropolitan Realty Corporation, a
Michigan corporation, and its principal executive office is at
535 Griswold, Suite 748, Detroit, Michigan 48226.
(b) The class of securities to which this Schedule 13E-3 relates is
MRC's common stock, par value $0.01 per share. The information
set forth in "THE COMPANIES-- Metropolitan Realty Corporation"
in the Proxy Statement/Prospectus is incorporated herein by
reference.
(c) The information set forth in "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING-- Background of and Reasons for the
Restructuring" in the Proxy Statement/Prospectus is
incorporated herein by reference.
(d) The information set forth in "COMPARISON OF MRC CAPITAL STOCK
AND MRC,LLC CLASS A MEMBERSHIP INTERESTS-- Nature of Equity
-1-
<PAGE>
Interests" in the Proxy Statement/Prospectus is incorporated
herein by reference.
(e) Not applicable.
(f) Not applicable.
ITEM 2. IDENTITY AND BACKGROUND.
The person filing this Schedule 13E-3 is the issuer of the class of
equity securities which is the subject of the Rule 13e-3 transaction.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a-b) Not applicable.
ITEM 4. TERMS OF THE TRANSACTION.
(a-b) The information set forth in "SUMMARY", "INTRODUCTION", "THE
SPECIAL MEETING", "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING", "THE OFFERING", and "THE RESTRUCTURING
AGREEMENT" in the Proxy Statement/Prospectus is incorporated
herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a-b) Not applicable.
(c) The information set forth in "MANAGEMENT AND OPERATIONS AFTER
THE RESTRUCTURING" in the Proxy Statement/Prospectus is
incorporated herein by reference.
(d) The information set forth in "COMPARISON OF MRC CAPITAL STOCK
AND MRC,LLC CLASS A MEMBERSHIP INTERESTS-- Nature of Equity
Interests" in the Proxy Statement/Prospectus is incorporated
herein by reference.
(e) The information set forth in "MANAGEMENT AND OPERATIONS AFTER
THE RESTRUCTURING", "COMPARISON OF MRC CAPITAL STOCK AND
MRC,LLC CLASS A MEMBERSHIP INTERESTS", "THE OPERATING
AGREEMENT" and "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" in
the Proxy Statement/Prospectus is incorporated herein by
reference.
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<PAGE>
(f-g) The information set forth in "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING-- Stock Exchange Listing and Marketability" in
the Proxy Statement/Prospectus is incorporated herein by
reference.
ITEM 6. SOURCES AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
(a) MRC estimates that the total amount of funds to be used in the
Rule 13e-3 transaction is $1,049,891. The source of the funds
will be liquidation of a portion of the marketable
mortgage-backed securities and shares of money market funds
owned by MRC.
(b) The expenses expected to be incurred in connection with the
Rule 13e-3 transaction are estimated to total $840,000.00. The
expenses are as follows:
Securities and Exchange Commission registration fee.....$ 40,000.00
Legal fees and expenses.................................$310,000.00
Financial Advisor fees and expenses.....................$220,000.00
Accounting services.....................................$135,000.00
Printing fees...........................................$ 45,000.00
Appraisal fees..........................................$ 60,000.00
Miscellaneous...........................................$ 30,000.00
(c-d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The information set forth in "SUMMARY-- Purpose of the
Restructuring and Reasons for the Restructuring" and "SPECIAL
FACTORS CONCERNING THE RESTRUCTURING-- Background of and
Reasons for the Restructuring" in the Proxy
Statement/Prospectus is incorporated herein by reference.
(b-c) The information set forth in "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING-- Background of and Reasons for the
Restructuring" in the Proxy Statement/Prospectus is
incorporated herein by reference.
(d) The information set forth in "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING", "MANAGEMENT AND OPERATIONS AFTER THE
RESTRUCTURING", "COMPARISON OF MRC CAPITAL STOCK AND MRC,LLC
CLASS A MEMBERSHIP INTERESTS", "THE OPERATING AGREEMENT", "THE
RESTRUCTURING AGREEMENT" and "MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS" in the Proxy Statement/Prospectus is
incorporated herein by reference.
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<PAGE>
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) MRC reasonably believes that the Rule 13e-3 transaction is fair
to unaffiliated security holders. No director of MRC dissented
to or abstained from voting on the Rule 13e-3 transaction.
(b) The information set forth in "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING-- Background of and Reasons for the
Restructuring" "-- Recommendation of the Board of Directors",
"--Appraisal" and "-- Consideration for Shares to be Paid to
Minority Shareholders" in the Proxy Statement/Prospectus is
incorporated herein by reference.
(c) The transaction has not been structured so that approval of at
least a majority of unafilliated shareholders is required.
(d) No unaffiliated representative has been retained to act on
behalf of unaffiliated shareholders for the purposes of
negotiating the terms of the transaction.
(e) The transaction has been approved by over a majority of the
directors of MRC who are not employees of MRC.
(f) Not applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) Cushman & Wakefield of Michigan, Inc. of Southfield, Michigan
was engaged on behalf of the Board of Directors of MRC to
prepare a limited appraisal in a summary format of the market
value of the mortgage notes which constitute MRC's loan
portfolio. A copy of the appraisal is attached hereto as
Exhibit B. This appraisal was a factor in determining the price
to be paid to MRC's shareholders holding fewer than 50,000
shares of MRC's common stock. The information set forth in
"SPECIAL FACTORS CONCERNING THE RESTRUCTURING-- Appraisal" and
"--Consideration for Shares to be Paid to Minority
Shareholders" in the Proxy Statement/Prospectus is incorporated
herein by reference.
(b) The information set forth in "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING-- Appraisal" and "--Consideration for Shares to
be Paid to Minority Shareholders" in the Proxy
Statement/Prospectus is incorporated herein by reference.
(c) Such appraisal will be made available for inspection and
copying at the principal executive offices of MRC during its
regular business hours by any
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<PAGE>
interested shareholder of MRC or its representative who has
been so designated in writing.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in "SUMMARY-- Security Ownership" in
the Proxy Statement/Prospectus is incorporated herein by
reference.
(b) Not applicable.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH
RESPECT TO THE ISSUER'S SECURITIES.
Not applicable.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN
PERSONS WITH REGARD TO THE TRANSACTION.
(a) The information set forth in "SUMMARY-- Security Ownership" in
the Proxy Statement/Prospectus is incorporated herein by
reference.
(b) The information set forth in "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING-- Recommendation of the Board of Directors" in
the Proxy Statement/Prospectus is incorporated herein by
reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in "SPECIAL FACTORS CONCERNING THE
RESTRUCTURING-- No Appraisal Rights" in the Proxy
Statement/Prospectus is incorporated herein by reference. No
other rights are available to objecting shareholders under
applicable state law.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a)(1-2) MRC's Annual Report on Form 10-K/A for the year ended December
31, 1995 and its Quarterly Reports on Form 10-Q for the
periods ended March 31, 1996 and June 30, 1996 filed by MRC
with the Securities and Exchange Commission (File No. 1-9450)
are hereby incorporated by this reference.
-5-
<PAGE>
(a)(3) Not applicable.
(a)(4) The information set forth in "SUMMARY-- Summary Selected
Financial Data of Metropolitan Realty Corporation" in the Proxy
Statement/Prospectus is incorporated herein by reference.
(b) The information set forth in "PRO FORMA FINANCIAL INFORMATION"
in the Proxy Statement/Prospectus is incorporated herein by
reference.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) Not applicable.
(b) Not applicable.
ITEM 16. ADDITIONAL INFORMATION.
Not applicable.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a) Not applicable.
(b) (i) Limited Appraisal in a Summary Format of the Assets of
Metropolitan Realty Corporation, Detroit, Michigan, as of
August 10, 1995, prepared by Cushman & Wakefield of Michigan,
Inc., Valuation Advisory Services (previously filed).
(ii) Draft of Limited Appraisal in a Summary Format of the
Assets of Metropolitan Realty Corporation, Detroit, Michigan,
as of August 10, 1995, prepared by Cushman & Wakefield of
Michigan, Inc., Valuation Advisory Services (previously filed).
(c) Not applicable.
(d) Proxy Statement/Prospectus and the appendices thereto forming a
part of amendment no. 6 to the registration statement on Form
S-4 under the Securities Act of 1933 which has been filed by
Metropolitan Realty Company, L.L.C. with the Securities and
Exchange Commission concurrently herewith (attached hereto as
Exhibit A).
(e) Not applicable.
(f) Not applicable.
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<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Metropolitan Realty Corporation
By: /s/ Nancy A. Mattar
---------------------------
Name: Nancy A. Mattar
Title: Executive Vice President
Dated: September 12, 1996
-7-
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Description
- -------------- -------------------
A Proxy Statement/Prospectus and the appendices
thereto forming a part of amendment no. 6 to
registration statement on Form S-4 under the
Securities Act of 1933, registration no. 33-99694,
which has been filed by Metropolitan Realty
Company, L.L.C. with the Securities and
Exchange Commission concurrently herewith.
B Limited Appraisal in a Summary Format of the
Assets of Metropolitan Realty Corporation,
Detroit, Michigan, as of August 10, 1995,
prepared by Cushman & Wakefield of Michigan,
Inc., Valuation Advisory Services (previously
filed)
C Draft of Limited Appraisal in a Summary Format
of the Assets of Metropolitan Realty Corporation,
Detroit, Michigan, as of August 10, 1995,
prepared by Cushman & Wakefield of Michigan,
Inc., Valuation Advisory Services (previously
filed)
-8-
<PAGE>
EXHIBIT A
As filed with the Securities and Exchange Commission on September 20, 1996.
Registration No. 33-99694.
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
AMENDMENT NO. 6 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------
METROPOLITAN REALTY COMPANY, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 535 Griswold 38-3260057
(State or other jurisdiction of Suite 748 (I.R.S. Employer
incorporation or organization) Detroit, Michigan 48226 Identification
(313) 961-5552 Number)
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
6743
(Primary Standard Industrial Classification Code Number)
F. Thomas Lewand, Esq.
100 Renaissance Center
34th Floor
Detroit, Michigan 48243
(313) 259-7777
(Name, address, including zip code, and telephone
number, including area code, of agent for service
of process)
---------
Copies to:
Barbara A. Bluford, Esq.
Bodman, Longley & Dahling LLP
100 Renaissance Center
34th Floor
Detroit, Michigan 48243
(313) 259-7777
---------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
---------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. |_|
==============================================================================
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
==============================================================================
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY COMPANY, L.L.C.
Cross Reference Sheet Pursuant To Item 501(b) Of Regulation S-K
Item
Numbers Caption Location in Prospectus
- ------- ------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Outside Front Cover of Prospectus
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of Inside Front and Outside Back Cover Page of
Prospectus Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges Summary; Risk Factors; The Introduction; The
and Other Information Companies; The Special Meeting; The Restructuring;
The Offering; Management's Discussion and
Analysis of Financial Conditions and Results of
Operations; The Operating Agreement; The
Restructuring Agreement; Federal Income Tax
Considerations
4. Terms of the Transaction Summary; The Special Meeting; The Restructuring;
The Offering; Comparison of MRC Capital Stock
and MRC, LLC Class Membership Interests; The
Restructuring Agreement
5. Pro Forma Financial Information Summary; Pro forma Financial Information; MRC,
LLC Pro forma Condensed Balance Sheet; Selected
Financial Data of Metropolitan Realty Corporation
6. Material Contacts with Company Being Acquired The Restructuring Agreement
7. Additional Information Required for Re-Offering *
by Persons and Parties Deemed Underwriters
8. Interests of Named Experts and Counsel Relationship with Independent Accountants; Experts;
Legal Matters
9. Disclosure of Commission Position on The Operating Agreement
Indemnification for Securities Act Liabilities
10. Information with Respect to S-2 or S-3 Registrants Summary; The Companies; Pro forma Financial
Information; MRC, LLC Pro forma Condensed
Balance Sheet; Selected Financial Data of
Metropolitan Realty Corporation; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Management and Operations
After the Restructuring; Federal Income Tax
Considerations
11. Incorporation of Certain Information by Reference *
12. Information with Respect to S-2 or S-3 *
Companies
<PAGE>
13. Incorporation of Certain Information by Reference *
14. Information with Respect to Registrants other than *
S-2 or S-3 Registrants
15. Information with Respect to S-3 Companies *
16. Information with Respect to S-2 or S-3 *
Companies
17. Information with Respect to Companies Other than Summary; The Companies; Pro forma Financial
S-2 or S-3 Companies Information; MRC, LLC Pro forma Condensed
Balance Sheet; Selected Financial Data of
Metropolitan Realty Corporation; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Management and Operations
After the Restructuring; Federal Income Tax
Considerations
18. Information if Proxies, Consents or Authorization Summary; The Special Meeting; The Restructuring;
are to be Solicited Management and Operations After the Restructuring;
Legal Matters
19. Information if Proxies, Consents or Authorizations *
are not to be Solicited or in an Exchange Offer
<FN>
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*Not applicable.
</TABLE>
<PAGE>
METROPOLITAN REALTY CORPORATION
PROXY STATEMENT
METROPOLITAN REALTY COMPANY, L.L.C.
PROSPECTUS
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is
being furnished to the shareholders of Metropolitan Realty Corporation ("MRC")
in connection with the solicitation of proxies by the Board of Directors of
such corporation for use at its Special Meeting of Shareholders (including any
adjournments or postponements thereof) to be held on December 6, 1996. This
Proxy Statement/Prospectus relates to the proposed restructuring of MRC, which
will be accomplished by (1) the transfer of the assets of MRC to, and the
assumption of the liabilities of MRC by, Metropolitan Realty Company, L.L.C.,
a Delaware limited liability company ("MRC, LLC" or the "Company"), in
exchange for Class A limited liability company membership interests (the
"Class A Membership Interests") of MRC, LLC, (2) dissolving MRC, and (3)
distributing the Class A Membership Interests to certain of MRC's shareholders
upon liquidation (the "Restructuring") pursuant to the Agreement and Plan of
Dissolution and Restructuring dated as of September 24, 1996 by and between MRC
and MRC, LLC (the "Restructuring Agreement"). The beneficial holders of fewer
than 50,000 shares of MRC's common stock, $0.01 par value ("Common Stock") as
of October 7, 1996, will receive a cash payment equal to the book value of
their shares as of September 30, 1995 ($9.03 per share) in lieu of membership
interests in MRC, LLC.
This Proxy Statement/Prospectus also constitutes a prospectus of MRC,
LLC with respect to the initial exchange of the Class A Membership Interests
of MRC, LLC. Upon consummation of the Restructuring, shareholders of MRC will,
with certain exceptions, become holders of Class A Membership Interests of
MRC, LLC. See "THE RESTRUCTURING".
MRC, LLC will also gift that number of Class A Membership Interests
necessary to bring the total number of Class A Members to at least 100, the
number necessary to satisfy certain requirements applicable to pension plans
subject to the Employee Retirement Income Security Act of 1974, as amended.
See "CONSIDERATIONS FOR PENSION FUND INVESTORS".
There is no public market for the Class A Membership Interests and
MRC, LLC believes none will develop. In addition, the transfer of Membership
Interests is subject to certain limitations. See "COMPARISON OF MRC CAPITAL
STOCK AND MRC, LLC CLASS A MEMBERSHIP INTERESTS -- General".
The MRC Common Stock is listed on the American Stock Exchange ("AMEX")
under the symbol "MET". The high and low sales price on the AMEX ranged from
$6.375 to $5.175 during 1994 and from $8.725 to $5.625 during 1995 and from
$9.00 to $8.125 during the first six months of 1996. See "COMPARISON OF MRC
CAPITAL STOCK AND MRC, LLC CLASS A MEMBERSHIP INTERESTS -- General".
MRC, LLC has filed a registration statement with the Securities and
Exchange Commission on Form S-11 relating to a separate offer of a minimum of
50 Units ($25,000,000) and a maximum of 100 Units ($50,000,000) in Class B
membership interests to create a new investment pool which will be segregated
on the books of MRC, LLC from the existing investment pool. The effectiveness
of that registration statement is a condition to the consummation of the
Restructuring. See "THE RESTRUCTURING AGREEMENT -- Conditions to the
Restructuring" and "THE OFFERING".
<PAGE>
THE RESTRUCTURING MAY HAVE CERTAIN ADVERSE EFFECTS, INCLUDING THE
FOLLOWING:
o There is not anticipated to be any public market for the Class A
Membership Interests. MRC, LLC will register under Section 12(g) of
the Exchange Act and will file periodic reports and other information
with the Securities and Exchange Commission, but its membership
interests will not be listed on any securities exchange.
o The nature of the investment of the shareholders of MRC will
change from an investment in common stock which is listed on a
national securities exchange to an investment in limited
liability company interests. MRC cannot predict whether any
market will develop.
o Four entities are the beneficial owners of approximately 62%
of MRC's outstanding shares. Directors, executive officers
and directors who are nominees of such entities holding
approximately 45.3% of the outstanding shares of MRC have
indicated that they and such entities intend to vote such shares
for approval and adoption of the Restructuring Agreement.
o Holders of fewer than 50,000 shares of MRC as of October 7, 1996
(assumed to represent 116,267 shares in the aggregate) will receive,
in lieu of the distribution of Class A Membership Interests in MRC,
LLC, a cash payment equal to the book value of their shares as of
September 30, 1995 ($9.03 per share, or $1,049,891 in the aggregate).
o Risks associated with a reduced level of participation in corporate
governance by investors and lack of scheduled annual meetings.
The Managing Board Members of MRC, LLC will be appointed by its
Member-Managers (which will consist of (a) those Members with a Total
Percentage Interest at least equal to the Minimum Percentage and (b)
to the extent not previously taken into account, those Class A Members
(but excluding their assignees) which held sufficient shares of MRC's
common stock immediately prior to the initial Capital Contribution of
the Class A Members to elect at least one director at an annual
meeting of the shareholders of MRC, and in either case which have not
declined in writing to serve as Member-Managers). There will be no
regularly scheduled meetings of the Members of MRC, LLC. Meetings of
all Members or of a class or classes of Members may be called by the
Managing Board, the Executive Committee or by the Chairman of the
Managing Board, and must be called upon the written request to the
Managing Board of Members holding in the aggregate at least ten
percent (10%) of the Total Percentage Interests of MRC, LLC or of the
applicable class or classes.
o There will be certain restrictions upon the transfer of
Membership Interests. Members with Restricted Membership
Interests (generally those with a Membership Interest that
represents at least 21% of a particular class) cannot transfer
such interests without the consent of a majority of the
non-transferring Member-Managers.
o Certain tax risks, including the possibility that the IRS might
not consider MRC, LLC a partnership for federal tax
purposes, notwithstanding the opinion of Coopers & Lybrand
L.L.P. that MRC, LLC is a partnership for such purposes. Prior
to obtaining an opinion from Coopers & Lybrand L.L.P., MRC,
LLC filed a request on January 5, 1996 for a private letter
ruling from the IRS which recognizes that it is classified as a
partnership for federal income tax purposes. The request is
still pending. Although MRC, LLC at this time anticipates
receiving a favorable ruling, the request involves issues of
first impression and no firm assurance can be given that the
IRS will ultimately decide to issue a ruling. Should the IRS
ultimately decide not to issue a ruling, MRC, LLC's
classification for tax purposes will not be adversely affected
by this decision. However, if the IRS declines to rule, it
could also decide to challenge MRC, LLC's classification for
tax purposes, notwithstanding the opinion of Coopers & Lybrand
L.L.P. If such challenge were successful, then under certain
conditions MRC, LLC could be subject to Federal income tax
(including applicable alternative minimum tax) on its
taxable income at corporate rates.
<PAGE>
SEE "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING", "COMPARISON
OF MRC CAPITAL STOCK AND MRC,LLC CLASS A MEMBERSHIP INTERESTS", AND "THE
OPERATING AGREEMENT".
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," page 13 of this Proxy Statement/Prospectus.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date on which this Proxy Statement/Prospectus is first being sent
to shareholders of MRC is on or about October 14, 1996.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
AVAILABLE INFORMATION........................................................................viii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................................viii
SUMMARY....................................................................................... 1
The Companies.......................................................................... 1
The Special Meeting.................................................................... 1
Special Meeting of Shareholders........................................................ 1
Matters to be Considered at the Special Meeting........................................ 1
Shareholder Proposals.................................................................. 2
Votes Required......................................................................... 2
Record Date............................................................................ 2
Security Ownership..................................................................... 2
The Restructuring...................................................................... 3
Form of Restructuring.................................................................. 3
Effective Date of the Restructuring.................................................... 3
Purpose of the Restructuring and Reasons for the Restructuring......................... 3
Disadvantages of the Restructuring..................................................... 3
Recommendations of the Board of Directors ............................................. 4
Opinion of Appraisers.................................................................. 4
Conditions to the Consummation of the Restructuring; Termination....................... 4
Material Federal Income Tax Consequences............................................... 4
Considerations for Pension Fund Investors.............................................. 5
Stock Exchange Listing................................................................. 5
No Appraisal or Other Rights........................................................... 5
The Offering of Class B Membership Interests........................................... 6
Risk Factors........................................................................... 6
Management and Operations After the Restructuring...................................... 8
Managing Board......................................................................... 8
Committees............................................................................. 8
Class A Membership Interests........................................................... 8
Meetings............................................................................... 9
Federal Income Tax Treatment........................................................... 9
Dissolution............................................................................ 10
Summary Financial Data................................................................. 10
Pro Forma Financial Information........................................................ 10
Metropolitan Realty Company, L.L.C. Summary Pro Forma Condensed Balance Sheet.......... 11
Summary Selected Financial Data of Metropolitan Realty Corporation..................... 12
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RISK FACTORS................................................................................ 13
Conditions to the Restructuring...................................................... 13
Termination.......................................................................... 13
Material Federal Income Tax Consequences............................................. 14
Considerations for Pension Fund Investors............................................ 14
Lack of Market; Substantial Transfer Restrictions.................................... 14
Southeast Michigan Economy........................................................... 14
Real Estate Investment Risks......................................................... 15
Potential Conflicts of Interest...................................................... 15
Competition.......................................................................... 16
Risk of Borrowing.................................................................... 16
Selection of an Advisory Company..................................................... 16
Uncertainties Concerning Control..................................................... 16
Limited Liability Company as an Untested Entity...................................... 17
Rights of creditors to reach Class A Assets.......................................... 17
Adverse Consequences of Failure to Qualify as a Partnership.......................... 17
INTRODUCTION................................................................................ 18
THE COMPANIES............................................................................... 18
Metropolitan Realty Corporation...................................................... 18
Material Assets of Metropolitan Realty Corporation................................... 19
Metropolitan Realty Company, L.L.C................................................... 19
THE SPECIAL MEETING......................................................................... 20
Matters to be Considered at Meeting.................................................. 20
Votes Required....................................................................... 21
Voting of Proxies.................................................................... 21
Revocability of Proxies.............................................................. 21
Record Date; Shares Entitled to Vote; Quorum......................................... 22
No Appraisal Rights.................................................................. 22
Solicitation of Proxies.............................................................. 22
SPECIAL FACTORS CONCERNING THE RESTRUCTURING................................................ 22
Form of the Restructuring............................................................ 22
Background of and Reasons for the Restructuring...................................... 23
Valuation of Common Stock............................................................ 23
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Direction of MRC..................................................................... 23
Appointment of Board Committee and Proposed Structures Considered.................... 24
Restructuring Proposal............................................................... 25
Recommendation of the Board of Directors............................................. 26
Appraisal............................................................................ 27
General.............................................................................. 27
Scope and Extent of Appraisal Process................................................ 27
Assumptions and Limiting Conditions.................................................. 28
Market Value of Mortgage Notes....................................................... 28
Consideration for Shares to be Paid to Minority Shareholders......................... 29
Majority Shareholders................................................................ 31
Effect of the Restructuring.......................................................... 32
Limited Liability Company............................................................ 32
Managing Board....................................................................... 33
Committees........................................................................... 33
Class A Membership Interests......................................................... 33
Meetings............................................................................. 34
Effective Date....................................................................... 34
Conditions to the Consummation of the Restructuring.................................. 35
Anticipated Accounting Treatment..................................................... 35
Material Federal Income Tax Consequences............................................. 35
Stock Exchange Listing and Marketability ............................................ 35
No Appraisal Rights.................................................................. 36
THE OFFERING................................................................................ 36
PRO FORMA FINANCIAL INFORMATION............................................................. 36
METROPOLITAN REALTY COMPANY, L.L.C. PRO FORMA CONDENSED
BALANCE SHEET........................................................................ 37
SELECTED FINANCIAL DATA OF METROPOLITAN REALTY CORPORATION.................................. 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................. 39
Results of Operations for the Six Months Ended June 30 , 1996........................ 39
Liquidity and Capital Resources for the Six Months ended June 30, 1996............... 41
Results of Operations of MRC for the years ended December 31, 1995, 1994 and 1993.... 42
Liquidity and Capital Resources of MRC at December 31, 1995.......................... 45
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MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING........................................... 47
MRC's Current Management Structure................................................... 47
Board of Directors................................................................... 47
Committees........................................................................... 47
MRC, LLC............................................................................. 48
Member-Managers...................................................................... 50
Managing Board after the Restructuring............................................... 50
Compensation and Expense Reimbursement............................................... 51
Fiduciary Responsibility of Managing Board Members................................... 52
Limited Liability of Managing Board Members.......................................... 52
Committees after the Restructuring................................................... 52
Meetings of Shareholders and Members................................................. 53
MRC.................................................................................. 53
MRC, LLC............................................................................. 53
Voting............................................................................... 53
MRC.................................................................................. 53
MRC, LLC............................................................................. 54
Dissolution.......................................................................... 54
MRC.................................................................................. 54
MRC, LLC............................................................................. 54
INVESTMENT OBJECTIVES AND POLICIES AFTER THE RESTRUCTURING.................................. 55
General.............................................................................. 55
Underwriting Criteria................................................................ 56
Types of Investments................................................................. 56
Commercial Mortgage Loans............................................................ 57
Construction Loans................................................................... 58
Equity Participations................................................................ 59
Reinvestment Policy.................................................................. 60
Borrowing Policies................................................................... 61
Arrangements with Advisory Company................................................... 61
Other Operating and Investment Policies.............................................. 61
Prohibited Investments and Activities................................................ 62
Annual Review of Investment Policies and Advisor Performance........................ 64
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COMPARISON OF MRC CAPITAL STOCK AND MRC, LLC CLASS A
MEMBERSHIP INTERESTS...................................................................... 64
General.............................................................................. 64
Limited Liability Companies.......................................................... 65
Nature of Equity Interests........................................................... 65
MRC.................................................................................. 65
General.............................................................................. 65
Certain Anti-Takeover Provisions..................................................... 65
Common Stock......................................................................... 66
Preferred Stock...................................................................... 67
Dividends and Distributions.......................................................... 67
MRC, LLC............................................................................. 67
General.............................................................................. 67
Disposition of Membership Interests.................................................. 68
In General........................................................................... 68
Prohibited Dispositions.............................................................. 69
Permitted Dispositions............................................................... 69
Admission of Substitute Members...................................................... 69
Dividends and Distributions.......................................................... 70
THE OPERATING AGREEMENT..................................................................... 70
Purpose.............................................................................. 70
Federal Income Tax Classification.................................................... 70
Classes of Members................................................................... 71
Meetings of Members.................................................................. 71
Quorum and Voting.................................................................... 71
Redemption........................................................................... 72
Initial Class A Contributions and Members............................................ 72
Class A Capital Accounts............................................................. 72
Initial Class B Contributions and Members............................................ 72
Class B Assets....................................................................... 73
Class B Capital Accounts............................................................. 73
Capital Accounts and Capital Contributions in General................................ 73
Allocation of Expenses............................................................... 73
Indemnification...................................................................... 74
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THE RESTRUCTURING AGREEMENT................................................................. 75
The Restructuring.................................................................... 75
Assignment of Assets and Assumption of Liabilities;
Conversion of Common Stock Held by
Majority Shareholders into Class A Membership Interests............................ 75
Conversion of Common Stock Held by Minority Shareholders
into Right to Receive Cash Payment................................................. 75
Conditions to the Restructuring...................................................... 75
Effective Date of the Restructuring.................................................. 76
Surrender of MRC Stock Certificates.................................................. 76
Conduct Pending the Restructuring.................................................... 77
Effect of Restructuring.............................................................. 77
Operating Agreement and Management................................................... 77
Cessation of Business................................................................ 77
Closing of Transfer Books............................................................ 78
Termination.......................................................................... 78
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.................................................. 78
The Restructuring.................................................................... 78
General.............................................................................. 78
Federal Tax Consequences of the Restructuring........................................ 79
The Organizational Transactions...................................................... 79
Taxation of MRC, LLC and Members..................................................... 80
Partnership Status................................................................... 80
Partnership Classification Standards................................................. 80
Publicly Traded Partnership Rules.................................................... 81
Taxable Mortgage Pool Rules.......................................................... 83
Taxation of MRC, LLC Members......................................................... 85
Member Tax Basis..................................................................... 85
Minimum Gain Chargebacks and Qualified Income Offsets................................ 86
Tax Allocations With Respect To Contributed Properties............................... 87
Tax Exempt Investors................................................................. 87
General.............................................................................. 87
Fees................................................................................. 87
Real Property Rents.................................................................. 87
Debt-financed Property............................................................... 89
Dealer Property Sales................................................................ 89
Other Tax Considerations............................................................. 89
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CONSIDERATIONS FOR PENSION FUND INVESTORS................................................... 89
Pension Plans Subject to the Employee Retirement Income Security Act of 1974......... 89
Michigan Public Employee Retirement Systems.......................................... 90
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS................................................... 91
EXPERTS..................................................................................... 91
LEGAL MATTERS............................................................................... 91
OTHER MATTERS............................................................................... 91
FURTHER INFORMATION......................................................................... 92
GLOSSARY.................................................................................... 93
APPENDIX A -- OPERATING AGREEMENT............................................................A-1
APPENDIX B -- AGREEMENT AND PLAN OF DISSOLUTION AND RESTRUCTURING............................B-1
INDEX TO FINANCIAL STATEMENTS ...............................................................F-1
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AVAILABLE INFORMATION
Metropolitan Realty Company, L.L.C. ("MRC, LLC") has filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
on Form S-4, File No. 33-99694 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Restructuring, and Metropolitan Realty Corporation ("MRC") has filed a
Schedule 13E-3, File No. 5-40234 (the "Schedule 13E-3") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with the Commission in
connection with the Restructuring. This Proxy Statement/Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto or incorporated by reference therein. Statements made in
this Proxy Statement/Prospectus as to the contents of any contract or any
other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. The Registration Statement, including
exhibits and schedules thereto or incorporated by reference therein and the
Schedule 13E-3 can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the Commission's Midwest Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained upon written request
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Metropolitan Realty Corporation ("MRC") is subject to the
informational requirements of the Exchange Act, and in accordance therewith
files reports, proxy statements and other information with the Commission. All
such information can be inspected and copied at the public reference
facilities maintained by the Commission and referred to above. Reports, proxy
statements and other information concerning MRC can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; at its Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can also be obtained
upon written request from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at the prescribed rates.
Documents filed by MRC can also be inspected at the offices of the American
Stock Exchange, Inc., 86 Trinity Place, New York, New York 10006-1881.
MRC, LLC will be subject to the informational requirements of the
Exchange Act and, in accordance therewith, will be required to file periodic
reports and other information with the Commission. Such reports and other
information can be inspected and copied at the address set forth above.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
MRC's Annual Report on Form 10-K and on Form 10-K/A for the year ended
December 31, 1995, Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1996 and June 30, 1996, and MRC's Proxy Statement for
the 1995 Annual Meeting of Shareholders which was filed with the Commission on
May 1, 1995 (File No. 1-9450) are incorporated by reference in this Proxy
Statement/Prospectus and shall be deemed a part hereof. All reports and other
documents subsequently filed by MRC pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement/Prospectus
and prior to the Special Meeting of Shareholders to be held on December 6,
1996
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and any adjournment thereof shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such reports and
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein prior to the date hereof shall be deemed to
be modified or superseded for purposes of this Proxy Statement/Prospectus to
the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein, modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
The information relating to MRC contained in this Proxy
Statement/Prospectus summarizes, is based upon, or refers to, information and
financial statements contained in one or more of the documents incorporated by
reference herein; accordingly, such information contained herein is qualified
in its entirety by reference to such documents and should be read in
conjunction therewith.
Any documents incorporated by reference in this Proxy
Statement/Prospectus (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference) are available, without
charge, to any person, including any beneficial owner, to whom this Proxy
Statement/Prospectus is delivered, on written or oral request to Nancy A.
Mattar, Executive Vice President, Metropolitan Realty Corporation, 535
Griswold, Suite 748, Detroit, Michigan 48226 (telephone (313) 961-5552). In
order to ensure timely delivery of the documents, requests should be received
by November 29, 1996.
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SUMMARY
The following is a summary of certain information appearing elsewhere
in this Proxy Statement/Prospectus. As this summary is necessarily incomplete,
reference is made to, and this summary is qualified in its entirety by, the
more detailed information contained or incorporated by reference in this Proxy
Statement/Prospectus and the Appendices hereto in their entirety. See the
"GLOSSARY" for definitions of various terms used herein.
The Companies
MRC is a Michigan corporation which operates as a real estate investment
trust. Its common stock has been traded on the American Stock Exchange since
November, 1988. MRC has focused its investments in southeast Michigan's Wayne
and Macomb Counties, as well as the City of Detroit. See "THE COMPANIES --
Metropolitan Realty Corporation".
MRC, LLC is a Delaware limited liability company, formed on October 23, 1995
for the purpose of acquiring the assets and carrying on the business of MRC
upon the consummation of the Restructuring. See "THE COMPANIES -- Metropolitan
Realty Company, L.L.C.".
The Special Meeting
Special Meeting of Shareholders.
A special meeting of the shareholders of Metropolitan Realty
Corporation ("MRC") will be held at the _______________________, on
December 6, 1996 at ________ (the "Special Meeting"). See "THE SPECIAL
MEETING".
Matters to be Considered at the Special Meeting.
At the MRC Special Meeting, holders of MRC's Common Stock, $.01 par
value per share (the "MRC Common Stock"), will consider and vote upon a
proposal (the "Restructuring Proposal") to approve and adopt the Agreement and
Plan of Dissolution and Restructuring attached as Appendix A to this Proxy
Statement/Prospectus and incorporated herein by this reference (the
"Restructuring Agreement") and the transactions contemplated thereby,
including the transfer of the assets of MRC to, and the assumption of the
liabilities of MRC by, Metropolitan Realty Company, L.L.C., a Delaware limited
liability company ("MRC, LLC") in exchange for Class A membership interests in
the limited liability company, the dissolution of MRC, and the distribution of
the limited liability company membership interests to certain of MRC's
shareholders in liquidation (the "Restructuring"); provided, however, that
holders of fewer than 50,000 shares as of October 7, 1996, will receive a cash
payment equal to the book value of their shares as of September 30, 1995
($9.03 per share) in lieu of the distribution of membership interests. These
cash payments will be made exclusively from the Class A Assets. MRC
shareholders may also consider and vote upon such other matters as may
properly be brought before the meeting. See "THE SPECIAL MEETING -- Matters to
be Considered at the Meeting".
In the event that the Restructuring is not approved, MRC intends to
continue to conduct its business as presently operated. It is anticipated that
the Restructuring will be approved. Four entities are the beneficial owners of
approximately 62% of the outstanding shares of MRC and directors, executive
officers and directors who are nominees of such entities which are the
beneficial owners of approximately 45.3% of MRC's Common Stock have indicated
that they and such entities intend to vote such shares of MRC
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Common Stock for approval and adoption of the Restructuring Agreement. See
"THE SPECIAL MEETING -- Record Date; Shares Entitled to Vote; Quorum."
Shareholder Proposals
Proposals of shareholders of MRC intended to be presented at the MRC
1996 Annual Meeting must be received by MRC no later than , 1996 to be
included in the notice of the MRC Annual Meeting and form of proxy relating to
that meeting. Any such proposal must comply with Rule 14a-8 promulgated by the
Commission under the Exchange Act.
Votes Required
Approval of the Restructuring Agreement requires the affirmative vote
of the holders of a majority of the outstanding shares of MRC Common Stock,
with each share entitled to one vote. Such approval is required to approve and
adopt the Restructuring Agreement. The members of MRC, LLC must also approve
the Restructuring Agreement. Such approval is a condition to, and required
for, consummation of the Restructuring. See "THE SPECIAL MEETING -- Votes
Required".
Record Date
The record date for the MRC Special Meeting is October 7, 1996.
Only MRC shareholders at the close of business on such date are entitled to
notice of, and to vote at, the MRC Special Meeting or at any adjournment
thereof. As of the close of business on the Record Date, MRC had outstanding
4,532,169 shares of Common Stock, which were held by approximately 50 (fifty)
shareholders of record. See "THE RESTRUCTURING -- Vote Required for Approval"
and "THE SPECIAL MEETING -- Record Date; Shares Entitled to Vote; Quorum".
Security Ownership
As of June 11, 1996, directors and executive officers of MRC as a
group were the beneficial owners of less than 1% of the outstanding shares of
MRC Common Stock. To the Company's knowledge and belief, four entities are the
beneficial owners of more than 5% of MRC's Common Stock as of the Record Date.
These beneficial owners own 2,814,470 shares of MRC Common Stock, or
approximately 62% of its outstanding shares. Directors, executive
officers and directors who are nominees of such entities holding approximately
45.3% of the outstanding shares of MRC have indicated that they and such
entities intend to vote such shares of MRC Common Stock for approval and
adoption of the Restructuring Agreement. See "THE SPECIAL MEETING -- Record
Date; Shares Entitled to Vote; Quorum".
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The Restructuring
Form of Restructuring.
Pursuant to the Restructuring Agreement, on the Effective Date, the
assets of MRC will be transferred to MRC, LLC in exchange for Class A
membership interests of MRC, LLC (the "Class A Membership Interests"). MRC,
LLC will assume all of the liabilities of MRC. MRC will then be dissolved and
the Class A Membership Interests in MRC, LLC will be distributed to certain of
MRC's shareholders in liquidation. Holders of fewer than 50,000 shares of MRC
as of October 7, 1996, will receive, in lieu of the distribution of Class A
Membership Interests in MRC, LLC, a cash payment equal to the book value of
their shares as of September 30, 1995 ($9.03 per share), based upon an
appraisal of MRC's loan portfolio as determined by an independent appraiser.
See "THE RESTRUCTURING -- Form of the Restructuring" and "--Appraisal".
MRC, LLC will simultaneously offer a minimum of 50 Units ($25,000,000)
and a maximum of 100 Units ($50,000,000) in Class B membership interests (the
"Class B Membership Interests") in a separate offering to create a new
investment pool.
Effective Date of the Restructuring.
It is expected that if the Restructuring is approved by MRC
shareholders at the Special Meeting, and assuming that the other conditions
described in the Restructuring Agreement are satisfied, the Restructuring will
become effective during the fourth calendar quarter of 1996. See "THE
RESTRUCTURING AGREEMENT".
Purpose of the Restructuring and Reasons for the Restructuring
The purpose of the Restructuring is to reorganize MRC into a limited
liability company, which the Board of Directors believes will provide a number
of significant advantages. MRC's Common Stock currently trades at a fraction
of book value. The Board of Directors believes that the Common Stock is
substantially undervalued by the market because it is traded thinly. The
Restructuring will permit MRC's shareholders which are pension funds,
representing 69.2% of the outstanding shares of Common Stock, to write up
their investment to its estimated fair value at the date of Restructuring,
which is expected to equal book value. The Restructuring will also enable MRC
to delist from the American Stock Exchange and, in conjunction with the
offering of Class B membership interests of MRC, LLC described below, will
permit MRC to realize other significant cost savings. The Restructuring will
also result in a more flexible organizational structure, which will provide a
vehicle for both raising additional capital and developing exit strategies for
the members of MRC, LLC. See "THE RESTRUCTURING -- Special Factors" and "THE
OFFERING".
Disadvantages of the Restructuring
The Restructuring will result in a number of changes, some of which
could be considered disadvantages to some or all of the shareholders of MRC.
Foremost is that the nature of the investment of certain of the shareholders
of MRC will change from an investment in common stock which is listed on the
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American Stock Exchange to an investment in limited liability company
interests which will not be listed on an exchange and are not expected to be
publicly traded. Holders of fewer than 50,000 shares of MRC as of October 7,
1996, will receive, in lieu of the distribution of Class A Membership
Interests in MRC, LLC, a cash payment equal to the book value of their shares
as of September 30, 1995 ($9.03 per share), based upon an appraisal of MRC's
loan portfolio as determined by an independent appraiser.
SEE "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING", "COMPARISON OF
MRC CAPITAL STOCK AND MRC,LLC CLASS A MEMBERSHIP INTERESTS", AND "THE
OPERATING AGREEMENT".
Recommendations of the Board of Directors
The MRC Board unanimously approved the Restructuring Agreement and
recommends that MRC shareholders vote FOR the approval and adoption of the
Restructuring Agreement. See "THE RESTRUCTURING -- Recommendations of the
Board of Directors".
Opinion of Appraisers
The MRC Board has retained Cushman & Wakefield of Michigan, Inc. to
perform an appraisal of MRC's loan portfolio, and has utilized this appraisal
in establishing the cash payment to be made to holders of fewer than 50,000
shares of MRC Common Stock. A copy of the appraisal will be made available for
inspection and copying at the offices of MRC during its regular business hours
by any interested shareholder or his or her representative who has been so
designated in writing. This appraisal should be read in its entirety with
respect to the assumptions made and other matters considered in performing
such appraisal. See "THE RESTRUCTURING -- Appraisal".
Conditions to the Consummation of the Restructuring; Termination
The obligations of MRC and MRC, LLC to consummate the Restructuring
are subject to various conditions including obtaining requisite shareholder
and member approvals, and the accuracy in all material respects of the
representations and warranties of the two entities. There are no federal or
state regulatory requirements which must be complied with or approvals which
must be obtained in connection with the Restructuring.
Under certain circumstances, the Restructuring Agreement may be
terminated by MRC and/or MRC, LLC at any time prior to the Effective Time,
whether before or after approval of the Restructuring by the Shareholders of
MRC and the members of MRC, LLC. See "THE RESTRUCTURING AGREEMENT --
Termination".
Material Federal Income Tax Consequences
Provided certain conditions are met, no gain or loss will be
recognized by MRC upon the contribution of its assets to MRC, LLC in exchange
for Class A Membership Interests. All amounts received by MRC shareholders in
a distribution in complete liquidation will be treated as full payment in
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exchange for their stock pursuant to Section 331 of the Internal Revenue
Code of 1986, as amended (the "Code"). Gain or loss will be recognized based
on the difference between the amount of the distribution and the shareholder's
tax basis in its MRC stock. See "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS --
Federal Tax Consequences of the Restructuring".
As provided in the opinion of Coopers & Lybrand L.L.P., MRC, LLC
will be classified as a partnership for federal income tax purposes, and as
such it generally will be treated as a "pass-through" entity that is not
subject to federal income tax. Items of income, deduction, gain, loss or
credit generally will be allocated proportionately (based on class of
membership interests) to MRC, LLC's Members, which will be treated as partners
for tax purposes. The Members may be subject to tax on allocated items,
without regard to whether they receive a distribution from MRC, LLC. See
"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS -- Federal Tax Consequences of the
Restructuring -- Taxation of MRC, LLC Members".
Considerations for Pension Fund Investors
A fiduciary of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA")
or of a Michigan public employee retirement system should consider the
fiduciary standards under applicable law in the context of the plan's or
system's particular circumstances before authorizing or continuing an
investment of a portion of such plan's or system's assets in the Class A
Membership Interests. Such fiduciary should consider, among other factors,
whether the investment satisfies the applicable prudence and diversification
requirements. Further, an investment by a Michigan public employee retirement
system's assets in the Class A Membership Interests may be subject to
limitations based upon a percentage of such system's assets. See
"CONSIDERATIONS FOR PENSION FUND INVESTORS -- Plans Subject to the Employee
Retirement Income Security Act of 1974" and "Michigan Public Employee
Retirement Systems".
Stock Exchange Listing
MRC Common Stock is listed on the American Stock Exchange ("AMEX")
under the symbol "MET". As part of the Restructuring, MRC will de-list its
Common Stock from AMEX. There is not anticipated to be any public market for
the Class A Membership Interests. MRC, LLC will register under Section 12(g)
of the Exchange Act and will file periodic reports and other information with
the Securities and Exchange Commission, but its membership interests will not
be listed on an exchange or quoted on the National Association Securities
Dealers Automated Quotation System ("NASDAQ"). See "THE RESTRUCTURING --
Conditions to the Restructuring" and "-- Stock Exchange Listing".
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No Appraisal or Other Rights
No holders of MRC Common Stock will have any appraisal or other rights
under Michigan law in connection with or as a result of the matters to be
acted upon at the MRC Special Meeting.
The Offering of Class B Membership Interests
Upon consummation of the Restructuring, MRC, LLC intends to offer
Units of its Class B Membership Interests in a separate offering to create a
new investment pool which will be segregated on the books of MRC, LLC from the
existing investment pool (the "Offering"). The proceeds of the Offering will
be invested in Short-term Investments until such time as the proceeds are
invested in real estate loans. The Class B Membership Interests will be
structured so that payments of principal in the investment pool will be passed
through to the Class B members on an annual basis (or more frequently as
determined by MRC, LLC's Managing Board), and cash income (less expenses) will
be passed through on a quarterly basis. The Class B Membership Interests will
terminate when the underlying mortgage loans mature or are liquidated, with
the final maturity of such loans not later than December 31, 2025, the date
MRC, LLC's existence will terminate. See "THE RESTRUCTURING AGREEMENT --
Conditions to the Restructuring" and "THE OFFERING".
There can be no assurance that the Offering will be completed, or, if
the Offering is completed, that it will be completed on the terms currently
contemplated. See "THE OFFERING".
Risk Factors
The Restructuring and investment in the Class A Membership Interests
are subject to certain risks, including among other things, the following:
o The likelihood exists that an active public market for the Class
A Membership Interests will not develop. MRC, LLC will register
under the Securities Exchange Act of 1934 and will file period
reports with the Securities and Exchange Commission, but the
Class A Membership Interests will not be listed on any exchange
and it is not anticipated that there will be any public market
for the Class A Membership Interests.
o The nature of the investment of the shareholders of MRC will
change from an investment in common stock which is listed on a
national securities exchange to an investment in limited
liability company interests. MRC cannot predict whether any
market will develop.
o Four entities are the beneficial owners of approximately 62% of
MRC's outstanding shares. Directors, executive officers and
directors who are nominees of such entities holding
approximately 45.3% of the outstanding shares of MRC have
indicated that they and such entities intend to vote such
shares for approval and adoption of the Restructuring
Agreement.
o Holders of fewer than 50,000 shares of MRC as of October 7, 1996
(assumed to represent 116,267 shares in the aggregate) will
receive, in lieu of the distribution of Class A Membership
Interests in MRC, LLC, a cash payment equal to the book value
of their shares as of September 30, 1995 ($9.03 per share, or
$1,049,891 in the aggregate).
6
<PAGE>
o Risks associated with a reduced level of participation
in corporate governance by investors and lack of
scheduled annual meetings. The Managing Board Members
of MRC, LLC will be appointed by its Member-Managers
(which will consist of (a) those Members with a Total
Percentage Interest at least equal to the Minimum
Percentage and (b) to the extent not previously
taken into account, those Class A Members (but
excluding their assignees) which held sufficient
shares of MRC's common stock immediately prior to
the initial Capital Contribution of the Class A
Members to elect at least one director at an annual
meeting of the shareholders of MRC, and in either case
which have not declined in writing to serve as Member-
Managers). There will be no regularly scheduled
meetings of the Members of MRC, LLC. Meetings of all
Members or of a class or classes of Members may be
called by the Managing Board, the Executive Committee
or by the Chairman of the Managing Board, and must be
called upon the written request to the Managing Board
of Members holding in the aggregate at least ten
percent (10%) of the Total Percentage Interests of MRC,
LLC or of the applicable class or classes.
o There will be certain restrictions upon the transfer of
Membership Interests. Members with Restricted Membership
Interests (generally those with a Membership Interest that
represents at least 21% of a particular class) cannot transfer
such interests without the consent of a majority of the
non-transferring Member-Managers.
o The absence of previous operating history of MRC, LLC. Although
MRC has been operating since 1988, MRC, LLC has no operating
history. A limited liability company is a new form of business
organization. Because of the relative absence of developed law
or judicial decisions regarding the operation and management of
limited liability companies, there is no assurance that all the
intended benefits will be achieved.
o The nature of the economy in southeastern Michigan. MRC, LLC
intends to make where possible the majority of its Real Estate
Investments in Detroit, with the balance being in the eight
county metropolitan region constituting southeastern Michigan.
Historically, this area has been subject to cyclical economic
change tied to the health of the automotive manufacturing
industry. Cycles in the local economy could impact the ability
of MRC, LLC to make Real Estate Investments and the yields
achievable on them.
o Certain real estate investment risks. The Real Estate
Investments which MRC, LLC intends to make will be subject to
various risks. Real Estate Investments tend to be long-term and
illiquid, and consequently MRC, LLC will have minimal ability
to vary its portfolio in response to changing economic,
financial and investment conditions. Real Estate Investments
are affected by a number of various factors over which MRC, LLC
has no control, including (i) changes in tax laws, (ii)
operating and construction costs, (iii) the location and the
attractiveness of the properties, (iv) changes in interest
rates or the availability of long-term mortgage funds, (v) the
ability of the owner to provide adequate maintenance and
insurance of its properties, (vi) adverse changes in general
economic conditions resulting in an inability to maintain
occupancies or rent levels, (vii) over-building, (viii)
increases in operating costs, and (ix) changes in zoning laws
or other governmental regulations. In addition, owners,
mortgagees and operators of real estate may have potential
liabilities under environmental and other such laws.
o Potential conflicts of interest of the Members and Managing
Board Members of MRC, LLC. Neither the Operating Agreement nor
the Certificate of Formation of MRC, LLC prohibit the Members
or Managing Board Members of MRC, LLC from engaging in business
activities of the type conducted by MRC, LLC and accordingly,
certain conflicts of interest may arise in the event that such
persons engage in these activities. The Member or Managing
Board Members of MRC, LLC may be subject to certain conflicts
of interest arising out of their relationship with MRC, LLC and
with other entities.
7
<PAGE>
o Certain tax risks, including the possibility that the IRS might
not consider MRC, LLC a partnership for federal tax
purposes, notwithstanding the opinion of Coopers & Lybrand
L.L.P. that MRC, LLC is a partnership for such purposes. Prior
to obtaining an opinion from Coopers & Lybrand L.L.P., MRC,
LLC filed a request on January 5, 1996 for a private letter
ruling from the IRS which recognizes that it is classified as a
partnership for federal income tax purposes. The request is
still pending. Although MRC, LLC at this time anticipates
receiving a favorable ruling, the request involves issues of
first impression and no firm assurance can be given that the
IRS will ultimately decide to issue a ruling. Should the IRS
ultimately decide not to issue a ruling, MRC, LLC's
classification for tax purposes will not be adversely affected
by this decision. However, if the IRS declines to rule, it
could also decide to challenge MRC, LLC's classification for
tax purposes, notwithstanding the opinion of Coopers & Lybrand
L.L.P. If such challenge were successful, then under certain
conditions MRC, LLC could be subject to Federal income tax
(including applicable alternative minimum tax) on its
taxable income at corporate rates.
See "RISK FACTORS", "THE RESTRUCTURING AGREEMENT -- Conditions to the
Restructuring", "-- Termination" and "MATERIAL FEDERAL INCOME TAXATION
CONSIDERATIONS".
Management and Operations After the Restructuring
Managing Board.
MRC is managed by a Board of Directors of twenty-two (22) directors.
Upon consummation of the Restructuring, MRC, LLC will be managed by its
Member-Managers through a Managing Board (the "Managing Board"). The
Member-Managers are (a) those Members with a Total Percentage Interest at
least equal to the Minimum Percentage and (b) to the extent not previously
taken into account, those Class A Members (but excluding their assignees)
which held sufficient shares of MRC's common stock immediately prior to the
initial Capital Contribution of the Class A Members to elect at least one
director at an annual meeting of the shareholders of MRC, and in either case
which have not declined in writing to serve as Member-Managers.
Each Member-Manager is entitled, but is not required, to appoint the
greater of one (1) Managing Board Member to the Managing Board or that number
obtained by dividing such Member-Manager's Total Percentage Interest by the
Minimum Percentage Interest, rounded down to the nearest whole number. The
Managing Board will consist of that number of Managing Board Members appointed
from time to time by the Member-Managers of MRC, LLC, but in no event will the
number of Managing Board Members be fewer than three (3) or greater than forty
(40). See "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING -- MRC, LLC --
Managing Board After the Restructuring".
Committees.
The Managing Board will appoint an Executive Committee, an Audit
Committee, and a Loan Committee and such other subcommittees as the Managing
Board shall specify from time to time. These committees will be empowered and
structured in a manner substantially identical to the analogous committees
which MRC has now. See "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING --
MRC, LLC -- Committees".
Class A Membership Interests.
Class A Membership Interests will represent an interest in MRC's
existing investment pool and other net assets, which will be transferred to
MRC, LLC as part of the Restructuring. Class A Members are expected to receive
quarterly distributions of 100% of Class A Cash Income, pro rata based upon
their Class A Percentage Interests. Distributions of principal will be
returned as follows:
(i) prior to 2001, MRC,LLC has the option to reinvest any principal
returned with respect to Real Estate Investments which are part of the Class A
Assets; and
8
<PAGE>
(ii) beginning in 2001, a Class A Member may elect each year to
receive its pro rata share of (x) principal returned with respect to Real
Estate Investments which are part of the Class A Assets, and (y) any cash or
cash equivalents which are part of the Class A Assets. Any part of the Class A
Assets which is not distributed pursuant to the foregoing may, at the option
of MRC,LLC, be reinvested in Real Estate Investments. Any such election must
be made by a Member in writing and must be received by MRC, LLC by the
November first preceding the fiscal year for which such election is to be
effective.
All distributions are subject to a determination by the Managing Board
that MRC, LLC will have sufficient cash on hand to meet its current and
anticipated needs to fulfill its business purpose. See "COMPARISON OF MRC
CAPITAL STOCK AND MRC, LLC CLASS A MEMBERSHIP INTERESTS -- Nature of Equity
Interests -- MRC, LLC -- General".
All dispositions of Membership Interests must be made in compliance
with applicable state and federal securities laws and regulations. No
disposition may be made if it would cause a termination of MRC, LLC under the
Internal Revenue Code or if the disposition would, in the opinion of tax
counsel to MRC, LLC, jeopardize the status of MRC, LLC as a partnership for
federal income tax purposes. See "COMPARISON OF MRC CAPITAL STOCK AND MRC, LLC
CLASS A MEMBERSHIP INTERESTS -- Nature of Equity Interests -- MRC, LLC--
Disposition of Membership Interests".
A Member may assign its economic interest in MRC, LLC in whole or in
part. Such an assignment does not entitle the assignee to participate in the
management or affairs of the Company or to become a Member. An assignee of a
Transferable Membership Interest may be admitted as a substitute Member. An
assignee of a Restricted Membership Interest may become a substitute Member
with the consent of not less than a majority of the non-transferring
Member-Managers. A Restricted Membership Interest is a Class A or Class B
Membership Interest which represents at least 21% of the membership interests
of such class. A Transferable Membership Interest is a membership interest
which is not a Restricted Membership Interest. See "COMPARISON OF MRC CAPITAL
STOCK AND MRC, LLC CLASS A MEMBERSHIP INTERESTS -- Nature of Equity Interests
- -- MRC, LLC -- Disposition of Membership Interests".
Meetings.
There will be no regularly scheduled meetings of the Members of MRC,
LLC. Meetings of all Members or of a class or classes of Members may be called
by the Managing Board, the Executive Committee or by the Chairman of the
Managing Board, and must be called upon the written request to the Managing
Board of Members holding in the aggregate at least ten percent (10%) of the
Total Percentage Interests of MRC, LLC or of the applicable class or classes.
See "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING -- Meetings of
Shareholders and Members -- MRC, LLC".
Federal Income Tax Treatment.
It is intended that MRC, LLC will be classified as a partnership for
federal income tax purposes. See "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
- -- Taxation of MRC, LLC" and "-- Partnership Classification Standards".
9
<PAGE>
Dissolution.
MRC, LLC will dissolve and its affairs will be wound up on the first
to occur of the following events: (a) December 31, 2025; (b) the entry of a
decree of judicial dissolution, as provided under Delaware law; (c) by the
consent of Members holding at least 75% of the Total Percentage Interests of
MRC, LLC as a whole; (d) upon the death, retirement, resignation, expulsion,
Bankruptcy, or dissolution of a Member-Manager or the occurrence of any other
event that terminates the continued membership of a Member-Manager in MRC,
LLC, unless, in the case of disassociation of membership described in clause
(d) above, remaining Members representing either a majority of the Total
Percentage Interests of the Company (provided such majority represents a
majority of the profit interests of the Company, or, alternatively, a majority
of the Percentage Interests of each class or series, consent to the
continuation of the business of MRC, LLC within 90 days after the
disassociation. See "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING --
Dissolution -- MRC, LLC".
Summary Financial Data
Pro Forma Financial Information
Pursuant to the Restructuring Agreement, assuming the restructuring
occurred for balance sheet purposes on June 30, 1996, the assets and
liabilities of MRC have been transferred to MRC, LLC at the amounts at which
they were stated in the financial statements of MRC (the "predecessor
company").
The effect of the Restructuring on net investment income assuming the
transaction occurred on January 1, 1995 is disclosed in Note 3.
The pro forma data do not purport to be indicative of the results
which would actually have been reported if the transaction had occurred on
such dates or which may be reported in the future. The pro forma data should
be read in conjunction with the historical financial statements of
Metropolitan Realty Corporation and related notes to such financial
statements.
An audited balance sheet of MRC, LLC has not been provided because it
does not have any assets or operations, and will not have until after the
Restructuring is consummated.
10
<PAGE>
<TABLE>
<CAPTION>
Metropolitan Realty Company, L.L.C.
Summary Pro Forma Condensed Balance Sheet
at June 30, 1996
Historical Pro Forma
---------- ---------
<S> <C> <C>
Cash and cash equivalents ........................................ $ 1,781,496 $ 731,605
Marketable securities ............................................ 14,873,710 14,873,710
Mortgage notes receivable, net of allowance ...................... 25,466,575 25,466,575
Other assets ..................................................... 678,889 678,889
------------ ------------
Total assets ..................................................... $ 42,800,670 $ 41,750,779
============ ============
Total liabilities ................................................ $ 437,611 $ 437,611
------------ ------------
Shareholders' equity:
Common stock ..................................................... 45,322 --
Additional paid-in capital ....................................... 43,355,529 --
Unrealized holding losses on
securities available for sale ................................... (97,735) --
Distributions in excess of
net investment income ........................................... (940,057) --
Total shareholders' equity ....................................... 42,363,059 --
------------
Class A Members' equity(1) ....................................... -- 41,313,168
Class B Members' equity(2) ....................................... -- --
Total liabilities and shareholders'/Members' equity(3) ........... $ 42,800,670 $ 41,750,779
============ ============
<FN>
- ---------
(1) Pursuant to the Restructuring Agreement, on the Effective Date, the
assets of MRC will be transferred to MRC, LLC in exchange for Class A
Membership Interests of MRC, LLC (the "Class A Membership Interests").
MRC, LLC will assume all of the liabilities of MRC. MRC will then be
dissolved and the Class A Membership Interests in MRC, LLC will be
distributed to certain of MRC's shareholders in liquidation. Holders
of fewer than 50,000 shares of MRC as of October 7, 1996 (assumed to
represent 116,267 shares in the aggregate) will receive, in lieu of
the distribution of Class A Membership Interests in MRC, LLC, a cash
payment equal to the book value of their shares as of September 30,
1995 ($9.03 per share, or $1,049,891 in the aggregate). See "THE
RESTRUCTURING -- Form of the Restructuring" and "-- Appraisal".
(2) MRC, LLC will simultaneously offer a minimum of 50 Units ($25,000,000)
and a maximum of 100 Units ($50,000,000) in Class B membership
interests (the "Class B Membership Interests") in a separate offering
to create a new investment pool. No proceeds have been included
related to the proposed offering of Class B Membership Interests.
(3) Using the historical yields from MRC's cash equivalents of 6.47% and
6.48% for the six months ended June 30, 1996 and the year ended
December 31, 1995, respectively, the use of cash equivalents to
acquire minority shares would have reduced net investment income from
$1,673,696 to $1,639,732 for the six months ended June 30, 1996
and from $1,990,203 to $1,922,170 for the year ended December 31,
1995. This transaction would not change net investment income per
share of $.37 for the six months ended June 30, 1996 and $.44 for
the year ended December 31, 1995.
</TABLE>
11
<PAGE>
Summary Selected Financial Data of
Metropolitan Realty Corporation
The following data, except for the data provided as of and for the
periods ended June 30, 1996 and 1995, have been derived from financial
statements that have been audited by Coopers & Lybrand L.L.P., independent
accountants. The data provided as of and for the six months ended June 30,
1996 and 1995 are unaudited, but in the opinion of management contain all
adjustments which are necessary for a fair presentation of the results of such
periods. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
financial statements and notes thereto. All data is stated in thousands except
for per share data.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31
---------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Total Income ............. $ 1,912 $ 1,877 $ 3,764 $ 3,858 $ 3,716 $ 3,829 $ 4,135
Net Investment Income .... 1,674 1,499 1,990(1) 2,588 2,701 2,113 1,935
Net Investment Income
per share ............... .37 .33 .44(1) .57 .60 .47 .43
Balance Sheet Data:
Cash and Cash
Equivalents ............. 1,781 4,658 2,466 3,529 2,337 1,612 3,270
Total Assets ............. 42,801 42,053 41,761 41,025 41,626 41,235 42,189
Stockholders' Equity ..... 42,363 41,453 41,333 40,479 41,104 40,851 41,910
Other:
Net cash provided by
operating activities .... 1,612 1,331 2,555 2,957 2,845 3,052 3,404
Cash Dividends(2) ........ 499 906 1,541 2,855 2,447 3,173 3,490
Cash Dividends per
share(2) ................ .11 .20 .34 .63 .54 .70 .77
Book Value per share ..... 9.35 9.15 9.12 8.93 9.07 9.01 9.25
<FN>
(1) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" related to an increase in the allowance for
loan losses in the third quarter of 1995.
(2) All dividends were ordinary income; no dividends constituted a
return of capital. No dividends were declared for the quarter ended
June 30, 1996 in anticipation of the consummation of the Restructuring.
</TABLE>
12
<PAGE>
RISK FACTORS
The Restructuring and investment in the Class A Membership Interests
are subject to certain risks, including among other things, failure to
consummate the Restructuring, the nature of the economy in southeastern
Michigan, certain real estate investment risks, potential conflicts of
interest of the Members and Managing Board Members of MRC, LLC, and certain
tax risks, including the possibility that MRC, LLC might not be able to
qualify as a partnership. See "RISK FACTORS", "THE RESTRUCTURING AGREEMENT --
Conditions to the Restructuring", "-- Termination" and "MATERIAL FEDERAL
INCOME TAXATION CONSIDERATIONS".
Conditions to the Restructuring
Each of MRC's and MRC, LLC's obligation to effect the Restructuring is
subject to the following conditions, among others:
(a) The Restructuring Agreement shall have been approved and adopted
by the affirmative vote of the shareholders of MRC and the members of MRC, LLC
by the requisite vote in accordance with applicable law;
(b) No statute, rule, regulation, executive order, decree, order or
injunction shall have been enacted, entered, promulgated or enforced by any
court or governmental authority which prohibits or materially and adversely
restricts the consummation of the Restructuring; and
(c) The Registration Statement on Form S-4 of which this Proxy
Statement/Prospectus forms a part and the Registration Statement on Form S-11
with respect to the Class B Membership Interests shall have become effective
under the Securities Act and no stop order suspending the effectiveness of
such Form S-4 and Form S-11 shall have been issued and no proceeding for that
purpose shall have been undertaken or threatened by the SEC.
In the event any of this obligations are not met, there may be a
failure to consummate the Restructuring.
Termination
The Restructuring Agreement may be terminated at any time prior to the
Effective Date of the Restructuring, whether before or after approval of the
matters presented in connection with the Restructuring by the consent of MRC
and MRC, LLC, or by either MRC or MRC, LLC, if any court of competent
jurisdiction or other governmental body in the United States shall have issued
an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Restructuring and such
order, judgment or decree shall have become final and nonappealable. In the
event of the termination of the Restructuring Agreement and the Restructuring,
the Restructuring Agreement shall become void and there shall be no liability
thereunder on the part of either party.
13
<PAGE>
Material Federal Income Tax Consequences
Provided certain conditions are met, no gain or loss will be
recognized by MRC upon the contribution of its assets to MRC, LLC in exchange
for Class A Membership Interests. All amounts received by MRC shareholders in
a distribution in complete liquidation will be treated as full payment in
exchange for their stock pursuant to Section 331 of the Code. Gain or loss
will be recognized based on the difference between the amount of the
distribution and the shareholder's tax basis in its MRC stock. See "MATERIAL
FEDERAL INCOME TAX CONSIDERATIONS -- Federal Tax Consequences of the
Restructuring".
As provided in the opinion of Coopers & Lybrand L.L.P., MRC, LLC
will be classified as a partnership for federal income tax purposes, and as
such it generally will be treated as a "pass-through" entity that is not
subject to federal income tax. Items of income, deduction, gain, loss or
credit generally will be allocated proportionately (based on class of
membership interests) to MRC, LLC's Members, which will be treated as partners
for tax purposes. The Members may be subject to tax on allocated items,
without regard to whether they receive a distribution from MRC, LLC. See
"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of MRC, LLC".
Considerations for Pension Fund Investors
A fiduciary of a pension, profit-sharing or other employee benefit
plan subject to ERISA or of a Michigan public employee retirement system
should consider the fiduciary standards under applicable law in the context of
the plan's or system's particular circumstances before authorizing or
continuing an investment of a portion of such plan's or system's assets in the
Class A Membership Interests. Such fiduciary should consider, among other
factors, whether the investment satisfies the applicable prudence and
diversification requirements. Further, an investment by a Michigan public
employee retirement system's assets in the Class A Membership Interests may be
subject to limitations based upon a percentage of such system's assets. See
"CONSIDERATIONS FOR PENSION FUND INVESTORS -- Plans Subject to the Employee
Retirement Income Security Act of 1974" and "Michigan Public Employee
Retirement Systems".
Lack of Market; Substantial Transfer Restrictions
The Class A Membership Interests will not be listed on any securities
exchange, and MRC, LLC cannot predict whether any market will develop. In
addition, the transfer of interests is subject to certain limitations.
Although MRC, LLC will attempt to match unsolicited requests to sell the
interests in the future, such transfers are not expected to be frequent.
Consequently, holders of Class A Membership Interests may not be able to
liquidate their investments in the event of emergency or for any other reason.
In addition, the interests may not be readily accepted by lenders as
collateral for a loan.
Southeast Michigan Economy
MRC, LLC intends to make where possible the majority of its Real
Estate Investments in Detroit, with the balance being in the eight county
metropolitan region constituting Southeast Michigan. Historically, the
Southeast Michigan area has been subject to cyclical economic change tied to
the health of the automotive manufacturing industry. MRC, LLC has no reason to
believe that this interrelationship will
14
<PAGE>
change; and cycles in the local economy could impact both the ability of MRC,
LLC to make Real Estate Investments and the yields achievable on them. To the
extent MRC, LLC's Real Estate Investments are concentrated in one geographic
area and an overall decline occurs in such area, including a decline in
property values, the rates of the delinquencies, foreclosures and losses could
be higher than those experienced in less concentrated portfolios.
Real Estate Investment Risks
The Real Estate Investments which MRC, LLC intends to make will be
subject to various risks. Real Estate Investments tend to be long-term and
illiquid. Consequently, MRC, LLC will have minimal ability to vary its
portfolio in response to changing economic, financial and investment
conditions. Real estate values are affected by various factors, including (i)
changes in tax laws, (ii) operating and construction costs, (iii) the location
and the attractiveness of the properties, (iv) changes in interest rates or
the availability of long-term mortgage funds, (v) the ability of the owner to
provide adequate maintenance and insurance of its properties, (vi) adverse
changes in general economic conditions resulting in an inability to maintain
occupancies or rent levels, (vii) over-building, (viii) increases in operating
costs, and (ix) changes in zoning laws or other governmental regulations. In
addition, owners, mortgagees and operators of real estate may have potential
liabilities under environmental and other such laws.
The above factors may also adversely affect a borrower's or a lessee's
ability to meet its obligations to MRC, LLC. In the event of a default by a
borrower or lessee, MRC, LLC may experience delays in enforcing its rights as
mortgagee or lessor and may incur substantial costs associated with protecting
its investment. MRC, LLC may be required to acquire title or to reacquire
possession of a property and thereafter to make substantial improvements or
repairs in order to maximize the property's investment potential. MRC, LLC may
be required to borrow funds to pay for such improvements or repairs. In
addition, in the event of a bankruptcy or similar proceeding against a
borrower or lessee, MRC, LLC may not be able to realize on its investment for
an extended period of time. Moreover, in the event of the commencement of such
a proceeding against a borrower, a court might conclude that certain equity
enhancements such as contingent interest should not be treated as a debt of
such borrower. In such circumstances, MRC, LLC may not ultimately be able to
recover its investment.
For further information regarding the risks involved in making Real
Estate Investments, see "INVESTMENT OBJECTIVES AND POLICIES".
Potential Conflicts of Interest
Neither the Operating Agreement nor the Certificate of Formation of
MRC, LLC prohibit the Members or Managing Board Members of MRC, LLC from
engaging in business activities of the type conducted by MRC, LLC and
accordingly, certain conflicts of interest may arise in the event that such
persons engage in these activities. The Member or Managing Board Members of
MRC, LLC may be subject to certain conflicts of interest arising out of their
relationship with MRC, LLC and with other entities. MRC, LLC's Operating
Agreement does provide, however, that if a Managing Board Member becomes aware
of the fact that he or she individually, the Member-Manager which appointed
such Managing Board Member or an Affiliate has a direct or indirect interest
in a Real Estate Investment which is under consideration by
15
<PAGE>
MRC, LLC, the Managing Board Member shall disclose such interest to the
Managing Board or any committee of the Managing Board reviewing such Real
Estate Investment, promptly, but in all events prior to a vote by the Managing
Board or committee with respect to the transaction. All transactions which
involve a potential conflict of interest must be approved by a majority of the
members of the Managing Board or committee thereof who are Uninterested
Representatives.
All acquisitions and dispositions of Real Estate Investments by MRC,
LLC are subject to the approval of a majority of the Unaffiliated
Representatives voting thereon. However, the Managing Board may delegate the
duty of management of the assets and the administration of MRC, LLC's
day-to-day operations to an advisory company. No sale of property to the
advisory company, a director, or an affiliate thereof is permitted under MRC,
LLC's Operating Agreement. See "INVESTMENT OBJECTIVES AND POLICIES --
Arrangement with Advisory Company".
Competition
MRC, LLC will be competing for acceptable Real Estate Investments with
other financial institutions such as banks, insurance companies, savings and
loan associations, mortgage bankers, pension funds and other real estate
investment vehicles, which may have investment objectives similar to those of
MRC, LLC. Many of these competitors will have greater resources than MRC, LLC
and some may have greater experience than MRC, LLC or the advisory company, if
any. It is MRC, LLC's intention, however, to participate with financial
institutions when such opportunities arise in making the Real Estate
Investments. See "INVESTMENT OBJECTIVES AND POLICIES".
Risk of Borrowing
MRC, LLC may borrow for various purposes. The effect of any such
borrowing could be to increase the risk of loss to and diminish the net income
of MRC, LLC. See "INVESTMENT OBJECTIVES AND POLICIES -- Borrowing Policies".
Selection of an Advisory Company
The Operating Agreement authorizes the Managing Board to select an
advisory company and to delegate the duty of management of the assets and the
administration of MRC, LLC's day-to-day operations to such advisory company.
No advisory company has been selected by MRC, LLC and MRC, LLC does not have
any present plans to select one. Because no advisory company has been selected
by MRC, LLC, the Class A Members will be unable to evaluate any specific
advisor, which if later retained, will play an important part in selecting the
Real Estate Investments. See "INVESTMENT OBJECTIVES AND POLICIES --
Arrangement with Advisory Company".
Uncertainties Concerning Control
MRC's Board of Directors is selected by MRC's Majority Shareholders
who, following the Restructuring, will hold the Class A Membership Interests.
After the Restructuring, MRC,LLC's operations will be controlled by the
Managing Board Members. Managing Board Members are appointed by Member-
16
<PAGE>
Managers. Member-Managers are those holders of Class A and Class B Membership
Interests with a Total Percentage Interest at least equal to the Minimum
Percentage and (b) to the extent not previously taken into account, those
Class A Members (but excluding their assignees) which held sufficient shares
of MRC's common stock immediately prior to the initial Capital Contribution of
the Class A Members to elect at least one director at an annual meeting of the
shareholders of MRC, and in either case which have not declined in writing to
serve as Member-Managers. The identity of the purchasers of Class B Membership
Interests who qualify as Member-Managers and the number and identity of
Managing Board Members they select will not be known until completion of the
Offering. There is no assurance that the persons who control MRC will remain
in control of MRC, LLC following the Offering. See "MANAGEMENT AND OPERATIONS
AFTER THE RESTRUCTURING".
Limited Liability Company as an Untested Entity
A limited liability company is a new form of business organization
that is intended to combine the benefits of corporate flexibility and limited
liability with the advantages of partnership taxation. Because of the relative
absence of developed law or judicial decisions regarding the operation and
management of limited liability companies, there is no assurance all the
intended benefits will be achieved.
Rights of creditors to reach Class A Assets
The existing assets of MRC will be held as a separate investment pool
identified as the "Class A Assets", and the net proceeds from the Offering
will be held as a separate investment pool identified as the "Class B Assets".
MRC, LLC's Operating Agreement provides that the liabilities associated with
or incurred in connection with one class of assets will be paid only from that
class of assets. However, under the Delaware Limited Liability Company Act,
all creditors of MRC, LLC, including creditors whose claims arose solely in
connection with one class of assets, can look to all the assets of MRC, LLC
for payment of their claims. Accordingly, there is no assurance that the Class
A Assets will not be used to pay creditors whose claims relate only to the
Class B Assets.
Adverse Consequences of Failure to Qualify as a Partnership
Prior to obtaining an opinion from Coopers & Lybrand L.L.P., MRC, LLC
filed a request on January 5, 1996 for a private letter ruling from the IRS
which recognizes that it is classified as a partnership for federal income tax
purposes. The request is still pending. Although MRC, LLC at this time
anticipates receiving a favorable ruling, the request involves issues of first
impression and no firm assurance can be given that the IRS will ultimately
decide to issue a ruling. Should the IRS ultimately decide not to issue a
ruling, MRC, LLC's classification for tax purposes will not be adversely
affected by this decision. However, if the IRS declines to rule, it could
also decide to challenge MRC, LLC's classification for tax purposes,
notwithstanding the opinion of Coopers & Lybrand L.L.P. If such challenge were
successful, then under certain conditions MRC, LLC could be subject to Federal
income tax (including applicable alternative minimum tax) on its taxable
income at corporate rates. See "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS --
Partnership Classification Standards".
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INTRODUCTION
This Proxy Statement/Prospectus has been prepared by the management of
Metropolitan Realty Corporation ("MRC") and is furnished to shareholders of
MRC in connection with the solicitation of proxies by the Board of Directors
for use at the Special Meeting of shareholders of MRC (the "Special Meeting")
to be held at ____________, on December 6, 1996, and at any adjournments
or postponements thereof.
At the MRC Special Meeting, shareholders of MRC will be asked to
approve and adopt the Agreement and Plan of Dissolution and Restructuring,
dated as of September 24, 1996 (the "Restructuring Agreement"), between
MRC and Metropolitan Realty Company, L.L.C. ("MRC, LLC") attached as Appendix
B and as more fully described herein. The Restructuring Agreement provides,
among other things, that MRC will transfer all of its assets to, and the
liabilities of MRC will be assumed by, MRC, LLC in exchange for Class A
limited liability company membership interests (the "Class A Membership
Interests") of MRC, LLC, that MRC will then be dissolved, and that the Class A
Membership Interests will then be distributed to MRC's shareholders who own
50,000 shares or more of MRC Common Stock beneficially or of record on the
Record Date (the "Majority Shareholders") in liquidation (the
"Restructuring"). Holders, beneficially or of record, of fewer than 50,000
shares of MRC Common Stock (the "Minority Shareholders") as of October 7, 1996,
will receive a cash payment equal to the book value of their shares as of
September 30, 1995 ($9.03 per share) in lieu of the distribution of Class A
Membership Interests in MRC, LLC. These cash payments will be made exclusively
from the Class A Assets.
Upon the approval and adoption of the Restructuring Agreement, MRC,
LLC intends to offer Units of its Class B membership interests (the "Class B
Membership Interests") in a separate offering to create a new investment pool
(the "Offering").
THE COMPANIES
Metropolitan Realty Corporation
MRC operates as a qualified as a real estate investment trust ("REIT")
under the Code. MRC was incorporated under Michigan law on November 13, 1986.
In November 1988, MRC issued 4,512,169 shares of common stock in an initial
public offering and received net proceeds of $43,200,851. The net proceeds of
the offering have been invested in commercial real estate mortgages in
southeastern Michigan and other investments. As of June 30, 1996, MRC has
approximately $42,801,000 in total assets, of which approximately
$25,467,000 is invested in mortgage loans and approximately $16,655,000 is
invested in cash and cash equivalents and marketable securities. At December
31, 1995, MRC's total mortgage loan portfolio was invested 74% in projects
located in the City of Detroit, 11% in projects located in the County of
Macomb, and 15% in projects located in the County of Wayne outside of the City
of Detroit. The mortgage loan investments were chosen on the basis of economic
merit, including availability, risk and potential return. The maximum amount
of any loan is $5,000,000, for a loan term of up to ten years. MRC's
investment guidelines provide for immediate and forward commitments.
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MRC's goals are to provide a competitive economic return for
shareholders and current income and cash flow.
MRC's only class of stock outstanding is its common stock, $.01 par
value, of which MRC is authorized to issue 25,000,000 shares (the "Common
Stock"). MRC has approximately fifty (50) shareholders of record and believes
that there are approximately 400 beneficial owners of its Common Stock. As of
June 30, 1996, 4,532,169 shares of Common Stock were issued and outstanding.
MRC has a second class of stock, Preferred Stock, $.01 par value, of which MRC
is authorized to issue 5,000,000 shares.
The principal executive offices of MRC are located at 535 Griswold,
Suite 748, Detroit, Michigan 48226 and its telephone number is (313) 961-5552.
Material Assets of Metropolitan Realty Corporation
As noted above, as of June 30, 1996, MRC has approximately
$42,801,000 in total assets, of which approximately $25,467,000 is invested
in mortgage loans and approximately $16,655,000 is invested in cash and cash
equivalents and marketable securities. Of such assets, only one, a 9.09%
mortgage note receivable with an outstanding principal balance of $4,193,405
as of June 30, 1996 (net of loan origination fees of $25,382), constitutes
10% of MRC's total assets. Monthly installments of principal and interest of
$35,494 are due through December, 2000 on this mortgage note.
The mortgage note is secured by a mortgage on a parking deck owned by
the borrower under the mortgage note which is located at Abbott and Third
Streets in Detroit, Michigan. The parking deck consists of a 595 space deck
and 126 spaces of surface parking. The borrower has advised MRC that the
occupancy rate of the parking garage was 100% in 1992 and 1993, and that
beginning in 1994, the parking deck has been 80% leased, with the 20% balance
of the space filled by public parking. City and county taxes on the parking
deck are approximately $98,500 annually.
Metropolitan Realty Company, L.L.C.
In June 1995, the Board of Directors of MRC determined that it would
be in the best interests of MRC and its shareholders to restructure MRC by
transferring the assets of MRC to a limited liability company in exchange for
membership interests in the limited liability company. It was determined that
the limited liability company would be structured to meet the requirements for
being taxed for federal income tax purposes as a partnership and the
distribution of the membership interests to the MRC shareholders would be
pursuant to a registered offering.
MRC, LLC was recently organized as a Delaware limited liability
company on October 23, 1995 and has never conducted any business. MRC, LLC was
formed for the purpose of implementing the Restructuring. It has no assets.
Its principal executive offices are located at 535 Griswold, Suite 748,
Detroit, Michigan 48226 and its telephone number is (313) 961-5552. Messrs.
Wayne S. Doran and Robert H. Naftaly, members of the Board of Directors of
MRC, are the initial members of MRC, LLC and are expected to continue in such
capacity until consummation of the Restructuring.
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MRC, LLC's purpose will be to engage profitably in any activity within
the purposes for which limited liability companies may be organized, to
produce the highest rate of return possible to its Members, and strengthen the
economy in southeastern Michigan by enabling developers, business owners and
other qualified borrowers to create jobs, including union jobs, to the extent
permitted by law, by financing construction or rehabilitation projects. MRC,
LLC was formed for a definite term (December 31, 2025).
Upon consummation of the Restructuring, all of the assets of MRC shall
be transferred to, and the liabilities of MRC will be assumed by, MRC, LLC in
exchange for the Class A Membership Interests of MRC, LLC, and MRC shall be
dissolved, de-listed from the American Stock Exchange and the Class A
Membership Interests shall be distributed to MRC's Majority Shareholders in
liquidation. MRC's Minority Shareholders as of October 7, 1996, will receive a
cash payment equal to the book value of their shares as of September 30, 1995
($9.03 per share) in lieu of the distribution of Class A Membership Interests.
The Operating Agreement of MRC, LLC, the Restructuring Agreement and other
material aspects relating to the Restructuring and the Offering have all been
approved by the Board of Directors of MRC.
THE SPECIAL MEETING
Matters to be Considered at Meeting
At the Special Meeting, the shareholders will be asked to consider and
vote upon a proposal (the "Restructuring Proposal") to approve and adopt the
Restructuring Agreement and the transactions contemplated thereby, including:
(a) the transfer of the assets of MRC to, and the assumption of the
liabilities of MRC by, MRC, LLC in exchange for its Class A Membership
Interests; and
(b) the dissolution of MRC, and the distribution of the Class A
Membership Interests to MRC's shareholders who own 50,000 shares or
more of Common Stock beneficially or of record on the Record Date (the
"Majority Shareholders") in liquidation; and
(c) the cash payment of $9.03 per share to the holders, beneficially
or of record, of fewer than 50,000 shares of MRC Common Stock (the
"Minority Shareholders") as of October 7, 1996, in lieu of the
distribution of the Class A Membership Interests, without any interest
thereon.
Items (a), (b) and (c) will be considered as one proposal.
In addition, holders of MRC Common Stock may also consider and vote
upon such other matters as may properly be brought before the MRC Special
Meeting.
The MRC Board has unanimously approved the Restructuring Agreement and
recommends that MRC shareholders vote FOR the approval and adoption of the
Restructuring Agreement.
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Votes Required
The Restructuring Agreement will require the affirmative vote of a
majority of the outstanding shares of MRC Common Stock, with each share
entitled to one vote. Approval of the Restructuring Agreement by the requisite
vote of MRC shareholders is a condition to, and is required for, the
consummation of the Restructuring.
At the Record Date, MRC's directors and executive officers may be
deemed to be beneficial owners of less than 1% of the outstanding shares of
MRC Common Stock.To the Company's knowledge and belief, four entities are each
the beneficial owners of more than 5% of MRC's Common Stock as of the Record
Date. These beneficial owners own 2,814,470 shares of MRC Common Stock, or
approximately 62% of its outstanding shares, which exceeds the requisite
percentage of MRC shares required to approve the Restructuring Agreement.
Directors, executive officers and directors who are nominees of such entities
have indicated that they and such entities holding approximately 45.3% of
the outstanding shares of MRC intend to vote such shares of MRC
Common Stock for approval and adoption of the Restructuring Agreement.
Voting of Proxies
Shares of MRC Common Stock represented by properly executed proxies
received at or prior to the MRC Special Meeting will be voted at the MRC
Special Meeting in the manner specified by the holders of such shares.
Properly executed proxies which do not contain voting instructions will be
voted FOR approval and adoption of the Restructuring Agreement.
If any other matters are properly presented at the MRC Special Meeting
for consideration, including, among other things, consideration of a motion to
adjourn the MRC Special Meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the
persons named in the relevant form of proxy enclosed herewith and acting
thereunder will have discretion to vote on such matters in accordance with
their best judgment. MRC does not have any knowledge of any matters to be
presented at the MRC Special Meeting, other than those matters referred to and
described herein.
Revocability of Proxies
The grant of a proxy on the enclosed MRC form of proxy does not
preclude a shareholder from voting in person or otherwise revoking a proxy.
Attendance at the MRC Special Meeting will not in and of itself constitute
revocation of a proxy. A shareholder may revoke a proxy at any time prior to
its exercise by filing with Nancy A. Mattar, Executive Vice President of
Metropolitan Realty Corporation, 535 Griswold, Suite 748, Detroit, Michigan
48226 a duly executed revocation or a proxy bearing a later date or by voting
in person at the MRC Special Meeting.
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Record Date; Shares Entitled to Vote; Quorum
Only holders of record of MRC Common Stock at the close of business on
October 7, 1996 (the "Record Date") will be entitled to receive notice of
and to vote at the MRC Special Meeting. At June 30, 1996, MRC had outstanding
4,532,169 shares of MRC Common Stock.
Shares representing a majority of the aggregate number of the
outstanding shares of MRC Common Stock must be represented in person or by
proxy at the MRC Special Meeting in order for a quorum to be present with
respect to the MRC Common Stock for purposes of approving the Restructuring
Proposal.
No Appraisal Rights
No shareholder of MRC will have any appraisal rights under the
Michigan Business Corporation Act, as amended (the "MBCA"), in connection
with, or as a result of, the matters to be acted upon at the MRC Special
Meeting.
Solicitation of Proxies
MRC will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by mail, the directors, officers and
employees of MRC may solicit proxies from shareholders by telephone or
telegram or in person. Such persons will not be additionally compensated, but
will be reimbursed for reasonable out-of-pocket expenses incurred in
connection with such solicitation. Arrangements will also be made with
brokerage firms, nominees, fiduciaries and other custodians, for the
forwarding of solicitation materials to the beneficial owners of shares held
of record by such persons, and MRC will reimburse such persons for their
reasonable out-of-pocket expenses in connection therewith.
SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS
SPECIAL FACTORS CONCERNING THE RESTRUCTURING
Form of the Restructuring
Pursuant to the Restructuring Agreement, on the Effective Date (as
defined below under "-- Effective Date"),
(a) the assets of MRC will be transferred to, and the liabilities of
MRC will be assumed by, MRC, LLC in exchange for its Class A
Membership Interests; and
(b) the Class A Membership Interests will be distributed to MRC's
Majority Shareholders, in liquidation; and
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(c) there will be a cash payment of $9.03 per share to MRC's Minority
Shareholders in lieu of the distribution of the Class A Membership
Interests, without any interest thereon.
Background of and Reasons for the Restructuring
Valuation of Common Stock.
MRC's Common Stock was sold in its initial public offering in
November, 1988 at a price of $10 per share. Since that time, the shares have
traded at a price significantly below book value. The following table sets
forth the high and low sales prices on the American Stock Exchange and book
value per share during each quarter of the years ended December 31, 1995, 1994
and 1993 and during the first two quarters of 1996:
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------------------- ------------------------ ----------------------- -----------------------
Book Book Book Book
High Low Value High Low Value High Low Value High Low Value
---- --- ----- ---- --- ----- ---- --- ----- ---- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 9 8 3/8 9.27 6 1/8 5 5/8 9.03 6 3/8 5 1/8 9.01 7 5 9.22
2nd Quarter 8 3/4 8 1/8 9.35 7 1/8 5 3/4 9.15 5 7/8 5 5/8 9.03 6 3/8 5 5/8 8.99
3rd Quarter N/A N/A N/A 7 1/4 6 3/4 9.03 6 5 3/4 9.14 6 3/8 5 3/4 9.12
4th Quarter N/A N/A N/A 8 7/8 7 1/8 9.12 5 3/4 5 5/8 8.93 5 3/4 4 7/8 9.07
</TABLE>
As may be seen from the foregoing table, the book value of the Common
Stock has been significantly higher than high sales price for the Common Stock
for each period. The high sales price ranged from approximately 63% to
approximately 76% of book value in 1993; from approximately 64% to
approximately 71% of book value in 1994; and from approximately 68% to
approximately 97% of book value in 1995 and was approximately 94% of book
value in the second quarter of 1996. The Board of Directors believes that the
Common Stock is substantially undervalued by the market because it is traded
thinly and only by the minority shareholders who were required to make up the
500 beneficial shareholders necessary to meet requirements for listing on
AMEX. The shares were required to be listed on AMEX in order to be an eligible
investment for certain private pension funds, representing 69.2% of the
outstanding shares of MRC. Generally accepted accounting principles require
both public and private pension funds to value stock which is listed on an
exchange at its fair market value, which, in the case of stock listed on an
exchange, is the price at which it trades. As a result, shareholders of MRC
which are public or private pension funds have had to recognize significant
losses over the original purchase price of the Common Stock.
Direction of MRC.
The Board of Directors was approached in 1994 by a number of
shareholders of MRC and asked to find a solution to this valuation issue. At
the same time, MRC had reached a turning point. Over 62% of MRC's assets had
been invested in mortgage loans, and it was not practical for MRC to engage in
significant
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marketing efforts with respect to its assets not invested in mortgage loans.
As a result, the Board was considering a new offering in connection with its
analysis of what direction MRC should be taking.
Appointment of Board Committee and Proposed Structures Considered.
The Board of Directors appointed a committee in 1994 to consider
possible solutions to the valuation issue and to recommend whether or not MRC
should raise additional capital. The committee consisted of the following
members of the Board of Directors: David M. Diegel, who was nominated to the
Board of Directors by the Macomb County (Michigan) Employees Retirement
System, a public pension fund; Russell P. Flynn, who was nominated to the
Board of Directors by the Chrysler Corporation Master Retirement Trust, a
private pension fund; Joel Schwartz, who was nominated to the Board of
Directors by Ford Motor Company, a corporate shareholder; R. Douglas Trezise,
who was nominated to the Board of Directors by the State of Michigan, Public
School Employees Retirement System; Timothy L. Nichols, an at-large director
who is Secretary/Treasurer of the Michigan State Building and Construction
Trades Council; Samuel H. Thomas, Jr., an at-large director who is also Vice
President of Phoenix Management, and F. Thomas Lewand, an at-large director
who is also a member of Bodman, Longley & Dahling LLP, MRC's legal counsel.
The committee met numerous times in 1994 and 1995 with Bodman, Longley &
Dahling LLP and MRC's certified public accountants, Coopers & Lybrand L.L.P.,
as well as with a financial advisor specifically engaged to assist the Board
of Directors in evaluating its alternatives, Tucker Anthony Incorporated. The
committee was faced with a difficult challenge because of the extensive and
complex legal restrictions and requirements relating to MRC, as a qualified
real estate investment trust, and to its shareholders, a significant portion
of which are public and private pension funds, with differing legal
restrictions on their investments.
A number of proposed structures were considered and rejected by the
committee. The first proposal considered was an offering of additional shares
of Common Stock. This proposal was rejected by the committee because the
Common Stock could not be offered at a price in excess of its fair market
value, which, as noted above, is substantially less than its book value, and
would dilute the value of the outstanding shares of MRC's Common Stock. Unless
the Common Stock was diluted to the point that its book value was equal to its
fair market value, the market value of the stock would remain undervalued when
compared to its book value.
The next proposal considered was the offering of trust certificates
(asset-backed securities). Under this proposal, MRC would offer certificates
of beneficial interest in a grantor trust, which would hold the assets of the
new mortgage pool to be created with the proceeds of the offering. The
existing shareholders of MRC would continue to own the existing assets of MRC
as they do now. The advantages of this proposal were that interests of
existing shareholders would not be diluted as in the case of an offering of
additional shares of common stock and a stock exchange listing would not be
required. However, this proposal presented a number of significant
disadvantages, including the requirement that all funds must be invested in
mortgage loans within three months, which the committee believed to be
unrealistic. In addition, as there would be no change affecting MRC's Common
Stock, the Committee's opinion was that the market value of MRC's Common Stock
would remain undervalued when compared to its book value.
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<PAGE>
The committee also considered an offering of preferred stock. Under
this proposal, MRC would offer shares of preferred stock, which would be tied
to a segregated pool of mortgages to be created with the proceeds of the
offering. The preferred shareholders would have a dividend and liquidation
preference with respect to the segregated pool. The advantage of this proposal
was that interests of common shareholders would not be diluted. However, in
the view of the committee, as a large number of investors was not
contemplated, it was unlikely for there to be a large public trading volume
for the preferred stock. As a result, the market value of preferred stock
would likely be undervalued when compared to its book value, as with the
Common Stock, and so this proposal was also rejected by the committee.
The committee also considered an offering of Class B common stock.
While this proposal presented the advantage that interests of existing
shareholders would not be diluted, as in the case of an offering of additional
shares of Common Stock, as again a large number of investors was not
contemplated, and it was unlikely for there to be a large public trading
volume for the Class B Common Stock. As a result, the committee again felt
that the market value of Class B common stock would likely be undervalued when
compared to its book value, as with the Common Stock. In addition, the
issuance of Class B common stock, in contrast to the issuance of Class B
Membership Interests as discussed in the following paragraph, would not solve
the problem that generally accepted accounting principles require both public
and private pension funds to value stock which is listed on an exchange at its
fair market value, which, in the case of stock listed on an exchange, is the
price at which it trades, which has resulted in the recognition by
shareholders of MRC which are public or private pension funds of significant
losses, and so this proposal was also rejected by the committee.
Restructuring Proposal.
The committee then developed the structure for the Restructuring
Proposal and the companion Offering. This was the only structure available, in
view of all the legal constraints, which the committee determined could meet
the dual objectives of permitting MRC's shareholders which are public and
private pension funds (all of whom MRC believes are Majority Shareholders; see
"--Majority Shareholders") to write up their investment to its estimated fair
value at the date of Restructuring, which is expected to equal book value, and
providing a means for a public offering without diluting existing
shareholders. The committee then gave consideration to the Minority
Shareholders, and determined to cash them out because otherwise they would not
benefit from the Restructuring to the degree that the Majority Shareholders
would benefit. Cashing out the Minority Shareholders at a price at least equal
to book value will enable the Minority Shareholders to receive significantly
more for their shares of Common Stock than they would be able to receive on
the open market. See "-- Background and Reasons for the Restructuring." The
committee also projected that the Restructuring Proposal and the Offering, if
implemented, would cause significant cost savings to be achieved in the
operation of the pool of assets generally representing the existing assets of
MRC (the "Class A Assets"). MRC had operating expenses for fiscal 1995
(exclusive of Restructuring expenses) of $528,958. The committee estimated
that for the five year period beginning with fiscal 1996 the average yearly
operating expenses following a successful Offering and the creation of the
second pool of assets generally representing the net proceeds from the
Offering (the "Class B Assets") would be approximately $695,000. However,
these expenses will be shared on an equitable basis by the two asset pools. As
a consequence, the committee estimates a cost savings to the pool of Class A
Assets of approximately $285,000 per year, as contrasted to
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<PAGE>
the costs of operating the pool of Class A Assets alone without a pool of
Class B Assets to share in such expenses.
The Restructuring Proposal, if implemented, would provide greater
organizational flexibility and would permit the development of an exit
strategy by providing a mechanism for Members to determine to receive
distributions of capital. The committee recommended proceeding with the
implementation of the Restructuring Proposal to the Board of Directors at its
meeting on June 8, 1995, and the committee was authorized by the Board to
obtain an appraisal of the MRC loan portfolio and have the necessary legal
documentation prepared for the Restructuring and the Offering, and directed to
present its final report and recommendation to the Board of Directors for its
final consideration and approval, which was received at the meeting of the
Board of Directors held on September 8, 1995.
Recommendation of the Board of Directors
The Restructuring was not structured so that the approval of at least
a majority of the Minority Shareholders was required, and no unaffiliated
representative was retained for the purposes of negotiating the terms of the
Restructuring. Nevertheless, the Board of Directors believes that the
Restructuring and the Offering are fair to, and in the best interests of, MRC
and its Majority Shareholders and Minority Shareholders, and will provide a
number of significant advantages, for the following reasons. Generally
accepted accounting principles require pension funds to carry securities which
are listed on a securities exchange to be carried at their market value,
which, in the case of MRC's Common Stock, has historically been significantly
lower the book value, as noted above. Of primary importance was that the Board
of Directors believes, based upon generally accepted accounting principles,
that the Restructuring will permit MRC's shareholders which are public and
private pension funds, representing 69.2% of the outstanding shares of Common
Stock, to write up their investment to its estimated fair value at the date of
Restructuring, which is expected to equal book value, and to thereafter carry
their investment at its fair value. While the Board of Directors believes that
this will be an advantage to MRC's shareholders which are public and private
pension funds because they will be able to reduce their funding costs to the
extent they are able to write up their investment, the Board of Directors does
not believe that any market will develop for the Class A Membership Interests.
The Class A Membership Interests will not be listed on any exchange. Although
MRC, LLC will attempt to match unsolicited requests to sell the interests in
the future, such transfers are not expected to be frequent. While there can be
no assurance that holders of Class A Membership Interests will readily be able
to liquidate their investment at any given time, the Class A Membership
Interests have been structured to self-liquidate over time through
distributions of principal returned with respect to Real Estate Investments.
See "COMPARISON OF MRC CAPITAL STOCK AND MRC, LLC CLASS A MEMBERSHIP INTERESTS
- -- Nature of Equity Interests -- MRC, LLC -- General."
Of equal importance was the fact that the Restructuring will also
result in the Minority Shareholders being paid substantially more for their
share of Common Stock than they could receive in the open market. See "--
Background and Reasons for the Restructuring." For this reason, the Board of
Directors believes that the Restructuring is fair to the Minority
Shareholders. Of lesser importance, but still a significant advantage, the
Restructuring will also enable MRC to de-list from AMEX and, in conjunction
with the Offering, will permit MRC to realize other significant cost savings
due to economies of scale. Finally, the Restructuring will also result in a
more flexible organizational structure, which could readily provide a vehicle
for raising
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<PAGE>
additional capital. The flexible organizational structure also permits each
separate investment pool to be structured to provide for the distribution or
reinvestment of income and capital. In reaching this determination, the MRC
Board has consulted with its legal counsel with respect to the legal duties of
the Board, regulatory matters, and the Restructuring Agreement and issues
related thereto; with its certified public accountants with respect to the
federal income tax treatment of MRC, LLC and the federal income tax
consequences of the transaction; and with its financial advisors, Tucker
Anthony Incorporated, with respect to the financial aspects and fairness of
the transaction, and considered a number of factors and proposals, as
discussed above.
For the reasons described above, the members of the MRC Board present
at the meeting held on September 8, 1995 (none of whom are employees of MRC)
unanimously approved the Restructuring Agreement and Offering and recommend
that MRC shareholders vote FOR the approval and adoption of the Restructuring
Agreement. No member of the MRC Board dissented to or abstained from voting on
the Restructuring.
Appraisal
General.
Cushman & Wakefield of Michigan, Inc. ("C&W"), subsidiary of Cushman &
Wakefield, Inc., which together with the affiliates, are nationally recognized
real estate appraisers, were engaged on behalf of the Board of Directors to
prepare a limited appraisal in a summary format ("Appraisal") of the market
value of each of the mortgage notes secured by mortgages which constitute
MRC's loan portfolio as of August 1, 1995 valuation date. A copy of the
Appraisal will be made available for inspection and copying at the offices of
MRC during its regular business hours by any interested shareholder or its
representative who has been so designated in writing. This Appraisal is as of
the date stated therein, August 1, 1995, qualified by certain assumptions,
limiting conditions, certifications, and definitions, which are set forth in
the Appraisal. A limited appraisal does not involve the typical scope of a
full self-contained appraisal report. The Appraisal should be read in its
entirety with respect to the assumptions made and other matters considered in
performing such appraisal.
C&W offers professional services in brokerage, property management,
development and valuation advisory services. Its areas of specialization
include the analysis and appraisal of commercial, industrial, special purpose
and investment type properties. The firm belongs to numerous professional
organizations and its clients include developers, corporate tenants,
institutional investors and individuals. The firm was selected on the basis of
the firm's qualifications, reputation, and familiarity with real property
located in the areas of the real estate securing the mortgage notes. C&W was
paid a fee of $60,000 for its appraisal. Other than the Appraisal of the
mortgage notes, there is no material relationship between MRC or its
affiliates and C&W or its affiliates which existed during the past two years
or is mutually understood to be contemplated.
Scope and Extent of Appraisal Process.
27
<PAGE>
The Appraisal satisfies the reporting requirements of USPAP (Standard
2). The appraisal was limited in the sense that the market value estimate was
for MRC's mortgage notes secured by mortgages only, and not the value of the
underlying real estate. An examination of the underlying real property assets
was performed to evaluate the mortgages. C&W first examined MRC's files
pertaining to the operating histories of each of the assets. It examined
historical operations, and, where appropriate, made adjustments to the
unaudited statements to reflect market conditions where appropriate. This
expense analysis adjustment was only effected in the case of properties that
were foreclosure candidates, as market level expense estimates are not
relevant when analyzing mortgage values. C&W further analyzed the lease
documents and compared the rental amounts against other data provided. It
performed quick on site inspections of each property, and briefly analyzed the
markets in which these properties operate in terms of supply and demand
characteristics, and long term stability. C&W developed stabilized pro-forma
income and expense statements for each property, with allowances for
management and reserves as necessary to derive net operating income figures
for each. These figures were then capitalized to yield potential market prices
for each asset. C&W did not analyze cost figures, land values, market rent
levels, or comparable sales. This potential market price figure was then used
in the valuation of the mortgages. The date of value was August 1, 1995. All
properties were inspected on or around this date. An appraisal is only an
estimate of value as of the date stated, subject to the assumption and
limiting conditions contained therein. Appraised value is not a guarantee of
actual or realizable value.
Assumptions and Limiting Conditions.
The Appraisal is subject to a number of assumptions and limiting
conditions, including the following. The Appraisal assumes responsible
ownership and competent management of the mortgaged property, and that there
are no hidden or unapparent conditions of the mortgaged property, subsoil or
structures. The Appraisal further assumes full compliance with all zoning and
environmental regulations and laws, except as otherwise stated. The physical
condition of the improvements considered by the appraisal is based upon visual
inspection, and C&W has assumed no responsibility for the soundness of
structural members nor for the condition of mechanical equipment, plumbing or
electrical components. The existence of potentially hazardous or toxic
materials which may have been used in the construction or maintenance or
operation of the improvements or which may be located at or about the mortgage
property was not considered. C&W is not qualified to detect such substances.
The data for C&W's analysis was provided by MRC, and C&W has assumed that the
data provided was accurate. Finally, C&W was instructed to complete its
analysis with no reliance on the personal guarantees that support many of the
mortgages held by MRC.
Market Value of Mortgage Notes.
Based upon its analysis, C&W formed an opinion of the market value of
each of the seventeen (17) mortgage notes secured by mortgages held by MRC,
subject to the assumptions, limiting conditions, certifications and
definitions contained in the appraisal, as of August 1, 1995 and which market
values total $23,300,000. See "-- Consideration for Shares to be Paid to
Minority Shareholders", below, for a discussion of how the amount of the
consideration to be paid to the Minority Shareholders was determined.
28
<PAGE>
MRC is not aware of any events or changed circumstances since August
1, 1995 that may positively affect the amount of the valuation as determined
by the appraisal, and consequently does not intend to have the appraisal
updated.
The methodology involved in valuing the mortgages was varied depending
on the status of each property. For this reason, the first step in the process
was an analysis of the properties themselves including determinations of the
stability of the markets in which the properties are located, the stability of
the tenants involved, the terms of leases in place, and finally, the long term
ability of the property to cover debt service requirements. The stability of
the asset, and its resulting debt service coverage ("DCR") and loan to value
("LTV") ratios were determined by an analysis of in-place incomes utilizing
direct capitalization. Based on these figures, C & W then determined if DCR
and LTV ratios, and hence the overall stability of the properties, were in
line and stable, or were outside of a comfortable range.
If the property's ratios were in line, and net operating income was
positive, then the mortgage was valued as follows. C & W compared the payments
specified by the existing mortgage and the resulting balloon with a
hypothetical market mortgage schedule utilizing the existing mortgage balance
as the beginning principal amount, and an interest rate determined from
discussions with lenders currently active in this marketplace, and the
resulting balloon from this hypothetical schedule. The differences in the two
monthly payment schedules were calculated, and then discounted at a rate
reflecting the cost of capital, and the risk associated with the properties.
Minor variances from a standard loan to value ratio of 75 percent and debt
coverage of 1.25 are reflected in the assumed interest rate. Greater variances
in loan to value ratios and debt coverage ratios from market norms are handled
in the same fashion as described above, except that the amount in excess of 80
percent loan to value is then considered a second lien, and the overall yield
rate must reflect the cost of first mortgage money, and also the increased
risk of a second position.
Properties that are not performing with respect to loan balances or
properties that are showing negative operating incomes were treated
differently. These properties were analyzed in terms of a potential
foreclosure where the mortgage lender will eventually take control of the
property, with disposition as the ultimate objective. C & W assumed a market
average redemption period of eight months (a combination of time associated
with the judicial process versus the advertised redemption period), during
which no income from the property is realized, and also assumed a standard
estimate of legal fees of $10,000. After the eight month lag period, it was
assumed that the mortgage lender takes control, and then disposes of the
property within a twelve month period. The income, operating expenses, and
reversion are then discounted at an overall yield rate of 18 percent. This
rate was obtained from C & W's discussions with a national insurance company
and other financial institutions that contained nonperforming assets.
The 18 percent yield reflects some of the primary elements of risk in
a foreclosure situation. This yield rate however does not incorporate all of
the elements of risk. There is considerable risk that the owner/borrower will
ignore deferred maintenance requirements, and bleed the property once
foreclosure becomes imminent. Also, as is typical of a potential foreclosure,
the property owner may file for protection under federal bankruptcy laws. This
scenario could dramatically increase the time and the cost associated with the
foreclosure.
Consideration for Shares to be Paid to Minority Shareholders
29
<PAGE>
Each share of MRC Common Stock held by a Minority Shareholder will
automatically be converted into the right to receive cash in the amount of,
$9.03 per share, which was book value as of September 30, 1995, without any
interest thereon. MRC estimates that the total amount of funds necessary to
cash out the Minority Shareholders will be approximately $1,049,891. The
source of funds will be the liquidation of a portion of the marketable
mortgage-backed securities and shares of money market funds owned by MRC.
The per share consideration which would be fair and equitable to the
Minority Shareholders was discussed at the Board of Directors meeting held on
September 8, 1995. The Board, as discussed above, considered the current and
historical market prices of MRC's Common Stock to be artificially low, and
determined that a per share consideration based upon market price would not
constitute fair value. The Board of Directors then reviewed and discussed a
preliminary draft of the appraisal (the final appraisal, which does not
materially differ from the preliminary draft reviewed by the Board, was not
yet available at the time of the meeting). The Board reached an approximate
determination of per share value of $8.55 for MRC's Common Stock based upon
the preliminary appraisal.
Considerable discussion then ensued and the Board then discussed
whether the per share consideration to be paid to the Minority Shareholders
should be based upon the appraised value or the net book value. The Board
determined that a per share price ranging from no less than the appraised
value to no greater than the net book value would be fair and equitable to the
Minority Shareholders. As the final appraisal had not yet been received, a
final determination of price could not be made at the Board of Directors
meeting, and the Board of Directors delegated to the Executive Committee the
authority to determine, within the approved range, the per share consideration
to be paid to the Minority Shareholders upon its receipt and review of the
final appraisal, barring any significant change from the preliminary
appraisal.
At its meeting on September 29, 1995, the Executive Committee
reviewed the final appraisal, and, as there had been no material change in the
aggregate appraised market value from the preliminary appraisal and no
material change in MRC's financial condition, arrived at a value of $8.51 per
share for MRC's Common stock based upon the final appraisal. The Executive
Committee then discussed whether the per share price should be based upon the
appraised value or the net book value, determined that the net book value of
$9.03 per share, which constitutes a premium of over 5% above the per share
appraised valuation of $8.51 and a premium of 24.5% over the market value of
$7.25 on such date, was a fair and equitable price to be paid to the Minority
Shareholders.
Subsequent to the meeting on September 8, 1995, the Board of Directors
has also noted that MRC's net book value per share was $9.35 as of June 30,
1996, an increase of $.32 per share over the book value as of September 30,
1995 and the amount per share to be paid to the Minority Shareholders. The
Board of Directors believes that this difference is immaterial and does not
impact the fairness of the proposed transaction from a financial point of
view.
30
<PAGE>
Majority Shareholders
The following chart sets forth certain information as of June 11,
1996, regarding the entities which, to MRC's knowledge, are the Majority
Shareholders of MRC:
31
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Beneficial Owner Beneficially Owned Percent of Class
---------------- ------------------ ----------------
<S> <C> <C>
Chrysler Corporation Master
Retirement Trust .............................. 789,470 17.42%
Ford Motor Company .............................. 765,000 16.88%
Treasurer, State of Michigan .................... 760,000 16.77%
Operating Engineers Local 324
Pension Fund .................................. 500,000 11.03%
Wayne County Retirement ......................... 226,608 5.0%
System
General Retirement System of
the City of Detroit ........................... 226,608 5.0%
Macomb County Employees
Retirement System ............................. 226,608 5.0%
Policemen & Firemen
Retirement System of the City
of Detroit .................................... 226,608 5.0%
NBD Bancorp, Inc. ............................... 225,000 4.96%
Comerica Incorporated ........................... 200,000 4.41%
Reinforcing Iron Workers Local
426 Pension Fund .............................. 180,000 3.97%
Michigan Consolidated Gas Co. ................... 100,000 2.21%
TOTAL ...................................... 4,425,902 97.65%
</TABLE>
To the Company's knowledge and belief, MRC's directors and officers,
as a group, own 700 shares of MRC Common Stock, or less than 1%.
Effect of the Restructuring
Limited Liability Company.
After the Restructuring, the business of MRC, a Michigan corporation,
will be conducted through MRC,LLC, which is a Delaware limited liability
company. A limited liability company is a business organization that is
generally intended to be taxed as a partnership for federal income taxation
purposes, while providing limited liability protection as a corporation for
its members. The owners of the equity interests in a limited liability company
are called "members". The business affairs of a limited liability
32
<PAGE>
company are governed by an operating agreement, which is analogous to a
partnership agreement. See "MANAGEMENT AND OPERATIONS AFTER THE
RESTRUCTURING", "COMPARISON OF MRC CAPITAL STOCK AND MRC,LLC CLASS A
MEMBERSHIP INTERESTS", AND "THE OPERATING AGREEMENT."
Managing Board.
MRC is managed by a Board of Directors of twenty-two (22) directors.
Upon consummation of the Restructuring, MRC, LLC will be managed by its
Member-Managers through a Managing Board (the "Managing Board"). The
Member-Managers are (a) those Members with a Total Percentage Interest at
least equal to the Minimum Percentage and (b) to the extent not previously
taken into account, those Class A Members (but excluding their assignees)
which held sufficient shares of MRC's common stock immediately prior to the
initial Capital Contribution of the Class A Members to elect at least one
director at an annual meeting of the shareholders of MRC, and in either case
which have not declined in writing to serve as Member-Managers.
Each Member-Manager is entitled, but is not required, to appoint the
greater of one (1) Managing Board Member to the Managing Board or that number
obtained by dividing such Member-Manager's Total Percentage Interest by the
Minimum Percentage Interest, rounded down to the nearest whole number. The
Managing Board will consist of that number of Managing Board Members appointed
from time to time by the Member-Managers of MRC, LLC, but in no event will the
number of Managing Board Members be fewer than three (3) or greater than forty
(40). See "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING -- MRC, LLC --
Managing Board After the Restructuring".
Committees.
The Managing Board will appoint an Executive Committee, an Audit
Committee, and a Loan Committee and such other subcommittees as the Managing
Board shall specify from time to time. These committees will be empowered and
structured in a manner substantially identical to the analogous committees
which MRC has now. See "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING --
MRC, LLC -- Committees".
Class A Membership Interests.
Class A Membership Interests will represent an interest in MRC's
existing investment pool and other net assets, which will be transferred to
MRC, LLC as part of the Restructuring. Class A Members are expected to receive
quarterly distributions of 100% of Class A Cash Income, pro rata based upon
their Class A Percentage Interests. Distributions of principal will be
returned as follows:
(i) prior to 2001, MRC,LLC has the option to reinvest any principal
returned with respect to Real Estate Investments which are part of the Class A
Assets; and
(ii) beginning in 2001, a Class A Member may elect each year to receive
its pro rata share of (x) principal returned with respect to Real Estate
Investments which are part of the Class A Assets, and (y) any
33
<PAGE>
cash or cash equivalents which are part of the Class A Assets. Any part of the
Class A Assets which is not distributed pursuant to the foregoing may, at the
option of MRC,LLC, be reinvested in Real Estate Investments. Any such election
must be made by a Member in writing and must be received by MRC, LLC by the
November first preceding the fiscal year for which such election is to be
effective.
All distributions are subject to a determination by the Managing Board
that MRC, LLC will have sufficient cash on hand to meet its current and
anticipated needs to fulfill its business purpose. See "COMPARISON OF MRC
CAPITAL STOCK AND MRC, LLC CLASS A MEMBERSHIP INTERESTS -- Nature of Equity
Interests -- MRC, LLC -- General".
All dispositions of Membership Interests must be made in compliance
with applicable state and federal securities laws and regulations. No
disposition may be made if it would cause a termination of MRC, LLC under the
Internal Revenue Code or if the disposition would, in the opinion of tax
counsel to MRC, LLC, jeopardize the status of MRC, LLC as a partnership for
federal income tax purposes. See "COMPARISON OF MRC CAPITAL STOCK AND MRC, LLC
CLASS A MEMBERSHIP INTERESTS -- Nature of Equity Interests -- MRC, LLC--
Disposition of Membership Interests".
A Member may assign its economic interest in MRC, LLC in whole or in
part. Such an assignment does not entitle the assignee to participate in the
management or affairs of the Company or to become a Member. An assignee of a
Transferable Membership Interest may be admitted as a substitute Member. An
assignee of a Restricted Membership Interest may become a substitute Member
with the consent of not less than a majority of the non-transferring
Member-Managers. A Restricted Membership Interest is a Class A or Class B
Membership Interest which represents at least 21% of the membership interests
of such class. A Transferable Membership Interest is a membership interest
which is not a Restricted Membership Interest. See "COMPARISON OF MRC CAPITAL
STOCK AND MRC, LLC CLASS A MEMBERSHIP INTERESTS -- Nature of Equity Interests
- -- MRC, LLC -- Disposition of Membership Interests".
Meetings.
There will be no regularly scheduled meetings of the Members of MRC,
LLC. Meetings of all Members or of a class or classes of Members may be called
by the Managing Board, the Executive Committee or by the Chairman of the
Managing Board, and must be called upon the written request to the Managing
Board of Members holding in the aggregate at least ten percent (10%) of the
Total Percentage Interests of MRC, LLC or of the applicable class or classes.
See "MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING -- Meetings of
Shareholders and Members -- MRC, LLC".
Effective Date
It is expected that if the Restructuring is approved by MRC
shareholders at the Special Meeting, and assuming that the other conditions
described in the Restructuring Agreement are satisfied, the Restructuring will
become effective during the fourth calendar quarter of 1996. See "THE
RESTRUCTURING AGREEMENT." It is expected that a period of time will elapse
between the MRC Special Meeting and the Effective Date while the Offering is
made. The Restructuring Agreement may be terminated by either party,
34
<PAGE>
even if the Restructuring Agreement has been approved by the shareholders of
MRC and the members of MRC, LLC. See "THE RESTRUCTURING
AGREEMENT--Termination" below.
Conditions to the Consummation of the Restructuring
The obligations of MRC and MRC, LLC to consummate the Restructuring
are subject to various conditions, including obtaining requisite shareholder
and member approval and the accuracy in all material respects of the
representations and warranties of the two companies. See "THE RESTRUCTURING
AGREEMENT -- Conditions to the Restructuring."
Anticipated Accounting Treatment
The assets and liabilities transferred from MRC to the Company will be
recorded initially at the amounts at which they were stated in the financial
statements of MRC, the predecessor company, in a manner similar to a pooling
of interests.
Material Federal Income Tax Consequences
Provided certain conditions are met, no gain or loss will be
recognized by MRC upon the contribution of its assets to MRC, LLC in exchange
for Class A Membership Interests. All amounts received by MRC shareholders in
a distribution in complete liquidation will be treated as full payment in
exchange for their stock pursuant to Section 331 of the Code. Gain or loss
will be recognized based on the difference between the amount of the
distribution and the shareholder's tax basis in its MRC stock. See "MATERIAL
FEDERAL INCOME TAX CONSIDERATIONS -- Federal Tax Consequences of the
Restructuring".
As provided in the opinion of Coppers & Lybrand L.L.P., MRC, LLC
will be classified as a partnership for federal income tax purposes, and as
such it generally will be treated as a "pass-through" entity that is not
subject to federal income tax. Items of income, deduction, gain, loss or
credit generally will be allocated proportionately (based on class of
membership interests) to MRC, LLC's Members, which will be treated as partners
for tax purposes. The Members may be subject to tax on allocated items,
without regard to whether they receive a distribution from MRC, LLC. See
"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS -- Federal Tax Consequences of the
Restructuring -- Taxation of MRC, LLC Members."
Stock Exchange Listing and Marketability
MRC Common Stock is listed on AMEX. As part of the Restructuring, such
Common Stock will cease to exist and will no longer be listed on AMEX. Public
trading of such shares shall cease, and MRC will no longer file periodic
reports with the Securities and Exchange Commission. MRC cannot predict
whether a public market for the Membership Interests will develop. MRC, LLC
will register under Section 12(g) of the Exchange Act, and will continue to
file the same periodic reports with the Securities and Exchange Commission
presently filed by MRC as required under the Exchange Act, but it is not
contemplated that its Membership Interests will be listed on an exchange or
quoted on NASDAQ or any over-the-counter system. As a result, the Class A
Membership Interests will not be as readily marketable as
35
<PAGE>
MRC's Common Stock. Information concerning MRC, LLC will be publicly available
to the same extent as it is presently available with respect to MRC, but its
Membership Interests are not expected to be publicly traded.
No Appraisal Rights
No shareholder of MRC will have any appraisal rights under the MBCA,
the Articles of Incorporation or Bylaws of MRC, or otherwise in connection
with the Restructuring.
THE OFFERING
Subject to the approval and adoption of the Restructuring Agreement by
the shareholders of MRC and the Members of MRC, LLC, MRC, LLC intends to offer
Units of its Class B Membership Interests in a separate offering to create a
new investment pool which will be segregated on the books of MRC, LLC from the
existing investment pool (the "Offering"). The net proceeds of the Offering
will be invested in Short-term Investments until such time as the proceeds are
invested in real estate loans. The Class B Membership Interests will be
structured so that payments of principal in the investment pool will be passed
through to the Class B members on an annual basis (or more frequently as
determined by MRC, LLC's Managing Board), and cash income (less expenses) will
be passed through on a quarterly basis. The Class B Membership Interests will
terminate when the underlying mortgage loans mature or are liquidated, with
the final maturity of such loans not later than December 31, 2025, the date
MRC, LLC's existence will terminate.
PRO FORMA FINANCIAL INFORMATION
Pursuant to the Restructuring Agreement, assuming the restructuring
occurred for balance sheet purposes on June 30, 1996, the assets and
liabilities of MRC have been transferred to MRC, LLC at the amounts at which
they were stated in the financial statements of MRC (the "predecessor
company").
The effect of the Restructuring on net investment income assuming the
transaction occurred on January 1, 1995 is disclosed in Note 3.
The pro forma data do not purport to be indicative of the results
which would actually have been reported if the transaction had occurred on
such dates or which may be reported in the future. The pro forma data should
be read in conjunction with the historical financial statements of
Metropolitan Realty Corporation and related notes to such financial
statements.
An audited balance sheet of MRC, LLC has not been provided because it
does not have any assets or operations, and will not have until after the
Restructuring is consummated.
36
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY COMPANY, L.L.C.
PRO FORMA CONDENSED BALANCE SHEET
AT JUNE 30, 1996
Historical Pro Forma
---------- ---------
<S> <C> <C>
Cash and cash equivalents .............................. $ 1,781,496 $ 731,605
Marketable securities .................................. 14,873,710 14,873,710
Mortgage notes receivable, net of allowance ............ 25,466,575 25,466,575
Other assets ........................................... 678,889 678,889
------------ ------------
Total assets ........................................... $ 42,800,670 $ 41,750,779
============ ============
Total liabilities ...................................... $ 437,611 $ 437,611
------------ ------------
Shareholders' equity:
Common stock ........................................... 45,322 --
Additional paid-in capital ............................. 43,355,529 --
Unrealized holding losses on
securities available for sale ......................... (97,735) --
Distributions in excess of
net investment income ................................. (940,057) --
Total shareholders' equity ............................. 42,363,059 --
------------
Class A Members' equity(1) ............................. -- 41,313,168
Class B Members' equity(2) ............................. -- --
Total liabilities and shareholders'/
Members' equity(3) ................................... $ 42,800,670 $ 41,750,779
============ ============
<FN>
- ---------
(1) Pursuant to the Restructuring Agreement, on the Effective Date, the
assets of MRC will be transferred to MRC, LLC in exchange for Class A
Membership Interests of MRC, LLC (the "Class A Membership Interests").
MRC, LLC will assume all of the liabilities of MRC. MRC will then be
dissolved and the Class A Membership Interests in MRC, LLC will be
distributed to certain of MRC's shareholders in liquidation. Holders
of fewer than 50,000 shares of MRC as of October 7, 1996 (assumed to
represent 116,267 shares in the aggregate) will receive, in lieu of
the distribution of Class A Membership Interests in MRC, LLC, a cash
payment equal to the book value of their shares as of September 30,
1995 ($9.03 per share, or $1,049,891 in the aggregate). See "THE
RESTRUCTURING -- Form of the Restructuring" and "-- Appraisal".
(2) MRC, LLC will simultaneously offer a minimum of 50 Units ($25,000,000)
and a maximum of 100 Units ($50,000,000) in Class B membership
interests (the "Class B Membership Interests") in a separate offering
to create a new investment pool. No proceeds have been included
related to the proposed offering of Class B Membership Interests.
(3) Using the historical yields from MRC's cash equivalents of 6.47% and
6.48% for the six months ended June 30, 1996 and the year ended
December 31, 1995, respectively, the use of cash equivalents to
acquire minority shares would have reduced net investment income from
$1,673,696 to $1,639,732 for the six months ended June 30, 1996
and from $1,990,203 to $1,922,170 for the year ended December 31,
1995. The transaction would not change net investment income per share
of $.37 for the six months ended June 30, 1996 and $.44 for the
year ended December 31, 1995.
</TABLE>
37
<PAGE>
SELECTED FINANCIAL DATA OF METROPOLITAN REALTY CORPORATION
The following data except for the data provided as of and for the
periods ended June 30, 1996 and 1995, have been derived from financial
statements that have been audited by Coopers & Lybrand L.L.P., independent
accountants. The data provided as of and for the six months ended June 30,
1996 and 1995 are unaudited, but in the opinion of management contain all
adjustments which are necessary for a fair presentation of the results of such
periods. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
financial statements and notes thereto. All data is stated in thousands except
for per share data.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Years Ended December 31
---------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Total Income .............. $ 1,912 $ 1,877 $ 3,764 $ 3,858 $ 3,716 $ 3,829 $ 4,135
Net Investment Income ..... 1,674 1,499 1,990(1) 2,588 2,701 2,113 1,935
Net Investment Income
per share ............... .37 .33 .44(1) .57 .60 .47 .43
Balance Sheet Data:
Cash and Cash Equivalents . 1,781 4,658 2,466 3,529 2,337 1,612 3,270
Total Assets .............. 42,801 42,053 41,761 41,025 41,626 41,235 42,189
Stockholders' Equity ...... 42,363 41,453 41,333 40,479 41,104 40,851 41,910
Other:
Net cash provided by
operating activities .... 1,612 1,331 2,555 2,957 2,845 3,052 3,404
Cash Dividends(2) ......... 499 906 1,541 2,855 2,447 3,173 3,490
Cash Dividends per
share(2) ................ .11 .20 .34 .63 .54 .70 .77
Book Value per share ...... 9.35 9.15 9.12 8.93 9.07 9.01 9.25
<FN>
- ---------
(1) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" related to an increase in the allowance for
loan losses in the third quarter of 1995.
(2) All dividends were ordinary income; no dividends constituted a
return of capital. No dividends were declared for the quarter ended
June 30, 1996 in anticipation of the consummation of the Restructuring.
</TABLE>
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition
and results of operations of MRC and the pool of assets (and assumed
liabilities) which will become the Class A Assets upon the consummation of the
Restructuring.
Results of Operations for the Six Months Ended June 30, 1996
MRC's net investment in mortgage loans represented 60% and 61% of its
assets, or $25,466,575 and $25,364,328, at June 30, 1996 and December 31,
1995, respectively. The range of yields on mortgage loans closed from MRC's
inception through June 30, 1996 ranges from 7.06% to 12.25% The weighted
average yield of mortgage notes was 10.12% at June 30, 1996 and 10.27% at
December 31, 1995.
The overall average yield on interest earning assets was 8.8% for
the six months ended June 30, 1996 and 8.7% for the year ended December
31, 1995. The average amount held in marketable securities net of unrealized
holding gains and losses for the six months ended June 30, 1996 was
$17.0 million. The average yield (based on total yield divided by average
amount of investments) on marketable securities was 5.2% for the six
months ended June 30, 1996 and 5.8% for the year ended December 31, 1995.
Investment income from marketable securities increased $25,741 to
$200,625 for the second quarter of 1996 from $174,884 for the second
quarter of 1995. Of the increase, $70,304 was the result of an increase in
the average amount invested in marketable securities, offset by a $44,563
decrease in the average yield. Investment income from marketable
securities increased $117,356 to $436,908 for the first six
months of 1996 from $319,552 for the first six months of 1995. Of the
increase, $178,587 was the result of an increase in the average amount
invested in marketable securities, offset by a $61,231 decrease in the average
yield.
Investment income from money market securities decreased $48,798 to
$15,696 for the second quarter of 1996 from $64,494 for the second
quarter of 1995. Of the decrease, $46,300 was the result of a decrease in
the average amount invested in money market securities combined with a
$2,498 increase in the average yield. Investment income from money market
securities decreased $73,055 to $46,084 for the first six months of 1996 from
$119,139 for the first six months of 1995. Of the decrease, $76,010 was the
result of a decrease in the average amount invested in money market securities
offset by a $2,955 increase in average yield.
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Interest income from mortgage notes increased $12,210 to $687,967
for the second quarter of 1996 from $675,757 for the second quarter of
1995. Of the increase, $16,698 was the result of an increase in average
earning loans offset by a $4,488 decrease in average yield. Interest income
from mortgage notes increased $24,794 to $1,377,181 for the first six months
of 1996 from $1,352,387 for the first six months of 1995. Of the increase,
$31,473 was the result of an increase in the average amount invested in
mortgage notes offset by a $6,679 decrease in average yield.
Operating expenses decreased $76,649, or 40%, to $113,611 for the
second quarter of 1996 from $190,260 for the second quarter of 1995. This
decrease results primarily from a $324,361 net loss from foreclosed property
held for sale incurred in 1995, which was largely attributable to an increase
in the valuation provision, offset by a $250,000 decrease in the allowance for
loan losses. Operating expenses decreased $139,975, or 37%, to $238,277 for
the first six months of 1996 from $378,252 for the first six months of
1996. This decrease results from a $335,065 net loss from foreclosed property
held for sale incurred in 1995, offset by a $250,000 decrease in the allowance
for loan losses and a $54,910 decrease in general and administrative expenses,
due primarily to decreased professional and loan advisory fees.
Net investment income increased 9% to $802,400, or $.18 per share, for
the second quarter of 1996 from $736,626, or $.16 per share, for the second
quarter of 1995 as a result of the items discussed above. Net investment
income increased 12% to $1,673,696, or $.37 per share, for the first six
months of 1996 from $1,499,147, or $.33 per share for the first six months of
1995 as a result of the items discussed above.
Management reviews, on a regular basis, factors which adversely affect
its mortgage loans, including occupancy levels, rental rates and property
values. It is possible that economic conditions in Southeast Michigan and the
nation in general may adversely affect the recoverability of MRC's loans.
MRC believes that the allowance for loan losses of $1,600,000 at June 30,
1996 is at a level that is sufficient to absorb probable credit losses in the
mortgage loan portfolio.
On December 23, 1992, MRC obtained an apartment building located in
Detroit, Michigan, through a foreclosure sale. This property was the
collateral for a construction loan under which the borrower defaulted during
1992. The carrying value of the property was written down to its estimated
fair value at the time of foreclosure of $2,100,000, based upon a July 1992
independent appraisal, net of a $140,000 valuation allowance for the estimated
costs to sell the property. At December 31, 1994 the carrying value of the
property was reduced to $900,000 to reflect an updated property valuation
based on the results of MRC's marketing efforts to locate a buyer for the
property. The carrying value of the property was further written down to
$555,000 during the quarter ended June 30, 1995 as the result of an offer to
purchase the property.
On August 1, 1995, the sale of this property was consummated. In
accordance with the terms of the purchase agreement, MRC received $100,000 of
the purchase price at the August 1, 1995 settlement date. The remaining
$455,000 of the purchase price will be paid, pursuant to the terms of a
mortgage note bearing interest at 10% per annum, in monthly installments of
principal and interest of $4,889 commencing in September 1995 until maturity
in August 2000, at which time the remaining unpaid principal of approximately
$375,000 is due. The mortgage note is guaranteed by the borrower and may be
prepaid in
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whole or in part at any time. The net loss from foreclosed property held for
sale totaled $335,065 for the six months ended June 30, 1995 and was largely
attributable to a $312,066 increase in the valuation provision.
During 1994, MRC reached settlements with the guarantors of the
foreclosed loan aggregating $320,000. These settlements are payable over four
to eight years, with interest rates ranging from non-interest bearing to 7.5%.
Income from settlements is recorded as miscellaneous income when received and
totaled $9,400 and $18,900 for the three and six months ended June 30, 1996
and $9,450 and $43,000 for the three and six months ended June 30, 1995,
respectively.
Liquidity and Capital Resources for the Six Months ended June 30, 1996
Funds that have not yet been invested in mortgage loans are primarily
invested in marketable mortgage-backed securities until needed for MRC's
operations or investments in mortgage loans. Income and principal received
with respect to MRC's investment in mortgage loans are also invested in
marketable securities pending distribution to shareholders in the form of
dividends or reinvestment in mortgage loans. At June 30, 1996, MRC had
$25,466,575 invested in net mortgage loans, $8,867,150 invested in
marketable mortgage-backed securities, $6,006,560 invested in U.S. Treasury
Notes and $1,597,299 invested in money market funds. MRC does not invest in
high-risk mortgage-backed securities, such as interest only strips or residual
tranches. However, there can be no assurance that cash flows will
materialize as scheduled as a result of prepayments of the underlying
mortgages or that the proceeds can be invested in securities that will provide
comparable yields.
At June 30, 1996, MRC had outstanding loan commitments aggregating
$576,000. The source of funds to satisfy these commitments will be MRC's
marketable securities. MRC anticipates that its sources of cash are more than
adequate to meet its liquidity needs.
MRC expects to invest the balance of its available assets in mortgage
loans to real estate projects during the balance of 1996 and 1997; however,
management will continue its prudent approach of approving funding only of
those loans which meet appropriate underwriting criteria.
On September 8, 1995, MRC's Board of Directors gave its approval for a
proposed restructuring of MRC into a limited liability company ("LLC") and the
generation of additional capital through the LLC. MRC expects to raise new
capital of $25 to $50 million through the private placement of securities by
the LLC. Distributions to current company shareholders under the proposed LLC
restructuring are expected to remain consistent with current levels. At June
30, 1996, $688,000 of professional fees have been incurred in connection
with this transaction, of which $344,000 have been deferred.
MRC's policy is to declare and pay cash dividends on a quarterly
basis. MRC paid dividends totalling $.11 per share during the first six
months of 1996, all of which was ordinary income to shareholders. For the
quarter ending June 30, 1996, no cash dividend was declared by the Board of
Directors of MRC
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in anticipation of the consummation of the Restructuring. MRC paid dividends
totalling $.20 per share during the first six months of 1995.
Results of Operations of MRC for the years ended December 31, 1995, 1994 and
1993
MRC's net investment in mortgage loans to real estate projects
represented 61% of its assets, or $25,364,328, at December 31, 1995 and 62% of
its assets, or $25,393,979, at December 31, 1994. The yields on MRC's
outstanding mortgage loans range from 7.25% to 12.25%. The weighted average
yield of earning mortgage loans is 10.27% at December 31, 1995, as compared to
10.58% at December 31, 1994. The weighted average term of outstanding mortgage
loans is 8.94 years. At December 31, 1995, MRC had outstanding loan
commitments for additional commercial mortgage loans aggregating $921,000. The
amount of marketable securities (which consisted primarily of Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation
mortgage-backed, pass through securities) held by MRC during 1995 averaged
$11,992,000 and earned an average yield of 5.8%, as compared to average
marketable security holdings of $8,164,000 which earned an average yield of
4.8% during 1994. The average yield on all interest earning assets was 8.7%
for the year ended December 31, 1995 and 8.9% for the year ended December 31,
1994.
Investment income from marketable securities increased $302,673 to
$689,955 for the year ended December 31, 1995 from $387,282 for the year ended
December 31, 1994. Of the increase, $186,003 was the result of an increase in
the average amount invested in marketable securities and $116,670 was the
result of an increase in the average yield earned.
Investment income from money market securities increased $9,444 to
$194,431 for the year ended December 31, 1995 from $184,987 for the year ended
December 31, 1994. Of the increase, $56,106 was the result of an increase in
average yield offset by a $46,662 decrease in the average amount invested in
money market securities.
Investment income from mortgage loans decreased $318,255 to $2,754,975
for the year ended December 31, 1995 from $3,073,230 for the year ended
December 31, 1994. Of the decrease, $233,321 was the result of a decrease in
the average amount invested in mortgage loans and $84,934 was the result of a
decrease in the average yield.
Miscellaneous income decreased $86,033 to $142,916 for the year ended
December 31, 1995 from $228,949 for the year ended December 31, 1994. The
decrease primarily results from $114,000 in prepayment penalties received in
1994 offset by a $19,000 increase in income from guarantor settlements from
1994 to 1995.
Operating expenses increased 40% to $1,773,856 for the year ended
December 31, 1995 from $1,270,478 for the year ended December 31, 1994. This
increase is due to a $1,061,500 increase in the change in the provision for
loan losses, a $312,944 increase in general and administrative expenses for
costs associated with MRC's proposed restructuring into a limited liability
company, and a $92,397 increase in other general and administrative expenses,
due primarily to increased loan advisory and professional service fees, offset
by a $963,463 decrease in net loss from foreclosed property held for sale.
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Net investment income decreased by 23% to $1,900,203 or $.44 per
share, for the year ended December 31, 1995 from $2,587,550, or $.57 per
share, for the year ended December 31, 1994 as a result of the items discussed
above.
Management reviews, on a regular basis, factors which may adversely
affect its mortgage loans, including occupancy levels, rental rates and
property values. It is possible that economic conditions in southeastern
Michigan, and the nation in general, may adversely affect certain of MRC's
other loans.
MRC had maintained an allowance for doubtful accounts of $1,461,500
from December 31, 1992 through the third quarter of 1994 to reflect the
expected recoverable cash flows from three troubled loans.
During 1994, the cash flows generated by one of the above loans which
had previously been in default, collateralized by a shopping center, increased
significantly. As this increase was supported by an improvement in tenant
base, MRC determined at December 31, 1994 that this loan no longer required a
loss reserve. The loan loss reserve was reduced, accordingly, by $461,500
during the fourth quarter of 1994 to $1,000,000. The other loan with an
affiliated borrower, which was also formerly in default, had not exhibited the
same magnitude of improvement in cash flows and tenants during 1994. The loan
loss reserve, however, was further reduced by $250,000 in the second quarter
of 1995, based on MRC's determination that the continued assignment of rents
reduced the risk of loss associated with this loan.
In 1994, only one loan was operating under a loan modification
agreement. The borrower was current with the modified debt service
requirements during 1994, although the underlying apartment collateral
continued to experience high tenant turnover and poor cash flow, and monthly
debt service payments were occasionally late. During 1995, the borrower tried
unsuccessfully to find a buyer for this property. The physical property
collateralizing the loan began to deteriorate as the year progressed. An
independent analysis of the loan portfolio performed in the third quarter of
1995, confirmed the deterioration of the property compared to similar
properties in the surrounding geographic location. The independent valuation
also identified a loan, collateralized by a shopping center which has begun to
experience limited market rent potential based on recent commercial
developments in its surrounding market area. Based on the results of this
independent market valuation, the allowance relating to these loans was
increased by $850,000 during the third quarter of 1995. MRC believes that the
allowance for loan losses of $1,600,000 at December 31, 1995 is adequate to
reflect mortgage loans at their estimated net realizable value.
On December 23, 1992, MRC obtained an apartment building located in
Detroit, Michigan, through a foreclosure sale. This property was the
collateral for a construction loan under which the borrower defaulted during
1992. The carrying value of the property was written down to its estimated
fair value at the time of foreclosure of $2,100,000, based upon a July 1992
independent appraisal, net of a $140,000 valuation allowance for the estimated
costs to sell the property. At December 31, 1994 the carrying value of the
property was reduced to $900,000 to reflect an updated property valuation
based on the results of the MRC's marketing efforts to locate a buyer for the
property. The carrying value of the property was further written down to
$555,000 during the quarter ended June 30, 1995 as the result of an offer to
purchase the property.
On August 1, 1995, the sale of this property was consummated. In
accordance with the terms of the purchase agreement, MRC received $100,000 of
the purchase price at the August 1, 1995 settlement date.
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The remaining $455,000 of the purchase price will be paid, pursuant to the
terms of a mortgage note bearing interest at 10% per annum, in monthly
installments of principal and interest of $4,889 commencing in September 1995
until maturity in August 2000, at which time the remaining unpaid principal of
approximately $375,000 is due. The mortgage note is guaranteed by the borrower
and may be prepaid in whole or in part at any time.
During 1994, MRC reached settlements with the guarantors of the
foreclosed loan aggregating $320,000. These settlements are payable over four
to eight years, with interest rates ranging from noninterest-bearing to 7.5%.
Income from settlements is recorded as miscellaneous income when received and
totalled $62,000 and $43,000 for the years ended December 31, 1995 and 1994,
respectively. The property's operating income and expenses from the date of
foreclosure are reflected in the statement of operations as net loss from
foreclosed property held for sale and totaled $331,953, $1,295,416, and
$337,699 for the years ended December 31, 1995, 1994 and 1993, respectively.
Investment income from mortgage-backed marketable securities decreased
$34,968 to $387,282 for the year ended December 31, 1994 from $403,608 for the
year ended December 31, 1993. Of the decrease, $9,508 was the result of a
decrease in the average amount invested in marketable securities and $26,260
was the result of a decrease in the average yield earned.
Investment income from money market securities increased $134,211 to
$184,987 for the year ended December 31, 1994 from $50,776 for the year ended
December 31, 1993. Of the increase, $112,893 was the result of an increase in
the average amount invested in money market securities and $21,318 was the
result of an increase in average yield.
Investment income from mortgage loans decreased $40,646 to $3,073,230
for the year ended December 31, 1994 from $3,113,876 for the year ended
December 31, 1993. Of the decrease, $210,745 was the result of a decrease in
average mortgage loans offset by a $45,326 increase in the stated average
yield on all mortgage loans, and a $124,773 increase in interest income from
loans which were nonearning at December 31, 1993.
Miscellaneous income increased $102,162 to $228,949 for the year ended
December 31, 1994 from $126,787 for the year ended December 31, 1993. The
increase primarily resulted from $114,000 in prepayment penalties received in
1994.
Operating expenses increased 25% to $1,270,478 for the year ended
December 31, 1994 from $1,015,087 for the year ended December 31, 1993. The
majority of this increase is due to a $957,717 increase in net loss from
foreclosed property held for sale, which was largely attributable to a
$994,000 increase in the provision for valuation allowance, offset by a
$461,500 decrease in the allowance for loan losses. Other operating expenses
decreased $240,826 to $436,562 for the year ended December 31, 1994 from
$677,388 for the year ended December 31, 1993. This decrease is due to a
$147,363 reduction in general and administrative expenses, primarily as a
result of decreased professional service fees, and a $93,463 reduction in
amortization of organization costs, which became fully amortized in 1993.
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Net investment income decreased by 4% to $2,587,550, or $.57 per
share, for the year ended December 31, 1994 from $2,700,898, or $.60 per share
for the year ended December 31, 1993 as a result of the items discussed above.
Investment income from marketable securities decreased $264,888 to
$403,608 for the year ended December 31, 1993 from $668,496 for the year ended
December 31, 1992. Of the decrease, $153,487 was the result of a decrease in
the average amount invested in marketable securities and $111,401 was the
result of a decrease in the average yield earned.
Investment income from mortgage loans increased $105,192 to $3,113,876
for the year ended December 31, 1993 from $3,008,684 for the year ended
December 31, 1992. Of the increase, $354,411 was the result of an increase in
average mortgage loans offset by a $38,918 decrease in the stated average
yield on all mortgage loans, a $54,381 decrease in interest income due to
property received in foreclosure and a $155,920 decrease in interest income
due to MRC's decision to discontinue accruing interest on certain loans.
Operating expenses decreased 41% to $1,015,087 for the year ended
December 31, 1993 from $1,716,288 for the year ended December 31, 1992. The
majority of this decrease is due to a $900,000 decrease in the allowance for
loan losses offset by a $337,699 net loss from foreclosed property held for
sale. Other operating expenses, consisting primarily of general and
administrative expenses, decreased $138,900 as a result of decreased
professional fees.
Net investment income increased by 28% to $2,700,898, or $.60 per
share, for the year ended December 31, 1993 from $2,112,662, or $.47 per
share, for the year ended December 31, 1992 as a result of the items discussed
above.
MRC intends to continue to invest its available funds at competitive
market rates in mortgage loans to real estate projects located in southeastern
Michigan. Cycles in the local and national economy have affected and could
continue to affect MRC's ability to invest its remaining funds in mortgage
loans and the yields attainable on such investments. Decreases in market
interest rates may result in lower returns on future mortgage loans than on
the mortgage loans closed to date. Although MRC expects to have the balance of
its available assets fully invested in mortgage loans by the end of 1996
management will continue its prudent approach of approving funding only of
those loans which meet appropriate underwriting criteria.
Liquidity and Capital Resources of MRC at December 31, 1995
Funds that have not yet been invested in mortgage loans are primarily
invested in marketable mortgage-backed securities until needed for MRC's
operations or investments in mortgage loans. Income and principal received
with respect to MRC's investments in mortgage loans are also invested in
marketable mortgage backed securities pending distribution to shareholders in
the form of dividends or reinvestment in mortgage loans. At December 31, 1995,
MRC had $25,364,328 invested in mortgage loans, $9,809,793 invested in
marketable mortgage-backed securities, $3,516,940 invested in U.S. Treasury
Notes, and $2,294,965 invested in money market funds. MRC does not invest in
high risk, mortgage-backed securities such as interest only strips or residual
trenches. However, there can be no assurance that cash flows will
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materialize as scheduled as a result of prepayments of the underlying
mortgages or that the proceeds can be invested in securities that will provide
comparable yields.
At December 31, 1995, MRC had outstanding loan commitments aggregating
$921,000. The source of funds to satisfy these commitments will be MRC's
marketable securities. MRC anticipates that its sources of cash are more than
adequate to meet its liquidity needs.
During the years ended December 31, 1995 and 1994, professional fees
incurred in connection with the Restructuring totaled $495,000 and $131,000,
respectively, of which $182,000 and $131,000 have been deferred at December
31, 1995 and 1994, respectively.
Net cash generated by operating activities during 1995 aggregated
$2,555,102, including $2,898,231 in net investment income adjusted for noncash
depreciation and amortization expense, the valuation provisions for mortgage
loans and foreclosed property held for sale, and amortization of net loan
origination fees.
Net cash used in investing activities during 1995 aggregated
$2,097,276 and consisted primarily of purchases of marketable securities and
loan disbursements offset by collections of principal from marketable
securities and loan repayments. MRC purchased $3,507,381 of marketable
securities and disbursed $444,293 in loans. MRC collected $1,345,072 of
principal from marketable mortgage-backed securities and $355,151 of loan
repayments.
Financing activities in 1995 consisted of dividend payments to
shareholders of $1,540,939 which represented $.34 per outstanding share.
MRC adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (SFAS 114), as amended by
SFAS 118, on January 1, 1995. Under these new standards, a loan is considered
impaired, based on current information and events, if it is probable that MRC
will be unable to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan agreement. The measurement
of impaired loans is based on the discounted cash flows of the underlying
collateral. The cumulative effect of adopting the provisions of SFAS No. 114
was not significant.
MRC adopted SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," at December 31, 1995; SFAS 107 requires disclosure of fair value
information about financial instruments along with the valuation method and
significant assumptions used.
MRC's policy is to declare and pay cash dividends on a quarterly
basis. MRC declared and paid dividends aggregating $.34 per share during the
year ended December 31, 1995, compared to $.63 per share during the year ended
December 31, 1994 and $.54 per share during the year ended December 31, 1993.
MRC declared a dividend of $.11 per share of common stock to its shareholders
of record on March 25, 1996 was paid on March 29, 1996 from MRC's money
market funds.
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MANAGEMENT AND OPERATIONS AFTER THE RESTRUCTURING
MRC's Current Management Structure
Board of Directors.
MRC's Bylaws provide that it is managed by a Board of Directors of not
less than three (3) nor more than twenty-four (24) directors, as fixed by the
shareholders of MRC or by the affirmative vote of seventy-five percent (75%)
of the directors. The number of directors has been set at twenty-two (22). The
Board of Directors is elected at each annual meeting. Each director serves for
a term ending at the succeeding annual meeting, unless such individual's
service as a director is terminated earlier by death, resignation or removal.
Each shareholder has the right to nominate as many persons to the
Board as such shareholder would be entitled to elect to the Board under the
cumulative voting provisions of MRC's Articles of Incorporation. Nine (9) of
MRC's shareholders nominated and elected sixteen (16) of MRC's twenty-two (22)
directors at MRC's 1995 annual meeting of shareholders.
Committees.
The Bylaws of MRC provide that the Executive Committee shall be
comprised of seven (7) members, to be selected as follows:
(1) The directors elected at each annual meeting of shareholders from
among those persons nominated by the shareholders which hold sufficient shares
to elect at least one (1) director at an annual meeting of shareholders,
excluding the directors selected as regular member of the Loan Committee
pursuant to (1) - (5) below, select four (4) from among their number to serve
as members of the Executive Committee.
(2) The Board of Directors of MRC, as a whole, selects the remaining
members of the Executive Committee.
The Executive Committee exercises all power and authority of the Board
in the management of the business and affairs of MRC, except that the
Executive Committee does not have power or authority to amend the Articles of
Incorporation; adopt an agreement of merger or consolidation; recommend to
shareholders the sale, lease or exchange of all or substantially all of MRC's
property and assets; recommend to shareholders a dissolution of MRC or a
revocation of a dissolution; amend the Bylaws; fill vacancies on the Board of
Directors; fix the compensation of the directors for serving on the Board of
Directors or on a committee; or unless expressly authorized by the Board of
Directors, declare a dividend or authorize the issuance of stock.
The Bylaws of MRC provide that the Loan Committee is comprised of nine
(9) regular members and three (3) alternate members. The regular members of
the Loan Committee are selected as follows:
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(1) Three (3) of the director(s) elected at each annual meeting of
shareholders from among those persons nominated by the State Treasurer, State
of Michigan serve as regular members of the Loan Committee.
(2) One (1) of the director(s) elected at each annual meeting of
shareholders from among those persons nominated by the Wayne County Employees'
Retirement System serves as a regular member of the Loan Committee.
(3) One (1) of the director(s) elected at each annual meeting of
shareholders from among those persons nominated by the Macomb County
Employees' Retirement Fund serves as a regular member of the Loan Committee.
(4) One (1) of the director(s) elected at each annual meeting of
shareholders from among those persons nominated by the Policemen and Firemen
Retirement System of the City of Detroit serves as a regular member of the
Loan Committee.
(5) One (1) of the director(s) elected at each annual meeting of
shareholders from among those persons nominated by the General Retirement
System of the City of Detroit serves as a regular member of the Loan
Committee.
(6) The Board of Directors of MRC, as a whole, selects from its number
the remaining regular and alternate members of the Loan Committee.
The Loan Committee has such power and authority as the Board of
Directors from time to time delegates to it.
The Board of Directors, through nominations made by the Chairman of
the Board and through approval by resolution passed by a majority of the whole
Board, appoints from among its members an Audit Committee composed of three
(3) or more directors. The duties of the Audit Committee may include: (i)
recommending independent auditors; (ii) reviewing with the independent
auditors the scope of the audit, audit fees, the report of audit and the
management letter; (iii) reviewing with management and the independent
auditors the financial statements for the year; (iv) reviewing and approving
non-audit services by the independent auditors; and (v) consulting with the
independent auditors with regard to the adequacy of internal controls.
MRC, LLC
The diagram which follows depicts the ownership and management
structure of MRC, LLC.
[The remainder of this page intentionally left blank]
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The diagram on page 49 of the Registration Statement on Form S-4
depicts the ownership and management structure of MRC, LLC. Following is a
summary of the diagram.
Upon consummation of the Restructuring, the assets of MRC will be
transferred to, and the liabilities of MRC will be assumed by, MRC, LLC in
exchange for its Class A Membership Interests and the Majority Shareholders of
MRC shall receive in proportion to their common stock holdings in MRC, 100% of
the Class A Membership Interests, in liquidation.
Upon consummation of the Restructuring, MRC, LLC will be managed by
its Member-Managers through a Managing Board. The Member-Managers are (a)
those Members with a Total Percentage Interest at least equal to the Minimum
Percentage and (b) to the extent not previously taken into account, those
Class A Members (but excluding their assignees) which held sufficient shares
of MRC's common stock immediately prior to the initial Capital Contribution of
the Class A Members to elect at least one director at an annual meeting of the
shareholders of MRC, and in either case which have not declined in writing to
serve as Member-Managers.
Upon consummation of the Offering, MRC, LLC will issue to the
subscribers certificates representing 100% of the Class B Membership
Interests. Each Member's Total Percentage Interest in MRC, LLC as a whole will
be determined by dividing the Member's total positive Adjusted Capital Account
Balances of all Members into such Member's positive Adjusted Capital Account
Balance. Those Members with a Total Percentage Interest at least equal to the
Minimum Percentage together with the Class A Member-Managers will appoint the
Managing Board.
The Managing Board will appoint an Executive Committee, an Audit
Committee, and a Loan Committee and such other subcommittees as the Managing
Board shall specify from time to time. These committees will be empowered and
structured in a manner substantially identical to the analogous committees
which MRC has now.
The Managing Board shall also elect the officers of MRC, LLC.
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Member-Managers.
The Operating Agreement provides that the business and affairs of MRC,
LLC shall be managed by its Member-Managers through the Managing Board.
Member-Managers are (a) those Members with a Total Percentage Interest at
least equal to the Minimum Percentage and (b) to the extent not previously
taken into account, those Class A Members (but excluding their assignees)
which held sufficient shares of MRC's common stock immediately prior to the
initial Capital Contribution of the Class A Members to elect at least one
director at an annual meeting of the shareholders of MRC, and in either case
which have not declined in writing to serve as Member-Managers.
Upon consummation of the Restructuring, holders of Class A Membership
Interests with a Total Percentage Interest at least equal to the Minimum
Percentage (the "Class A Member-Managers") are as follows:
Chrysler Corporation Master Retirement Trust
Ford Motor Company
General Retirement System of the City of Detroit
Macomb County Employees Retirement System
Operating Engineers Local 324 Pension Fund
Policeman and Fireman Retirement System of the City of Detroit
State of Michigan, State Employees Retirement
State of Michigan, Public School Employees
Wayne County Retirement System
NBD Bancorp, Inc.
Immediately following the Offering of the Class B Membership
Interests, each Member's Total Percentage Interest in MRC, LLC as a whole will
be determined by dividing the Member's total positive Adjusted Capital Account
Balances of all Members into such Member's positive Adjusted Capital Account
Balance. Those Members with a Total Percentage Interest at least equal to the
Minimum Percentage together with the Class A Member-Managers will appoint the
Managing Board.
Anything to the contrary in the Operating Agreement notwithstanding,
Member-Managers in the aggregate must own at least a one (1) percent interest
in each material item of MRC, LLC's income, gain, loss, deduction or credit
during MRC, LLC's entire existence.
Managing Board after the Restructuring.
Under the Operating Agreement, the Member-Managers have delegated to
the Managing Board all of their rights and powers to manage and control the
business and affairs of MRC, LLC.
The Managing Board shall consist of that number of Managing Board
Members appointed from time to time pursuant to the terms hereof by the
Member-Managers and the Managing Board of MRC, LLC, but in no event shall the
number of Managing Board Members be fewer than three (3) or greater than forty
(40). Each Member-Manager is entitled, but is not required, to appoint the
greater of one (1) Managing Board
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Member to the Managing Board or that number obtained by dividing such
Member-Manager's Total Percentage Interest by the Minimum Percentage, rounded
down to the nearest whole number. In the event the Managing Board Members
appointed by the Member-Managers do not represent 100% of the Total Percentage
Interests, whether because a Member-Manager has declined to appoint a Managing
Board Member or otherwise, the Managing Board may appoint one (1) at large
Managing Board Member for each full Minimum Percentage of the Membership
Interests which would otherwise be unrepresented on the Managing Board. In the
event that fewer than three (3) Managing Board Members have been appointed by
the Member-Managers, each of the Managing Board Members, in order of their
Total Percentage Interests beginning with the largest Total Percentage
Interest, will be given the opportunity to appoint one (1) Managing Board
Member, until the Managing Board consists of three (3) Managing Board Members.
A Managing Board Member may resign by written notice to the MRC, LLC. A
Member-Manager may at any time upon written notice to the Managing Board
replace a Managing Board Member appointed by it, or fill an opening on the
Managing Board (i) which exists because it did not appoint the full number of
Managing Board Members to which it is entitled (in which event the Managing
Board shall remove the corresponding number of at large Managing Board
Members, to the extent necessary to reduce the number of Managing Board
Members to forty (40)), (ii) which was created by the death, resignation or
removal by such Member-Manager of a Managing Board Member previously appointed
by such Member-Manager, or (iii) which was created by an increase in such
Member-Manager's Total Percentage Interest. A person is not eligible to be a
Managing Board Member if such person serves as a trustee of an employee
benefit plan that owns any of MRC, LLC's Membership Interests. A Managing
Board Member need not be a resident of Michigan or a Member of MRC, LLC.
Upon the reduction by any Member-Manager of its Total Percentage
Interest to the extent that it no longer has a Total Percentage Interest
sufficient to appoint as many Managing Board Members as it had previously
appointed, there will be an immediate and corresponding removal from the
Managing Board of that number of Managing Board Members such Member-Manager no
longer has the ability to elect. The person(s) to be removed will be
determined by such Member-Manager and in the event it fails to do so, by the
action of the Managing Board.
It is anticipated that the Class A Member-Managers will appoint to the
Managing Board many of the same persons they nominated and elected to MRC's
Board of Directors. However, the identity of all Member-Managers and their
respective appointees to the Managing Board will not be known until the
Restructuring is consummated and the Offering is completed and the Total
Percentage Interests of the Members is finally determined.
Compensation and Expense Reimbursement.
No member of the Managing Board or any other committee shall be
entitled to receive compensation for serving as a Managing Board Member in
connection with regular or special meetings of the Managing Board or any other
committee. However, the Managing Board, by the affirmative vote of a majority
of Managing Board Members in office and irrespective of any personal interest
of any of them, may (a) reimburse the Managing Board Members and committee
members for their reasonable out-of-pocket expenses incurred in connection
with attending meetings or otherwise in connection with their duties as
Managing Board Members and committee members; and (b) establish reasonable
compensation of Managing Board
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Members for serving as members of the Executive Committee, Loan Committee, or
other committees established under the Operating Agreement.
No compensation has been established for any Managing Board Member in
connection with serving as a member of any committee.
Fiduciary Responsibility of Managing Board Members
Consistent with the duties and obligations of, and limitations on, the
Managing Board Members, and under the laws of the State of Delaware, the
Managing Board Members are accountable to the Members as fiduciaries and are
required to perform their duties in good faith in a manner each Managing Board
Member believes to be in the best interest of MRC, LLC, with such care,
including reasonable inquiry as a prudent person in a like position would use
under similar circumstances.
Limited Liability of Managing Board Members
MRC, LLC's Operating Agreement provides that a Managing Board Member
shall not be liable to a Member for a breach of the Managing Board Member's
fiduciary duty when the Managing Board Member has relied in good faith on the
provisions of the Operating Agreement. But liability for monetary damages will
remain with respect to the following situations: (a) receipt of a financial
benefit to which the Managing Board Member is not entitled; (b) knowing
violations of law; (c) unlawful distributions to Members; and (d) transactions
in which the Managing Board Member receives an improper financial benefit.
MRC, LLC's Operating Agreement does not however, insulate a Managing Board
Member from liability for bad faith conduct, limit the right of MRC, LLC or a
Member to obtain injunctive or other non-monetary relief (although the
availability of such equitable remedies may be of limited usefulness in
certain situations such as when a transaction has already been effected), or
affect a Managing Board Member's liability under the federal securities laws.
As a result of the inclusion of such provisions in MRC, LLC's
Operating Agreement, Members will receive more limited rights of action than
they would otherwise be entitled. However, the Company believes that the
inclusion of such provisions serve the best interests of MRC, LLC by giving
MRC, LLC's Managing Board Members the greatest degree of discretion in
managing MRC, LLC's affairs and by supplementing the protection from personal
liability presently provided to Managing Board Members by MRC, LLC's Operating
Agreement and by directors' liability insurance (to the extent available),
ultimately enabling MRC, LLC to attract and retain talented and qualified
Managing Board Members.
Committees after the Restructuring.
The Managing Board shall appoint an Executive Committee, a Loan
Committee, an Audit Committee and such other subcommittees as the Managing
Board shall specify from time to time.
The Executive Committee will be comprised of seven (7) members, to be
selected by the Managing Board as a whole from among its number. The Executive
Committee exercises all power and authority of the Managing Board in the
management of the business and affairs of MRC, LLC except that the Executive
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Committee does not have power or authority to take any action or recommend to
any Members that any action be taken which requires approval of any Members
pursuant to the Operating Agreement.
The Loan Committee will be comprised of nine (9) regular members and
three (3) alternate members. The regular and alternate members of the Loan
Committee will be selected by the Managing Board as a whole from among its
number. The Loan Committee will have such power and authority as the Managing
Board from time to time delegates to it.
The Managing Board will, through nominations made by the Chairman with
approval by resolution passed by a majority of the whole Managing Board,
appoint from among its members an Audit Committee composed of three (3) or
more Managing Board Members. The duties of the Audit Committee may include:
(i) recommending independent auditors; (ii) reviewing with the independent
auditors the scope of the audit, audit fees, the report of audit and the
management letter; (iii) reviewing with management and the independent
auditors the financial statements for the year; (iv) reviewing and approving
non-audit services by the independent auditors; and (v) consulting with the
independent auditors with regard to the adequacy of internal controls.
Meetings of Shareholders and Members
MRC
An annual meeting of the shareholders of MRC is held on a date, at a
time and at a location fixed by resolution of the Board of Directors
(generally in June). Directors are elected at each annual meeting and such
other business transacted as may come before the meeting. Special meetings of
shareholders may be called by the Board of Directors, the Chairman of the
Board or the President and must be called by the President or Secretary at the
written request of shareholders holding at least ten percent (10%) of the
shares of MRC's Common Stock outstanding and entitled to vote.
MRC, LLC
The Operating Agreement does not provide nor require annual or other
regular meetings of the Members nor does MRC, LLC anticipate that meetings of
the Members will be called on any regular basis. However, meetings of all
Members or of a class or classes of Members may be called by the Managing
Board, the Executive Committee or by the Chairman of the Managing Board, and
must be called upon the written request to the Managing Board of Members
holding in the aggregate at least ten percent (10%) of the Total Percentage
Interests of MRC, LLC or of the applicable class or classes.
Voting
MRC
Each share of MRC Common Stock is entitled to one vote on each matter
submitted to a vote. When an action, other than the election of directors, is
to be taken by a vote of the shareholders, it is authorized by a majority of
the votes cast by the holders of shares entitled to vote thereon, unless a
greater plurality is
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required by the Articles of Incorporation. Directors are elected by a
plurality of the votes cast at any election. The Articles of Incorporation
provide for cumulative voting for directors.
MRC, LLC
When an action is to be taken by a vote of the Members, it will be
authorized by the affirmative vote of the holders of a majority of Total
Percentage Interests entitled to vote thereon. The holders of a class of
Membership Interests may vote separately on any item of business which does
not materially affect any other class. Managing Board Members are appointed by
the Member-Managers, not elected.
Dissolution
MRC
The Articles of Incorporation of MRC provide that the term of the
corporation automatically expires on December 31, 2018, unless sooner
dissolved and liquidated.
MRC, LLC
MRC, LLC will dissolve and its affairs will be wound up on the first
to occur of the following events: (a) December 31, 2025; (b) the entry of a
decree of judicial dissolution, as provided under Delaware law; (c) by the
consent of Members holding at least 75% of the Total Percentage Interests of
MRC, LLC as a whole; (d) upon the death, retirement, resignation, expulsion,
Bankruptcy, or dissolution of a Member-Manager or the occurrence of any other
event that terminates the continued membership of a Member-Manager in MRC,
LLC, unless, in the case of disassociation of membership described in clause
(d) above, remaining Members representing either a majority of the Total
Percentage Interests of the Company (provided such majority represents a
majority of the profit interests of the Company) or, alternatively, a majority
of the Percentage Interests of each class or series, consent to the
continuation of the business of MRC, LLC within 90 days after the
disassociation.
The foregoing does not purport to be a complete description of the
differences between the statutory and other rights of the shareholders of MRC
and the Class A Members of MRC, LLC. Such differences can be determined in
full only by reference to the laws of the United States, the MBCA, the
Delaware Limited Liability Company Act (the "DLLCA"), the Articles of
Incorporation and Bylaws of MRC, and the Certificate of Formation and
Operating Agreement of MRC, LLC.
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INVESTMENT OBJECTIVES AND POLICIES AFTER THE RESTRUCTURING
General
The estimated net proceeds from the sale of Units of Class B
Membership Interests offered pursuant to the Offering (approximately
$24,637,000 if the minimum is sold, and approximately $49,637,000 if the
maximum is sold) will constitute the Class B Assets. The Class B Assets will
be segregated from and invested separately from the Class A Assets. Upon
consummation of the Restructuring, the assets of MRC will constitute the Class
A Assets, which as of December 31, 1995 are valued at $41,761,000, of which
approximately $15,773,000 are cash and Short-term Investments which are
available for investment in Real Estate Investments. Pursuant to the Operating
Agreement, the Managing Board must allocate investment opportunities on a fair
and equitable basis.
MRC,LLC intends to invest in Real Estate Investments which will (i)
provide current income, (ii) provide the opportunity for growth in income and
(iii) protect Members' capital. MRC,LLC may delegate the duty of management of
the assets and the administration of MRC,LLC's day-to-day operations to an
advisory company. However, no advisory company has been selected and there are
no existing plans to do so. Accordingly, the Managing Board will review,
analyze and select potential Real Estate Investments for presentation to the
Managing Board for approval. All investments will comply with current
underwriting criteria established by the Managing Board, and final investment
decisions will be made by the Managing Board in a manner consistent with the
policies established from time to time by MRC, LLC. See "MANAGEMENT AND
OPERATIONS AFTER THE RESTRUCTURING".
The Managing Board has the duty to insure that the purchase, sale,
retention and disposal of MRC,LLC's assets, and the investment policies of
MRC,LLC and the limitations thereon are consistent with the policies,
limitations and restrictions contained in MRC,LLC's Operating Agreement.
Except as specifically restricted in the Operating Agreement, the investment
objectives and policies of MRC,LLC are controlled by the Managing Board, which
has the power to modify such policies without the consent of the Members. The
Operating Agreement provides that MRC,LLC shall not engage in investment
practices or activities involving conflicts of interest, and shall not invest
in assets or receive income (to the extent of 90% of MRC,LLC's gross income),
except as would be permitted for a qualified real estate investment trust
under Section 856 of the Code.
In order to realize MRC,LLC's objective of participating in the income
growth and/or capital appreciation of Real Property, MRC,LLC's First Mortgage
and Junior Mortgage investments may contain various participation features
including the payment of additional contingent interest equal to (i) a
percentage of the gross revenues from the property and/or (ii) a percentage of
gross proceeds that may be realized upon sale, other disposition or
refinancing of such property.
Real Estate Investments may consist of different interests in the same
project. MRC,LLC may invest a portion of the required proceeds as debt and the
remainder as equity so that MRC,LLC becomes a partner with the borrower and
owns a portion of the property as well as being a lender, this being known as
a debt/equity investment.
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The types of Mortgage Loans in which MRC,LLC intends to invest include
First Mortgages and Junior Mortgages secured by office buildings, shopping
centers, hotels, multifamily residential properties, mixed use and
industrial/warehouse developments. Mortgage Loans may additionally include
single-family residential properties. The types of properties in which MRC,LLC
might take an equity ownership position include office buildings, shopping
centers, hotels, multi- and single-family residential properties, mixed use
and industrial/warehouse developments.
MRC,LLC intends to make where possible the majority of its Real Estate
Investments in Detroit, with the balance being in the eight county
metropolitan region constituting Southeast Michigan. A selection of any such
investments will be made only after MRC,LLC has decided that a particular Real
Estate Investment is as desirable to MRC,LLC as other similar alternatives
based on the projected return and after taking into account levels of risk.
There can be no assurance that satisfactory investments of the type
described herein can be located or acquired by MRC,LLC. MRC,LLC may in the
future conclude that its criteria for the selection of Real Estate Investments
may best be satisfied by other types of investments. The Unaffiliated
Representatives will review the investment policies of MRC,LLC at least
annually and may alter such policies if they determine that such a change is
in the best interest of the Members and that investment opportunities are
being allocated equitably between the classes.
Underwriting Criteria
In evaluating potential investments, the Managing Board may consider,
among other factors: (i) the experience, past performance, credit rating,
competence and managerial and marketing ability of prospective project
developers or owners; (ii) the geographic area and type of property in light
of MRC,LLC's investment objectives; (iii) the location, construction quality,
condition and design of the property; (iv) the projected loan-to-appraised
value ratio and the underlying assumptions on which such projections are
based; (v) the current and projected cash flow; (vi) the potential for capital
appreciation in the case of participating mortgages or equity investments;
(vii) the terms of tenant leases; (viii) the occupancy, supply of and demand
for properties of similar type in the vicinity; (ix) the prospects for
liquidity through sale, financing or refinancing of the project; and (x) such
other factors as become relevant in the course of the evaluation process. No
objective standards have been established with respect to the above criteria.
Investment selections will be based on the subjective analysis of the criteria
applicable to each prospective Real Estate Investment.
The Managing Board will require borrowers to provide market research
for any prospective investment and will perform an analysis of all potential
Real Estate Investments, including a review of the existing inventory and
vacancy rates of similar properties in the market area. In the case of Real
Estate Investments involving construction financing, the total construction
budget will be analyzed, including the direct and indirect building costs. The
Managing Board intends to review the projected appraised value of the property
as it is anticipated to exist upon completion, the interest rates and debt
service coverage requirements of permanent lenders in the market, the
existence of a permanent financing commitment for the project and the
anticipated sources of repayment for the investment.
Types of Investments
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Commercial Mortgage Loans
MRC,LLC's mortgage activity may include the origination of Mortgage
Loans, the purchase of existing Mortgage Loans, the sale of Mortgage Loans or
portions thereof, and the participation in Mortgage Loans created by
independent mortgage sources. MRC,LLC expects to make Mortgage Loans on
commercial projects which include, in addition to base interest at a fixed or
variable rate, provisions permitting MRC,LLC to participate in the economic
benefits of an increase in the underlying property's revenue stream and/or an
increase in the value of the underlying property realized through sale or
refinancing. Such participation features may take the form of additional
interest, issuance of a limited partnership interest, grant of an option to
acquire an equity interest in the Real Property, or acquisition of an interest
in the land underlying the improvements. The terms and the extent of any
participation features will vary with each transaction, depending on such
factors as the equity investment and financial resources of the borrower, the
base interest rate of the Mortgage Loan, the projected cash flow from the Real
Property and current market conditions.
In negotiating investments with participation features, MRC,LLC may
accept a lower base interest rate or rent than it would have been able to
negotiate in the absence of the enhancement. Current income may thereby be
reduced in anticipation of greater returns in later years. There can be no
assurance that any amounts will be realized from MRC,LLC's equity
enhancements. Mortgage Loans with participation features may not permit
prepayment by the borrower. In cases where prepayment is permitted, the
borrower will be required to pay a premium based upon the projected yield to
MRC,LLC over the remaining term of the Mortgage Loan.
MRC,LLC also may invest in Mortgage Loans which provide for the
accrual of a portion of the base interest until maturity or another specific
event. Such Mortgage Loans may require that a funded interest reserve be
maintained in an escrow account for the purpose of meeting a portion of the
interest. Any reserve will be set at an amount which, when added to the
projected cash flow from the Real Property, will be sufficient to enable the
borrower to pay operating expenses and the debt service associated with the
Mortgage Loan until the projected cash flow from the Real Property is
sufficient to cover these items. The adequacy of such reserve will depend upon
the accuracy of the projections used in its establishment.
MRC,LLC may make Mortgage Loans which provide for the repayment of
principal, in whole or in part, upon maturity in lump-sum "balloon" payments.
The borrower's ability to make such payments may depend upon its ability to
sell the property or obtain refinancing. Mortgage Loans may or may not be
personal obligations of the borrower and may or may not be insured or
guaranteed by governmental agencies or otherwise.
MRC,LLC intends to require, prior to making a Mortgage Loan for a
given real estate project, that the owner obtain suitable comprehensive,
liability, fire and extended coverage insurance for the property of the types
and in the amounts customarily obtained for similar projects. There are
certain types of losses, however, that may be either uninsurable or not
economically insurable. Should such a loss occur, MRC,LLC could lose its
investment in a property as well as its anticipated income from such property.
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Newly constructed or uncompleted properties have no operating history
and, accordingly, the decision to invest in such properties must be based on
projections as to rental demand, revenues and value upon completion. There can
be no assurance that such projections will prove to be accurate. Some of
MRC,LLC's Mortgage Loans may be made on properties where few, if any,
commitments to lease have been obtained, and there can be no assurance that
such properties will in fact be leased or leased at rental rates which will
generate the cash flow sufficient to cover MRC,LLC's Mortgage Loan. If the
funds disbursed by MRC,LLC with respect to any such property are exhausted
before the property achieves rental revenues sufficient to produce cash flow,
or if the revenues received from the property when fully leased are
insufficient to cover mortgage payments, taxes and other expenses, MRC,LLC's
return on investment may be lower than anticipated, or MRC,LLC may incur
losses, and MRC,LLC could lose some or all of its investment in such property.
MRC,LLC's Mortgage Loans may also include Junior Mortgage Loans which
are subordinate to liens of First Mortgages. In the event of a default on a
First Mortgage, MRC,LLC may make payments to prevent foreclosure on the First
Mortgage, without necessarily improving MRC,LLC's position with respect to the
subject Real Property. In such event, MRC,LLC may only share in the proceeds
after satisfaction of the amounts due to the holder of the First Mortgage. In
this regard, MRC,LLC may be required to acquire the position of the holder of
the First Mortgage. In the case of a Leasehold Mortgage Loan, a default under
the lease could also result in the loss of MRC,LLC's investment unless MRC,LLC
is able to cure such default.
Certain Mortgage Loans by MRC,LLC may involve relatively high
"loan-to-value" ratios and/or reliance upon the establishment and maintenance
by the borrower or lessee of a reserve to fund a portion of its payment
obligations to MRC,LLC.
Interest charged by MRC,LLC on its Mortgage Loans, including the
equity enhancement feature, may be limited by the usury laws of certain
states, including Michigan, which impose penalties, including enforceability
of the debt, in the making of usurious loans. Uncertainties may exist in
determining what constitutes interest, including, among other things, the
treatment of loan commitment or other fees payable by the borrower and the
treatment of equity enhancements such as rights to participate in a share of
the income or capital appreciation of the Real Property securing a Mortgage
Loan.
Some states, including Michigan, impose prohibitions or limits on
remedies available to the mortgagee, including its right to recover the debt
from the mortgagor. The effect of these prohibitions and limits is to compel a
mortgagee to rely upon the value of the mortgaged property to repay the debt.
The prohibitions and limits may prevent or impede the mortgagee from obtaining
a personal money judgment against the mortgagor.
Construction Loans
MRC,LLC may make Construction Loans. Typically a Construction Loan has
an interest rate that will float at a fixed percentage over a specified
commercial bank's prime lending rate with such rate determined by, among other
things, the developer's borrowing strength and credit history, projected cash
flow from the project to be constructed, project pre-leasing, current market
conditions, and whether there is any recourse to the borrower.
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MRC,LLC may offer developers a commitment to provide intermediate term
permanent financing, available for funding at the developer's option, to repay
a Construction Loan obtained by the developer from MRC,LLC or a third party in
reliance upon such commitment. The term of each commitment generally will be
from three to five years. The financing commitment may be for a participating
mortgage or a straight fixed rate mortgage. In each of such cases, the
Managing Board intends to apply the same underwriting criteria as are applied
in connection with all of MRC,LLC's Real Estate Investments. As consideration
for providing the standby commitment, MRC,LLC intends to charge a negotiated
fee for the commitment.
Loans to developers to finance construction are subject to special
risks, including cost overruns and the inability of the borrower to complete,
or complete on a timely basis, construction of the property. Construction
Loans are also subject to the risk that upon completion the permanent loan may
not fund because one or more conditions to the funding, such as rental
achievement or occupancy requirements, are not met, the risk of insolvency of
the developer and the risk that the value of the incomplete project securing
the loan may not equal the amount of the loan.
Equity Participations
MRC,LLC may invest in an equity ownership position in office
buildings, shopping centers, hotels, multi- and single- family residential
properties, mixed-use and industrial warehouses; however, it is intended that
these types of investments will not exceed 25% of the assets of MRC,LLC. The
investment goals and underwriting criteria to be utilized are the same as for
other types of Real Estate Investments. While MRC,LLC intends primarily to
make such investments on an all-cash basis, MRC,LLC may utilize borrowed funds
if doing so furthers MRC,LLC's objectives.
MRC,LLC may also participate in joint ventures with developers of
properties. A joint venture may involve special risks, including the
possibility that MRC,LLC's co-venturer may have economic or business interests
or goals that are inconsistent with those of MRC,LLC, the co-venturer may act
contrary to the instructions or requests of MRC,LLC or MRC,LLC's policies or
objectives with respect to its investments, or the co-venturer might prove
incompetent or become insolvent.
A portion of the Real Estate Investments may be in the form of
debt/equity transactions with developers of individual properties. In such
transactions, MRC,LLC will become a partner with the developer. A debt/equity
transaction may involve special risks associated with the possibilities that
(i) the developer may at any time have economic or business interests or goals
which are inconsistent with those of MRC,LLC, (ii) the developer may act in a
manner which is contrary to the instructions or requests of MRC,LLC or
contrary to MRC,LLC's policies or objectives with respect to its Real Estate
Investments, or (iii) the developer might prove unable to complete the project
on schedule and within its budget or might encounter financial difficulties.
Among other things, actions by a developer/partner might have the result of
subjecting the partnership to liabilities in excess of those contemplated by
the terms of the debt/equity transaction or might have other adverse
consequences.
In the case of debt/equity transactions in which MRC,LLC is a general
partner, the partnership agreements may provide that MRC,LLC is entitled to
exercise certain rights of control over the development of the properties in
the event of cost overruns, operating deficits or default. However, in
addition to such
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rights of management control incident to MRC,LLC's status as a general
partner, in such cases it may be jointly and severally liable as a general
partner for all recourse debts of the partnership. In cases where MRC,LLC is
or becomes a limited partner, the partnership agreements may grant to MRC,LLC
such rights of control as are consistent with its nonmanagement status as a
limited partner. In the event, however, that the exercise of any such rights
were to cause MRC,LLC to be deemed a general partner, it would also be jointly
and severally liable for partnership recourse debts in such cases,
notwithstanding the provisions of the agreement constituting it as a limited
partner.
Debt/equity transactions may also involve special tax risks resulting
from MRC,LLC's status as an equity partner with the developer. Such risks
include, but are not limited to, possible challenge by the Internal Revenue
Service of (i) the allocation of income and expense items, which if
reallocated could adversely affect the computation of taxable income of
MRC,LLC and (ii) the status of the venture as a partnership (as opposed to a
corporation). If the partnerships through which debt/equity transactions are
effected are treated as corporations for federal income tax purposes, they
would be subject to corporate income taxes. Furthermore, MRC,LLC would not be
able to deduct its share of losses, if any, generated by the partnership in
computing its taxable income. See "MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS". MRC,LLC will not consummate a debt/equity transaction unless
it has received advice from legal counsel to the effect that the entity
utilized will be treated for tax purposes as a partnership.
MRC,LLC may participate in these equity ownership investments with
other investors, and may become involved in joint tenancies, partnerships or
similar sharing arrangements.
The on-site management of MRC,LLC's equity Real Estate Investments
must be conducted by independent contractors. MRC,LLC, therefore, will be
dependent upon the operating skills of other persons, which generally will be
companies owned by the developers.
Reinvestment Policy
MRC,LLC intends to make quarterly distributions of income with respect
to MRC,LLC's Real Estate Investments which are part of the Class A Assets.
Distributions of principal will be returned as follows:
(i) prior to 2001, MRC,LLC has the option to reinvest any principal
returned with respect to Real Estate Investments which are part of the Class A
Assets; and
(ii) beginning in 2001, a Class A Member may elect each year to receive
its pro rata share of (x) principal returned with respect to Real Estate
Investments which are part of the Class A Assets, and (y) any cash or cash
equivalents which are part of the Class A Assets. Any part of the Class A
Assets which is not distributed pursuant to the foregoing may, at the option
of MRC,LLC, be reinvested in Real Estate Investments. Any such election must
be made by a Member in writing and must be received by MRC, LLC by the
November first preceding the fiscal year for which such election is to be
effective.
Any amounts which have not been distributed to Class A Members
pursuant to the foregoing shall be reinvested in Real Estate Investments as
soon as is practicable consistent with MRC,LLC's investment guidelines and
policies.
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Distributions may be made only if the Managing Board determines in its
reasonable judgment that the Company has sufficient cash on hand exceeding the
current and the anticipated needs of the Company to fulfill its business
purposes (including needs for operating expenses, debt service to third
parties, acquisitions, reserves, and mandatory distributions, if any).
Distributions will be made in cash. No distribution will be declared or made
if, after giving it effect, the Company would not be able to pay its debts as
they become due in the usual course of business or the Company's total assets
would be less than the sum of its total liabilities plus the amount that would
be needed if the Company were to be dissolved at the time of the distribution,
to satisfy the preferential rights of other Members on dissolution that are
superior to the rights of the Members receiving the distribution.
Borrowing Policies
MRC,LLC may borrow in order to meet the operating expenses of MRC,LLC.
Such additional funds shall be obtained from the proceeds of secured or
unsecured loans pursuant to such terms, provisions and conditions and in such
manner as the Managing Board shall determine. MRC,LLC shall not borrow funds
for any other purpose, including, without limitation, for the purpose of
acquiring or holding any Real Estate Investments. The aggregate borrowings for
MRC,LLC, secured and unsecured, may not exceed $1,000,000.
Arrangements with Advisory Company
In the event MRC,LLC retains an advisory company, the Managing Board
shall evaluate the performance of the advisory company before entering into or
renewing any management arrangements. Upon any termination of the initial
advisory arrangements, the Managing Board shall determine that any successor
advisory company possesses sufficient qualifications (i) to perform the
management function for MRC,LLC and (ii) to justify the compensation provided
for in its contract with MRC,LLC.
Each contract for the services of an advisory company entered into by
the Managing Board shall have a term of no more than 1 year and may be renewed
for successive 1 year terms at or prior to the expiration of the contract. For
the initial term of each contract, unless otherwise determined by the Managing
Board, such contract shall be terminable by a majority vote of the Managing
Board or of the Unaffiliated Representatives in the event the advisory company
shall have violated any provision of its agreement and, after notice of such
violation, shall have failed to cure such default within 60 days. After the
initial term of each contract, such contract shall be terminable by the
advisory company upon 120 days' written notice to MRC,LLC and shall be
terminable by MRC,LLC, at its option for any reason, upon 60 days' written
notice to the advisory company. The Managing Board shall determine that any
successor advisory company possesses sufficient qualifications to perform the
advisory function for MRC,LLC and to justify the compensation provided for in
its contract with MRC,LLC.
Other Operating and Investment Policies
MRC,LLC does not intend to engage in the active operation or
management of Real Property. If the nature of any Real Estate Investment
requires that MRC,LLC operate the property or furnish services to
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tenants, MRC,LLC will do so only through a property manager meeting the
requirements of an "independent contractor".
MRC,LLC has authority to make Short-term Investments, and it may do so
pending the investment of funds in Real Estate Investments, payment of
expenses or distributions to shareholders. MRC,LLC does not intend to acquire
any Real Estate Investments primarily for sale in the ordinary course of
business, or to hold any investments with a view to making short-term profits
from their sale.
MRC,LLC will not underwrite securities of other issuers and MRC,LLC
does not intend to invest in the securities of other issuers for the purpose
of exercising control. While the Certificate of Formation and Operating
Agreement do not prohibit MRC,LLC from issuing its securities in exchange for
property, at present it does not intend to do so.
Except as specifically restricted in MRC,LLC's Operating Agreement,
the investment policies of MRC,LLC are controlled by the Managing Board, which
has the power to modify or alter such policies without the consent of the
Members. Although MRC,LLC has no present intention of modifying its investment
policies described herein, the Managing Board may in the future conclude that
it would be advantageous to MRC,LLC to do so.
The Managing Board is required under its Operating Agreement to
furnish to the Members annual reports concerning the financial conditions and
results of operation of MRC,LLC and the Capital Accounts of the Members as
required by applicable law and otherwise in the time, manner, and form as the
Managing Board determines. The Managing Board will at a minimum provide annual
financial statements audited by MRC,LLC's accountant. Each annual report will
include a statement by class of Membership Interest of each Member's share of
profits and other items of income, gain, loss, deduction and credit and will
be prepared and delivered as soon as practicable after the end of the period
to which it pertains.
Prohibited Investments and Activities
The Operating Agreement of MRC,LLC prohibits or restricts certain
investment practices and activities of MRC,LLC, including investments which
may involve conflicts of interest, and specifically provides that MRC,LLC may
not engage in any of the following activities:
(a) Invest in commodities or commodity future contracts; except that
such limitation shall not apply to interest rate futures or options therefor
when used solely for hedging purposes.
(b) Invest in or make Mortgage Loans unless an appraisal is obtained
concerning the underlying property. In cases in which a majority of the
Unaffiliated Representatives so determines, and in all cases in which the
transaction is with the advisory company, if any, a Managing Board Member, a
Member-Manager, or an Affiliate thereof, such appraisal must be obtained from
an independent, qualified appraiser and such appraisal shall be maintained
in MRC,LLC's records for a period of 5 years and shall be available for
inspection by MRC,LLC's Members. In addition to an appraisal, a mortgagee's
or owner's title insurance policy or commitment as to the priority of the
Mortgage or the condition of the title must be obtained.
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(c) Invest in real estate contracts of sale, unless such contracts of
sale are in recordable form and are appropriately recorded in the chain of
title.
(d) Make or invest in Mortgage Loans, including Construction Loans, on
any one property if the aggregate amount of all Mortgage Loans outstanding on
the property, including the loans of MRC,LLC, would exceed an amount equal to
95% of the appraised value of the property as determined by appraisal, unless
a higher percentage is approved by a majority vote of the Managing Board
(including a majority of the Unaffiliated Representatives).
(e) Make or invest in any Mortgage Loans that are subordinate to any
Mortgage or equity interest of the advisory company, if any, a Managing Board
Member, a Member-Manager, or an Affiliate thereof.
(f) Issue equity securities that are redeemable at the option of the
holder thereof.
(g) Issue debt securities unless the historical debt service coverage
(in the most recently completed fiscal year) as adjusted for known charges is
sufficient to properly service that higher level of debt.
(h) Invest in the equity securities of any non-governmental issuer,
including real estate investment trusts or limited partnerships, for a period
in excess of 18 months.
(i) Issue Membership Interests on a deferred payment basis or similar
arrangement.
(j) Purchase property from the advisory company, if any, any director
or Affiliate thereof, unless a majority of the Uninterested Representatives
approve the transaction as being fair and reasonable to MRC,LLC and at a price
to MRC,LLC no greater than the cost of the asset to such advisory company, if
any, Managing Board Member or Affiliate thereof, or, if the price to MRC,LLC
is in excess of such cost, that substantial justification for such excess
exists and such excess is not unreasonable. In no event shall the cost of such
asset to MRC,LLC exceed its current appraised value.
(k) Sell property to the advisory company, if any, any director or
Affiliate thereof.
(l) Make loans to or borrow money from the advisory company, if any,
any director or Affiliate thereof, unless a majority of the Uninterested
Representatives approve the transaction as being fair, competitive, and
commercially reasonable and no less favorable to MRC,LLC than loans between
unaffiliated lenders and borrowers under the same circumstances.
(m) Invest in joint ventures with the advisory company, if any, any
director or Affiliate thereof, unless a majority of the Uninterested
Representative approve the transaction as being fair and reasonable to
MRC,LLC, and on substantially the same terms and conditions as those received
by the other joint ventures.
(n) Invest in assets or receive income (to the extent of 90% of
MRC,LLC's gross income), except as would be permitted for a qualified real
estate investment trust under Section 856 of the Code.
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(o) Enter into any other transactions with the advisory company, if
any, any director or Affiliate thereof, unless a majority of the Uninterested
Representatives approve the transaction as being fair and reasonable to
MRC,LLC and on terms and conditions not less favorable to MRC,LLC than those
available from unaffiliated third parties.
Annual Review of Investment Policies and Advisor Performance
The Unaffiliated Representatives shall review the investment policies
of MRC,LLC at least annually to determine that the policies then being
followed by MRC,LLC are in the best interest of its Members and that
investment opportunities are being allocated equitably between the classes.
MRC,LLC's Operating Agreement provides that the Unaffiliated
Representatives are to supervise the performance and the amount of
compensation which MRC,LLC contracts to pay to the advisory company, if any,
based on such factors as they deem appropriate. Such factors generally include
the size of the management fee in relation to the size, composition and
profitability of the investment portfolio of MRC,LLC, the success of the
advisory company in generating opportunities that meet MRC,LLC's investment
objectives, the rates charged to other companies similar to MRC,LLC and to
other investors by advisors performing similar services, additional revenues
realized by the advisory company and its Affiliates for other services
performed for MRC,LLC, the quality and extent of service and advice furnished
to MRC,LLC, and the performance of MRC,LLC's investment portfolio.
COMPARISON OF MRC CAPITAL STOCK
AND MRC, LLC CLASS A MEMBERSHIP INTERESTS
General
MRC is a corporation incorporated under the MBCA which operates as a
real estate investment trust for federal income tax purposes, and MRC, LLC is
a limited liability company organized under the DLLCA which is intended to be
taxed as a partnership for federal income tax purposes. Accordingly, the
shareholders of MRC and the Class A Members of MRC, LLC are generally subject
to different rights and restrictions under their respective forms of
organization and state laws and to different federal income tax
considerations.
Upon consummation of the Restructuring, Majority Shareholders of MRC
will become Class A Members of MRC, LLC; provided however that Minority
Shareholders as of October 7, 1996, will receive a cash payment equal to the
book value of their shares as of September 30, 1995 ($9.03 per share) in lieu
of the distribution of Class A Membership Interests. These cash payments will
be made exclusively from the Class A Assets. The Class B Membership Interests
will be offered separately. The rights of the Members, in addition to being
governed by the DLLCA, will be governed by the Operating Agreement of MRC,
LLC. Many of the provisions of the Operating Agreement closely parallel the
provisions of the Second Restated Articles of Incorporation and Restated
Bylaws of MRC. However, there are a number of differences between the DLLCA
and the Operating Agreement and the MBCA and the Second Restated Articles
of Incorporation and Restated Bylaws of MRC. The material differences are
discussed in the following paragraphs.
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An important difference between MRC Common Stock and MRC, LLC Class A
Membership Interests is that MRC Common Stock is listed on the American Stock
Exchange and was held by 53 shareholders of record on December 31, 1995 (which
management believes represents approximately 635 beneficial owners), and no
public market will exist for MRC, LLC Class A Membership Interests, which
management believes will be held by approximately 13 owners. However, the
average daily trading volume for MRC Common Stock for the one month period
ending December 31, 1995 was 490 shares, representing a 2.6% turnover on an
annualized basis.
Information concerning MRC, LLC will be publicly available to the
same extent as information is now available with respect to MRC, as MRC, LLC's
Membership Interests will be registered under Section 12(g) of the Securities
Exchange Act of 1934, and MRC, LLC will be required to file with the
Securities and Exchange Commission the same periodic reports which are
presently filed by MRC.
Limited Liability Companies
A limited liability company ("LLC") is a business organization that is
generally intended to be taxed as a partnership for federal income taxation
purposes, while providing limited liability protection as a corporation for
its members. The owners of the equity interests in an LLC are called
"members". An LLC, like a partnership, is a pass-through entity, and generally
its income and losses are taxed only at the member level. The business affairs
of an LLC are governed by an operating agreement, which is analogous to a
partnership agreement.
MRC, LLC has been formed under the DLLCA which contains many
provisions that may be varied by agreement among members, and as a result
provides a great deal of flexibility in structuring a customized business
organization.
Nature of Equity Interests
MRC
General.
The authorized stock of MRC is divided into two classes, Common Stock,
$.01 par value, of which MRC is authorized to issue 25,000,000 shares, and
Preferred Stock, $.01 par value, of which MRC is authorized to issue 5,000,000
shares. As of June 30, 1996, 4,532,169 shares of Common Stock were issued
and outstanding. No shares of Preferred Stock are issued and outstanding and
MRC has no current plans to issue any shares of Preferred Stock.
Certain Anti-Takeover Provisions.
The MRC Articles do not contain any provisions that could have an
effect of delaying, deterring or preventing a merger, tender offer or other
takeover attempt of MRC. MRC is not governed by Chapter 7A of the MBCA.
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Common Stock.
The holders of Common Stock are entitled to one vote for each share
held by them upon all matters presented to the shareholders. There is
cumulative voting for the election of directors. Holders of Common Stock are
entitled to receive such dividends as may be declared from time to time by the
Board of Directors, out of funds legally available therefor and, in the event
of liquidation of MRC, to share ratably in all assets remaining after payment
of liabilities, subject to the rights of holders of any Preferred Stock then
outstanding. The Common Stock has no preemptive or conversion rights. In the
event of any liquidation, dissolution or winding up of MRC, the holders of MRC
Common Stock will be entitled to receive pro rata all of the remaining assets
of MRC available for distribution to shareholders. The Common Stock is listed
on the American Stock Exchange. State Street Bank and Trust is the Transfer
Agent, Registrar and Dividend Paying Agent for the Common Stock.
The following table sets forth the dividends paid per share during
each quarter of the years ended December 31, 1995, 1994 and 1993 and during
the first two quarters of 1996:
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<TABLE>
<CAPTION>
1996 1995 1994 1993
Dividends Dividends Dividends Dividends
Paid Paid Paid Paid
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1st Quarter $.19 $.13 $.22 $.17
2nd Quarter --(1) .07 .12 $.14
3rd Quarter N/A .07 .05 $.05
4th Quarter N/A .07 .24 $.18
$.34 $.63 $.54
==== ==== ====
<FN>
(1) No dividends were paid for the quarter ended June 30, 1996 in
anticipation of the consummation of the Restructuring.
</TABLE>
Preferred Stock.
No shares of MRC Preferred Stock have been issued. The shares of MRC
Preferred Stock may be issued upon resolution of the Board of Directors and
without action or approval by the shareholders, in one or more series, with
the rights, preferences, privileges and restrictions of each such series to be
determined by the Board of Directors.
Dividends and Distributions.
MRC, as a real estate investment trust, is not subject to federal
income tax on taxable income with respect to any fiscal year distributed to
its shareholders during such fiscal year and the subsequent fiscal year, but
prior to filing its federal tax return in such subsequent fiscal year. It is
MRC's policy to pay cash dividends to shareholders on a quarterly basis in
aggregate amounts sufficient to distribute at least 95% of its "real estate
investment trust taxable income" in order to maintain its status as a
qualified real estate investment trust.
MRC, LLC
General.
MRC, LLC was formed by MRC on October 23, 1995 as a Delaware limited
liability company. The initial Members are Wayne S. Doran and Robert H.
Naftaly. Messrs. Doran and Naftaly are directors of MRC and will serve as the
initial Members of MRC, LLC until completion of the Restructuring and the
close of the Offering at which time they will resign as Members.
The Restructuring Agreement provides that the Majority Shareholders of
MRC shall receive in proportion to their Common Stock holdings in MRC, 100% of
the Class A Membership Interests. Following the completion of the
Restructuring, no additional Class A Membership Interests will be issued by
MRC, LLC. Similarly, in the event of the successful completion of the
Offering, at the closing thereof, MRC, LLC
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will issue to subscribers certificates representing 100% of the Class B
Membership Interests. Accordingly, Total Percentage Interests of each
subscriber will not be known until both the Restructuring and the Offering are
completed.
Class A Membership Interests will represent an interest in MRC's
existing investment pool and other net assets ("Class A Assets"), which will
be transferred to MRC, LLC as part of the Restructuring. When an action is to
be taken by vote of the Members, it will be authorized by the affirmative vote
of the holders of a majority of the Total Percentage Interests entitled to
vote thereon. Members of a particular class may vote separately on matters
which do not materially affect any other class. Class A Members will be
entitled to receive quarterly distributions of 100% of Class A Cash Income,
pro rata based upon their Class A Percentage Interests. Distributions of
principal will be returned as follows:
(i) prior to 2001, MRC,LLC has the option to reinvest any principal
returned with respect to Real Estate Investments which are part of the Class A
Assets; and
(ii) beginning in 2001, a Class A Member may elect each year to receive
its pro rata share of (x) principal returned with respect to Real Estate
Investments which are part of the Class A Assets, and (y) any cash or cash
equivalents which are part of the Class A Assets. Any part of the Class A
Assets which is not distributed pursuant to the foregoing may, at the option
of MRC,LLC, be reinvested in Real Estate Investments. Any such election must
be made by a Member in writing and must be received by MRC, LLC by the
November first preceding the fiscal year for which such election is to be
effective.
Distributions will be made only if the Managing Board determines in
its reasonable judgment that MRC, LLC has sufficient cash on hand exceeding
the current and the anticipated needs of the MRC, LLC to fulfill its business
purposes, and subject to certain other restrictions as provided in the
Operating Agreement. See also "THE OPERATING AGREEMENT" for additional
information applicable to Class A Membership Interests.
Disposition of Membership Interests.
In General. Every sale, assignment, transfer, exchange, mortgage,
pledge, grant, hypothecation, or other disposition of any Membership Interest
may be made only in compliance with the Operating Agreement. No Membership
Interest will be disposed of unless and until:
(a) such instruments as may be required by applicable law or to
effect the continuation of MRC, LLC and MRC, LLC's ownership of its properties
are executed and delivered and/or filed;
(b) the instrument of assignment binds the assignee to all of
the terms and conditions of the Operating Agreement, and all amendments
thereto, as if the assignee were a signatory party thereto; and
(c) the instrument of assignment is manually signed by the
assignee and assignor and is otherwise acceptable in form and substance to the
Managing Board.
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Prohibited Dispositions. Any attempted sale, assignment, transfer,
exchange, mortgage, pledge, grant, hypothecation, or other disposition of any
Membership Interest will be null and void if it is not made in compliance with
the requirements of the Operating Agreement or:
(a) if the disposition would cause a termination of MRC, LLC
under the Code;
(b) if the disposition would, in the opinion of tax counsel to
MRC, LLC, jeopardize the status of MRC, LLC as a partnership for federal
income tax purposes; or
(c) if the disposition would not be in compliance with any and
all state and federal securities laws and regulations.
Permitted Dispositions. Subject to applicable law, and the provisions
of the Operating Agreement, a Member may assign its Membership Interest in
MRC, LLC in whole or in part. The assignment of a Membership Interest does not
itself entitle the assignee to participate in the management and affairs of
MRC, LLC or to become a Member; an assignee is entitled only to receive, to
the extent assigned, the distributions to which the assigning Member would
otherwise be entitled.
Admission of Substitute Members. An assignee of a Transferable
Membership Interest pursuant to an assignment permitted in the Operating
Agreement shall, subject to its provisions, be admitted as a member in MRC,
LLC in the place of the assignor Member in respect of the Membership Interest
acquired from the assignor Member and shall have all of the rights, powers,
obligations, and liabilities, and be subject to all of the restrictions, of
the assignor Member, including, without limitation, but without release of the
assignor Member, the liability of the assignor Member for any existing
unperformed obligations of the assignor Member.
An assignee of a Restricted Membership Interest pursuant to an
assignment permitted in the Operating Agreement shall, subject to its
provisions, and with the consent of not less than a majority of the non-
transferring Member-Managers, be admitted as a member in MRC, LLC in the place
of the assignor Member in respect of the Membership Interest acquired from the
assignor Member and shall have all of the rights, powers, obligations, and
liabilities, and be subject to all of the restrictions, of the assignor
Member, including, without limitation, but without release of the assignor
Member, the liability of the assignor Member for any existing unperformed
obligations of the assignor Member.
A Restricted Membership Interest is a Class A or Class B Membership
Interest which represents at least 21% of the membership interests of such
class. A Transferable Membership Interest is a membership interest which is
not a Restricted Membership Interest.
No persons will be admitted as additional Members of any class.
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Dividends and Distributions.
It is intended that MRC, LLC will be classified as a partnership for
federal income tax purposes. MRC, LLC will make quarterly distributions of
100% of its Class A Cash Income to its Class A Members from time to time, pro
rata based on their Class A Percentage Interests. Distributions of principal
will be returned as follows:
(i) prior to 2001, MRC,LLC has the option to reinvest any principal
returned with respect to Real Estate Investments which are part of the Class A
Assets; and
(ii) beginning in 2001, a Class A Member may elect each year to receive
its pro rata share of (x) principal returned with respect to Real Estate
Investments which are part of the Class A Assets, and (y) any cash or cash
equivalents which are part of the Class A Assets. Any part of the Class A
Assets which is not distributed pursuant to the foregoing may, at the option
of MRC,LLC, be reinvested in Real Estate Investments. Any such election must
be made by a Member in writing and must be received by MRC, LLC by the
November first preceding the fiscal year for which such election is to be
effective.
Distributions will be made only if the Managing Board determines in
its reasonable judgment that MRC, LLC has sufficient cash on hand exceeding
the current and the anticipated needs of the MRC, LLC to fulfill its business
purposes, and subject to certain other restrictions as provided in the
Operating Agreement.
THE OPERATING AGREEMENT
This section of the Proxy Statement/Prospectus describes certain of
the more important aspects of the Operating Agreement. The following
description does not purport to be complete and is qualified in its entirety
by reference to the Operating Agreement, which is set forth as Appendix A to
this Proxy Statement/Prospectus. See also "MANAGEMENT AND OPERATIONS AFTER THE
RESTRUCTURING" and "COMPARISON OF MRC CAPITAL STOCK AND MRC, LLC CLASS A
MEMBERSHIP INTERESTS".
Purpose
The purpose of MRC, LLC is to engage profitably in any activity within
the purposes for which limited liability companies may be organized, to
produce the highest rate of return possible to its Members, and strengthen the
economy in southeastern Michigan by enabling developers, business owners and
other qualified borrowers to create jobs, including, to the extent permitted
by law, union jobs, by financing construction or rehabilitation projects.
There can be no assurance that this purpose will be realized.
Federal Income Tax Classification
As provided in the opinion of Coopers & Lybrand L.L.P., MRC, LLC
will be classified as a partnership for federal income tax purposes, and a
private letter ruling from the Internal Revenue Service
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to this effect is being sought. The private letter ruling request was
submitted to the Internal Revenue Service on January 5, 1996. The request is
still pending. Although MRC, LLC at this time anticipates receiving
a favorable ruling, the request involves issues of first impression and no
firm assurance can be given that the IRS will ultimately decide to issue
a ruling. See "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of
MRC, LLC and Members -- Partnership Status".
Classes of Members
MRC, LLC will initially have two classes of Members, Class A Members
and Class B Members. Each class of Members will have equal rights, powers and
duties, except as otherwise provided in the Operating Agreement. The Managing
Board may from time to time, without the vote or approval of any Member or
class or group of Members, amend the Operating Agreement to provide for
additional classes or groups of Members having such relative rights, powers
and duties as may be established (excluding however, any authority to create
rights, powers and duties senior to existing classes and groups of Members),
and to grant to all or certain identified Members or a specified class or
group of the Members the right to vote separately or with all or any class or
group of the Members, on any matter. Voting by such Members may be on a per
capita, number, financial interest, class, group or any other basis.
Meetings of Members
There will be no regularly scheduled meetings of the Members of MRC,
LLC. Meetings of all Members or of a class or classes of Members may be called
by the Managing Board, the Executive Committee or by the Chairman of the
Managing Board, and must be called upon the written request to the Managing
Board of Members holding in the aggregate at least ten percent (10%) of the
Total Percentage Interests of MRC, LLC or of the applicable class or classes.
Quorum and Voting
Unless a greater or lesser quorum is required by law, the Members
present at a meeting in person or by proxy who, as of the record date for such
meeting, were holders of a majority of the Total Percentage Interests of MRC,
LLC entitled to vote at the meeting shall constitute a quorum at the meeting.
When an action is to be taken by a vote of the Members, it will be authorized
by the affirmative vote of the holders of a majority of Total Percentage
Interests entitled to vote thereon. The holders of a class of Membership
Interests may vote separately on any item of business which does not
materially affect any other class. Managing Board Members are appointed by the
Member-Managers, not elected. The Managing Board may from time to time,
without the vote or approval of any Member or class or group of Members, amend
the Operating Agreement. to provide for additional classes or groups of
Members having such relative rights, powers and duties as may be established
(excluding, however, any authority to create rights, powers and duties senior
to existing classes or groups of Members), and to grant to all or certain
identified Members or a specified class or group of the Members the right to
vote separately or with all or any class or group of the Members, on any
matter. Voting by such Members may be on a per capita, number, financial
interest, class, group or any other basis.
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Redemption
MRC may acquire, by purchase, redemption or otherwise, any Membership
Interests, on such terms and conditions as may be approved by the Managing
Board. Any interest so acquired shall be deemed canceled, unless otherwise
determined by the Managing Board.
Initial Class A Contributions and Members
The assets of MRC, subject to its liabilities, will be contributed to
MRC, LLC as the Capital Contribution of the Class A Members. These assets,
together with the additions and replacements thereto, will constitute the
Class A Assets. The Class A Membership Interests will represent an interest
only in the Class A Assets. The interests will be structured so that Class B
Cash Income will be passed through quarterly and principal will be reinvested.
Fees and expenses attributed solely to the Class A Assets will be allocated to
the holders of Class A Membership Interests in proportion to their Capital
Accounts.
Class A Capital Accounts
MRC, LLC will establish and maintain a separate capital account for
each Class A Member. Each such capital account will be:
(i) credited with such Class A Member's share, determined in
accordance with its Class A Percentage Interest, of the Class A
Assets, consisting of the amount of cash and the initial Gross
Asset Value (net of liabilities secured by such contributed
property that MRC, LLC assumes or takes subject to) of any
other property which is part of the Class A Assets, such Class
A Member's distributive share of Profits, and generally any
items in the nature of income or gain that are specially
allocated to such Class A Member, and
(ii) debited with the amount of cash and the Gross Asset Value (net
of liabilities secured by such distributed property that such
Class A Member assumes or takes subject to) of any property
distributed to such Class A Member pursuant to any provision of
the Operating Agreement, such Class A Member's distributive
share of Losses, such Class A Member's share, determined in
accordance with its Class A Percentage Interest, of certain
expenditures of the MRC, LLC, and generally any items in the
nature of expenses or losses that are specially allocated to
such Class A Member.
Initial Class B Contributions and Members
The initial Class B Members will be those persons who purchase Class B
Membership Interests as part of the Offering, and the initial Class B Capital
Contributions will be the net proceeds of the Offering.
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Class B Assets
The Class B Assets will consist of the Capital Contributions of the
Class B Members, together with all additions and replacements thereto. MRC,
LLC will establish and maintain a separate bookkeeping account for the Class B
Assets.
Class B Capital Accounts
MRC, LLC will establish and maintain a separate capital account for
each Class B Member. Each such capital account will be:
(i) credited with such Class B Member's share, determined in
accordance with its Class B Percentage Interest, of the Class B
Assets, consisting of the amount of cash and the initial Gross
Asset Value (net of liabilities secured by such contributed
property that MRC, LLC assumes or takes subject to) of any
other property which is part of the Class B Assets, such Class
B Member's distributive share of Profits, and generally any
items in the nature of income or gain that are specially
allocated to such Class B Member, and
(ii) debited with the amount of cash and the Gross Asset Value (net
of liabilities secured by such distributed property that such
Class B Member assumes or takes subject to) of any property
distributed to such Class B Member pursuant to any provision of
the Operating Agreement, such Class B Member's distributive
share of Losses, such Class B Member's share, determined in
accordance with its Class B Percentage Interest, of certain
expenditures of the MRC, LLC, and generally any items in the
nature of expenses or losses that are specially allocated to
such Class B Member.
Capital Accounts and Capital Contributions in General
Except as otherwise provided in the Operating Agreement, (i) no
interest will accrue on any Capital Contribution or on the positive balance,
if any, in any Capital Account, (ii) no Member will have any right to withdraw
any part of its Capital Account or to demand or receive the return of its
Capital Contribution, or to receive any distributions from MRC, LLC, (iii) no
Member shall be required to make any contribution to the capital of, or any
loan to, MRC, LLC, and (iv) no Member shall have any liability for the return
of any other Member's Capital Account or Capital Contributions.
Anything to the contrary in the Operating Agreement notwithstanding,
Member-Managers in the aggregate must maintain throughout the entire existence
of MRC, LLC a minimum Capital Account balance equal to the lesser of (i) one
(1) percent of the total positive Capital Account balances, or (ii) $500,000.
Allocation of Expenses
Class A Assets will be used and applied solely for the benefit of the
Class A Members. Except to the extent required by applicable law, Class A
Assets will be used only to pay Class A Expenses, the Restructuring Expenses,
and the allocable share of General Expenses.
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Class B Assets will be used and applied solely for the benefit of the
Class B Members. Except to the extent required by applicable law, Class B
Assets will be used only to pay Class B Expenses, the Public Offering
Expenses, and the allocable share of General Expenses.
General Expenses shall be allocated to the Class A Assets according to
the following formula: each item of General Expense shall be multiplied by a
fraction, the numerator of which is the total of the book value of any REO
Property and the outstanding principal balance of the Mortgage Loans which are
part of the Class A Assets and the denominator of which is the total of the
book value of any REO Property and the outstanding principal balance of all of
the Mortgage Loans of MRC,LLC. General Expenses shall be allocated to the
Class B Assets according to the following formula: each item of General
Expense shall be multiplied by a fraction, the numerator of which is the total
book value of any REO Property and the outstanding principal balance of the
Mortgage Loans which are part of the Class B Assets and the denominator is the
total of the book value of any REO Property and the outstanding principal
balance of all of the Mortgage Loans of MRC,LLC. The allocation of General
Expenses will be the same for GAAP and tax purposes.
Indemnification
MRC, LLC's Operating Agreement provides that MRC, LLC shall indemnify
its member and managers to the fullest extent authorized or permitted by the
Delaware Limited Liability Company Act ("DLLCA"), as the same exists or may
hereafter be amended, and such right to indemnification shall continue as to a
person who has ceased to be a Member-Manager of MRC, LLC and shall inure to
the benefit of his or her heirs, executors and administrators; provided,
however, that, except for proceedings to enforce rights to indemnification,
the MRC, LLC shall not be obligated to indemnify any Member or Manager (or his
or her heirs, executors or administrators) in connection with a proceeding (or
part thereof) initiated by such person unless such proceeding (or part
thereof) was authorized or consented to by the Member-Managers of the MRC,
LLC. The right to indemnification includes the right to be paid by MRC, LLC
the expenses incurred in defending or otherwise participating in any
proceeding in advance of its final disposition. In addition, MRC, LLC may, by
action by the Member-Managers, provide indemnification to employees and agents
with the same scope and effect as the foregoing indemnification of members and
managers.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, MAY BE PERMITTED TO MEMBERS, OFFICERS OR
PERSONS CONTROLLING MRC, LLC, PURSUANT TO THE FOREGOING PROVISIONS, MRC, LLC,
HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE
COMMISSION SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE
ACT AND IS THEREFORE UNENFORCEABLE.
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THE RESTRUCTURING AGREEMENT
The Restructuring
Assignment of Assets and Assumption of Liabilities; Conversion of Common Stock
Held by Majority Shareholders into Class A Membership Interests.
All of the assets and liabilities of MRC will be assigned to and
assumed by MRC, LLC, in exchange for all of the Class A Membership Interests
of MRC, LLC. Each share of MRC Common Stock held by a Majority Shareholder on
the Record Date will be cancelled and retired, and cease to exist, and MRC
will, upon surrender of such Majority Shareholder's certificates for MRC
Common Stock, distribute to such Majority Shareholder in proportion to the
number of shares of MRC Common Stock owned by it on the Record Date, in
liquidation, the Class A Membership Interests. A "Majority Shareholder" is a
holder of MRC Common Stock whose total holdings both beneficially and of
record are 50,000 shares or more on the Record Date. Each Majority Shareholder
will, at and after the Effective Date of the Restructuring, cease to have any
rights as a shareholder of MRC, except for the right to receive its
proportionate share of the Class A Membership Interests upon surrender of its
certificates for MRC Common Stock.
Conversion of Common Stock Held by Minority Shareholders into Right to Receive
Cash Payment.
Each share of MRC Common Stock held by a Minority Shareholder on the
Record Date will be cancelled and retired, and cease to exist, but will
automatically be converted into and the holder thereof will be entitled to
receive upon presentation of the certificate or certificates therefor to MRC,
LLC, cash in the amount of $9.03 per share of MRC Common Stock, without any
interest thereon. A "Minority Shareholder" is a holder of MRC Common Stock
whose total holdings both beneficially and of record are fewer than 50,000
shares on the Record Date. Each Minority Shareholder will, at and after the
Effective Date of the Restructuring, cease to have any rights as a shareholder
of MRC, except for the right to surrender such holder's shares for the cash
payment.
Conditions to the Restructuring
Each of MRC's and MRC, LLC's obligation to effect the Restructuring is
subject to the following conditions, among others:
(a) The Restructuring Agreement shall have been approved and adopted
by the affirmative vote of the shareholders of MRC and the members of MRC, LLC
by the requisite vote in accordance with applicable law;
(b) No statute, rule, regulation, executive order, decree, order or
injunction shall have been enacted, entered, promulgated or enforced by any
court or governmental authority which prohibits or materially and adversely
restricts the consummation of the Restructuring; and
(c) The Registration Statement on Form S-4 of which this Proxy
Statement/Prospectus forms a part and the Registration Statement on Form S-11
with respect to the Class B Membership Interests shall
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have become effective under the Securities Act and no stop order suspending
the effectiveness of such Form S-4 and Form S-11 shall have been issued and no
proceeding for that purpose shall have been undertaken or threatened by the
SEC.
Effective Date of the Restructuring
The Restructuring will become effective upon the filing of a
Certificate of Dissolution with respect to MRC with the Michigan Secretary of
State. It is expected that if the Restructuring is approved by MRC
shareholders at the Special Meeting, and assuming that the conditions to the
Restructuring are satisfied, the Restructuring will become effective during
the fourth calendar quarter of 1996.
Surrender of MRC Stock Certificates
After the Effective Date of the Restructuring, MRC, LLC will make the
cash payments described above to the Minority Shareholders and will distribute
the Class A Membership Interests to the Majority Shareholders, as follows.
Promptly after the Effective Date of the Restructuring, MRC, LLC will mail to
each Minority Shareholder a form letter of transmittal and instructions for
use in effecting the surrender for payment therefor of certificates which
prior to the Restructuring represented MRC Common Stock, and will mail to each
Majority Shareholder a form letter of transmittal and instructions for use in
effecting the surrender for Class A Membership Interests of certificates which
prior to the Restructuring represented MRC Common Stock. After the Effective
Date of the Restructuring and until so surrendered and exchanged, each
outstanding certificate which prior to the Effective Date of the Restructuring
represented shares of MRC Common Stock owned by a Minority Shareholder will be
deemed for all purposes to represent only a right to receive a cash payment of
$9.03 per share, and each outstanding certificate which prior to the Effective
Date of the Restructuring represented shares of MRC Common Stock owned by a
Majority Shareholder will be deemed for all purposes to represent only a right
to receive such shareholder's pro rata share of the Class A Membership
Interests, and no interest will be paid or accrued on the amount payable upon
surrender of any such certificates. Upon surrender to MRC of such certificates
by a Minority Shareholder, together with such letter of transmittal duly
executed, MRC will pay to the persons entitled thereto, in cash or equivalent,
the amount to which such persons are entitled. If payment is to be made to a
person other than the one in whose name the certificate surrendered is
registered, it will be a condition of such payment that the certificate so
surrendered must be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay to MRC, LLC any transfer
or other taxes required by reason of the payment to a person other than the
registered holder of the certificate surrendered, or establish to the
satisfaction of MRC, LLC that such tax has been paid or is not applicable.
Upon surrender to MRC of such certificates by a Majority Shareholder, together
with such letter of transmittal duly executed, such person shall be reflected
upon the books and records of MRC, LLC as a Class A Member to the extent of
its Percentage Interest. If any holder of MRC Common Stock is unable to
surrender such holder's MRC certificates because such certificates have been
lost or destroyed, such holder may deliver in lieu thereof an affidavit and
indemnity bond in form and substance and with surety reasonably satisfactory
to MRC, LLC.
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Conduct Pending the Restructuring
The Restructuring Agreement provides that between the date of the
Restructuring Agreement and the Effective Date of the Restructuring:
(a) No change will be made in the Articles of Incorporation or
Bylaws of MRC;
(b) MRC will not make any change in its authorized or issued
capital stock, declare or pay any dividend or other distribution other than in
the ordinary course of business in order to maintain its status as a qualified
real estate investment trust under Section 856 of the Internal Revenue Code of
1986, as amended, or issue, encumber, purchase or otherwise acquire any of its
capital stock;
(c) MRC will use its best efforts to maintain and preserve its
business organization, employee relationships and goodwill intact, and will
not, without the prior written consent of MRC, LLC, enter into any material
commitment, except in the ordinary course of its business;
(d) No change will be made in the Certificate of Formation or
Operating Agreement of MRC, LLC; and
(e) MRC, LLC will not, without the prior written consent of
MRC, enter into any material commitment, except in the ordinary course of its
business.
Effect of Restructuring
Operating Agreement and Management.
The Operating Agreement of MRC, LLC, as in effect on the Effective
Date of the Restructuring, will be the Operating Agreement of the Surviving
Organization. Each director of MRC who was nominated by those shareholders of
MRC which held sufficient shares to elect at least one (1) director at an
annual meeting of shareholders of MRC pursuant to its Bylaws immediately prior
to the Effective Date of the Restructuring will be an initial Managing Board
Member of the Surviving Organization after the Effective Date of the
Restructuring. The officers of MRC immediately prior to the Effective Date of
the Restructuring will be the officers of the Surviving Organization until
their respective successors have been duly appointed by the Managing Board.
Cessation of Business.
MRC will cease to carry on any business on and after the Effective
Date, except as may be necessary for the accomplishment of the transactions
contemplated by the Restructuring Agreement. MRC's Board of Directors and its
officers will be authorized and empowered to take any and all actions
necessary or appropriate to complete the liquidation of MRC.
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Closing of Transfer Books
From the Record Date to and including the Effective Date of the
Restructuring, no transfer of shares of MRC Common Stock will be made on the
stock transfer books of MRC.
Termination
The Restructuring Agreement may be terminated at any time prior to the
Effective Date of the Restructuring, whether before or after approval of the
matters presented in connection with the Restructuring by the consent of MRC
and MRC, LLC, or by either MRC or MRC, LLC, if any court of competent
jurisdiction or other governmental body in the United States shall have issued
an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Restructuring and such
order, judgment or decree shall have become final and nonappealable. In the
event of the termination of the Restructuring Agreement and the Restructuring,
the Restructuring Agreement shall become void and there shall be no liability
hereunder on the part of either party.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following summarizes the opinion of Coopers & Lybrand, L.L.P.
regarding the material federal income tax consequences regarding the
Restructuring and is based on current law. Much of this discussion is
general in nature and does not purport to deal with the tax considerations of
particular shareholders or all the ramifications of the Restructuring for
certain types of shareholders (including, for example, tax-exempt entities,
foreign shareholders, financial institutions, broker-dealers, etc.) who may
receive special treatment under the federal income tax laws.
EACH SHAREHOLDER IS URGED TO CONSULT ITS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES (INCLUDING FEDERAL, STATE, LOCAL AND FOREIGN TAXES)
OF THE RESTRUCTURING (INCLUDING THE ACQUISITION, OWNERSHIP AND SALE OF
MEMBERSHIP INTERESTS IN MRC, LLC) AND OF ANY POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
The Restructuring
General.
Through a series of transactions, MRC proposes to convert to a
limited liability organized under Delaware law ("MRC, LLC"). MRC will
contribute or assign substantially all of its assets and liabilities to MRC,
LLC in exchange for all the Class A Membership Interests in MRC, LLC.
Thereafter, existing Majority Shareholders of MRC will receive the Class A
Membership Interests in proportion to and in exchange for their stock
ownership in MRC in a liquidating transaction. Minority Shareholders as of May
6, 1996, or such later date as may be determined by the Executive Committee of
MRC will be entitled to a cash payment in lieu of receiving Class A Membership
Interests in MRC, LLC. In addition, MRC, LLC will issue Class B Membership
Interests to new investors in exchange for cash.
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In general, holders of the Class A Membership Interests will be
entitled to participate proportionately in the Class A Assets, which will
consist initially of the former assets of MRC that are transferred to MRC,
LLC. Holders of Class B Membership Interests will participate in the Class B
Assets, which will consist initially of the net proceeds of the offering of
Class B Membership Interests as invested by management. Under the Operating
Agreement, certain expenses of MRC, LLC may be borne entirely by the Class A
Assets (including income and accretions thereto) or entirely by the Class B
Assets (including income and accretions thereto), while other expenses may be
borne proportionately among both pools of assets. Notwithstanding MRC, LLC's
intention to so apportion expenses, neither the Class A Assets nor the Class B
Assets will be beyond the reach of MRC, LLC's general creditors.
Federal Tax Consequences of the Restructuring
The Organizational Transactions.
No gain or loss will be recognized by MRC upon the contribution of
its assets to MRC, LLC in exchange for Class A Membership Interests, provided
(1) MRC, LLC is classified as a partnership for federal income tax purposes,
and (2) no more than eighty percent (80%) of the value of MRC, LLC's assets
(excluding cash and nonconvertible debt obligations) are represented by
readily marketable stocks or securities, or interests (shares) in regulated
investment companies or REITs. In addition, no gain or loss will be recognized
by holders of Class B Membership Interests upon the contribution of cash to
MRC, LLC solely in exchange for such interests.
After the contribution of its assets to MRC, LLC in exchange for MRC,
LLC Class A Membership Interests, MRC will distribute the Class A Membership
Interests to the Majority Shareholders in a liquidating distribution. Under
Section 336(a) of the Code, the distribution will be treated as if MRC sold
the distributed membership interests to the distributees at fair market value
(i.e., net value of property distributed, plus liabilities assumed or taken
subject to), and gain or loss will be recognized. Based on the appraised
values of MRC's assets, that MRC will realize a net loss as a result of the
distribution.
Amounts received by shareholders in a distribution in complete
liquidation will be treated as full payment in exchange for their stock
pursuant to Section 331 of the Code. Gain or loss will be recognized based on
the difference between the amount of the distribution and the shareholder's
tax basis in its MRC stock. Such gain or loss may be excludable from unrelated
business taxable income ("UBTI") of a tax exempt shareholder, depending on the
circumstances of the particular investor (e.g., whether the investment was
"debt-financed"). See "-- Tax Exempt Investors", below, for additional
discussion of the UBTI rules.
The liquidating distribution of Class A Membership Interests to the
Majority Shareholders will result in a termination and reconstitution of MRC,
LLC solely for tax purposes under Section 708 of the Code. Generally, under a
Section 708 termination, the bases of MRC, LLC's assets will be substituted
with the bases of MRC, LLC Class A Membership Interests held by its Class A
Members. The new bases will then carryover to the reconstituted MRC, LLC.
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Taxation of MRC, LLC and Members
Partnership Status
In the opinion of Coopers & Lybrand L.L.P., MRC,LLC will be
classified and treated as a partnership for federal income tax purposes, as
described more fully below. As a partnership, MRC,LLC will not be subject to
federal income tax, but will pass through items of income, gain, deduction,
loss and credit to Members.
Prior to obtaining an opinion from Coopers & Lybrand L.L.P., MRC, LLC
filed a request on January 5, 1996 for a private letter ruling from the IRS
which recognizes that it is classified as a partnership for federal income tax
purposes. The request is still pending. Although MRC, LLC at this time
anticipates receiving a favorable ruling, the request involves issues of first
impression and no firm assurance can be given that the IRS will ultimately
decide to issue a ruling. Should the IRS ultimately decide not to issue a
ruling, MRC, LLC's classification for tax purposes will not be adversely
affected by this decision. However, if the IRS declines to rule, it could also
decide to challenge MRC, LLC's classification for tax purposes,
notwithstanding the opnion of Coopers & Lybrand L.L.P. If such challenge were
successful, then under certain conditions MRC, LLC could be subject to Federal
income tax (including applicable alternative minimum tax) on its taxable
income at corporate rates.
Partnership Classification Standards
For purposes of section 7701(a) of the Code, section 301.7701-2 of the
Income Tax Regulations, provides that an unincorporated organization that
possesses business associates and an objective to carry on business and divide
the gains therefrom, will be classified as a partnership if it lacks at least
two of the following four corporate characteristics:
1) continuity of life;
2) centralized management;
3) free transferability of interests; and
4) limited liability.
Coopers & Lybrand L.L.P. has reviewed the standards and other
requirements relating to partnership classification and the pertinent
provisions of the Operating Agreement. In the opinion of Coopers & Lybrand
L.L.P., MRC,LLC will at least lack the corporate characteristics of continuity
of life and free transferability of interests for federal income tax
classification purposes. Accordingly, MRC,LLC will be classified as a
partnership under section 7701(a) of the Code.
If MRC, LLC is not classified as a partnership (either because it
fails the basic partnership classification standards, or is treated as a PTP
or TMP), MRC, LLC or a portion of its assets could be treated as an
association that is taxable as a corporation for federal income tax purposes.
As an ordinary corporation, MRC, LLC would be subject to an entity level tax.
However, if MRC, LLC were classified as a corporation, it may be able
to elect qualified REIT status on a prospective basis, provided it otherwise
satisfies the REIT organizational, asset and income
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tests.** As a qualified REIT, MRC, LLC would be entitled to a deduction for
distributions paid to shareholders, and would thereby avoid an entity level
tax on income that is so distributed.
Under Section 1.856-2(b) of the Income Tax Regulations, a REIT
election is made by computing taxable income as a REIT in the tax return for
the taxable year for which the election is to be effective. If MRC, LLC files
returns other than as a REIT (i.e., as a partnership), and it is subsequently
determined that MRC, LLC is not a partnership for federal tax purposes, then
MRC, LLC may be subject to an entity level tax for such prior years
notwithstanding that it makes a valid REIT election following the adverse
determination.
If MRC, LLC is classified as a corporation, the tax consequences of
holding MRC, LLC's Membership Interests would also be affected. Rather than
reporting income, gain, loss and deductions under the partnership tax rules,
distributions by MRC, LLC would be treated as corporate distributions to the
extent they are paid from corporate earnings and profits. Distributions in
excess of earnings and profits may be treated either as a return of capital or
as a gain if the distributions exceed a Member's tax basis in its Membership
Interest. Such treatment may cause a Member to realize a different amount of
income for tax purposes than if it were allocated income under the partnership
tax rules.
Furthermore, if MRC, LLC is classified as corporation, but makes a
valid election to be taxed as a REIT, the taxation of its distributions may be
subject to special rules relating to capital gain distributions and tax
withholding under the Foreign Investment In Real Property Tax Act in the case
of foreign investors. Although corporate distributions ordinarily are not
considered to be unrelated business taxable income for tax-exempt investors,
under certain circumstances when a REIT is considered a "pension held REIT"
under Section 856(h)(3) of the Code, its distributions or a portion thereof
may be UBTI.
Publicly Traded Partnership Rules
Even though MRC,LLC is classified as a partnership for purposes of
section 7701(a) of the Code, in order to be treated as a partnership for
federal income tax purposes MRC,LLC cannot be subject to the publicly traded
partnership rules in section 7704 of the Code.
Generally, section 7704(a) provides that a publicly traded partnership
("PTP"), with certain exceptions, will be treated as a corporation for
purposes of Title 26. Under section 7704(b), an entity may be classified as a
publicly traded partnership ("PTP") if interests in the entity are traded on
an established securities market, or are readily tradable on a secondary
market (or the substantial equivalent thereof).
- --------
**Under Section 1.856-2(b) of the Income Tax Regulations, MRC, LLC may not be
permitted to elect REIT status for any taxable years for which it filed its
return as a partnership, notwithstanding an adverse determination classifying
it as a corporation.
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However, under section 7704(c)(1) and (2), corporate classification
will not be imposed on a partnership if at least 90 percent of its income is
qualifying income (irrespective of whether its interests are traded on an
established securities market, secondary market, or the substantial equivalent
thereof). Under section 7704(d)(1), qualifying income includes rents,
interest, dividends, and gains from the sale of real property (including
dealer property sales described in section 1221(1))) or from other capital
assets.
With respect to interest, section 7704(d)(2) incorporates the
restrictions provided in section 856(f) of the REIT rules, which generally
prohibit interest income that is based on the income or profits of another
person. Section 7704(d)(2) also provides that qualifying interest does not
include interest derived from the conduct of a financial or insurance
business.
Section 7704(d)(4) further provides that the term "qualifying income"
for purposes of the PTP rules includes any income that would qualify for REIT
purposes under section 856(c)(2). Such income generally includes interest,
dividends, rents, gains from the sale of securities or real estate assets,
property tax refunds and foreclosure property income.
The PTP rules do not define what constitutes a financial or insurance
business for purposes of section 7704(d)(2), although a similar restriction is
also found in the REIT rules. Under section 856(a)(4), a REIT can be neither a
financial institution (referred to in section 582(c)(5)[582(c)(2)]), nor an
insurance company to which subchapter L applies.
The legislative history for the financial business restriction in the
PTP rules provides that:
"...[A]n exception is provided for certain partnerships, 90 percent of
whose gross income is passive-type income....[P]assive-type income is
defined as certain interests, dividends, real property rents,
etc....[T]he purpose of distinguishing between passive-type income and
other income is to distinguish those partnerships that are engaged in
activities commonly considered as essentially no more than
investments, and those activities more typically conducted in
corporate form that are in the nature of active business
activities....[F]or example, interest income from the conduct of a
banking business is not treated as passive-type income, as deriving
interest is an integral part of the active conduct of the business."
The report also refers to a securities broker/dealer as an example of
a financial business. House Committee Report, P.L. 100-203.
Under Article IX, section 9.2(n) of the Operating Agreement, MRC,LLC
is required to invest only in assets that would be qualifying REIT assets, and
to receive gross income (to the extent of 90 percent of its total gross
income) that would be qualifying REIT income under section 856(c)(2) of the
Code. MRC,LLC's actual gross income will consists primarily of interest, but
may include some rents from real property in the case of foreclosed properties
or gains from the sale of properties.
With respect to interest earned by MRC,LLC on mortgages or other debt
instruments, MRC,LLC represents that such amounts will be qualified interest
under section 856(f), for purposes of section 7704(d)(2)(B). MRC,LLC further
represents that rents from real property will be qualifying
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rents under section 7704(d)(3) and that it will not hold assets for sale to
customers in the ordinary course of a trade or business.
For purposes of section 7704(d)(2)(A), which prohibits deriving
interest from the conduct of a financial or insurance business, MRC,LLC
further represents that it will not be a financial institution under section
582(c) (nor an insurance company subject to subchapter L of the Code), since
it is not organized under either Federal or state banking laws, will not be a
depository institution and will not be engaged in the business of banking.
Except in the case of default, MRC,LLC will hold all mortgages for investment
purposes until they mature or are refinanced. In addition, MRC,LLC represents
that it is not a registered securities broker/dealer, financial advisor or
underwriter.
Although section 7704 does not define a financial business, it is
clear from the statute and the legislative history that holding
interest-generating obligations for investment purposes only cannot be
considered a financial business. The example in the committee report indicates
that interest would be considered active income when it was an integral part
of another active business, i.e., a bank or a securities broker/dealer.
Accordingly, based on MRC,LLC's representations regarding the
qualification of its income under the REIT rules, the avoidance of dealer
property sales and not being classified as a financial institution, securities
broker/dealer, insurance company or financial advisor, in the opinion of
Coopers & Lybrand L.L.P., MRC,LLC will not be a financial business for
purposes of section 7704(d)(2) of the Code. Consequently, MRC,LLC will satisfy
the qualifying income exception under the PTP rules and will not be treated as
a corporation under section 7704(a) of the Code.
Taxable Mortgage Pool Rules
Under the taxable mortgage pool ("TMP") rules in section 7701(i) of
the Code, an entity, or portion thereof, may be classified as a corporation if
substantially all of its assets are debt obligations, at least fifty percent
of which are mortgages, and such entity is the obligor under debt obligations
with two or more maturities (the payments on which bear a relationship to
payments made on the underlying assets).
The income tax regulations and legislative history provide that the
taxable mortgage pool rules are intended to prevent income from escaping
federal taxation when a mortgage pool is used to issue multiple class
mortgage-backed securities. Furthermore, section 301.7701(i)-1(e)(1) of the
regulations provides that debt obligations will have two or more maturities if
they have different stated maturities or if the holders of the obligations
possess different rights concerning the acceleration of or delay in the
maturity of the obligations.
Section 301.7701(i)-2(a) and (b) of the regulations provides that a
portion of an entity includes all assets that support one or more of the same
issues of debt obligations, but does not include assets that are unlikely to
produce any significant cash flows for the holders of the debt obligations.
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Section 7701(i)(2)(D) of the Code provides that to the extent provided
in regulations, equity interests of varying classes which correspond to
maturity classes of debt shall be treated as debt for purposes of this
subsection.
The TMP rules are intended to apply to obligations of varying payment
classes that are supported by a single pool of mortgages. This type of
investment structuring, in which mortgages are "sliced" into fast-pay,
slow-pay cash flows may result in the deferral or avoidance of significant
amounts of income recognition.
MRC,LLC's classes of Membership Interests are not interests in a
taxable mortgage pool for several reasons. First, both the Class A Membership
Interests and the Class B Membership Interests represent traditional equity
interests, rather than debt obligations, for purposes of sections 7701(i)(1)
and 7701(i)(2)(D). Neither class of Membership Interests includes a stated
principal amount, nor an unconditional obligation to repay such an amount.
Neither class of Membership Interests includes a stated interest amount for
the use or forebearance of money and neither class is considered debt under
state law.
Furthermore, even if the Company's Membership Interests are
characterized as debt obligations for purposes of the TMP rules, the classes
of shares representing each mortgage pool do not have multiple maturities for
purposes of section 7701(i)(2)(A). Under the statute, payments on debt
obligations with multiple maturities must bear a relationship to payments
received on the assets of the entity or the assets of a portion of the entity.
In accordance with the statute and for purposes of determining a portion of an
entity, section 301.7701(i)-2(a) and (b) of the regulations segregates those
assets of an entity that will support payments on outstanding debt issuances
from those assets that are unrelated to such issuances.
Under the principle set forth in this regulation, each class of
interests issued by MRC,LLC is separately analyzed with respect to the
underlying assets that support that class. For example, because each Class A
Membership Interest participates only in Class A Assets and the Class A Assets
support only the Class A Membership Interests, then only the Class A
Membership Interests are considered in determining whether the Class A Assets
support a debt issuance with multiple maturities. Since the terms of each
Class A Membership Interest are identical in all material respects to every
other Class A Membership Interest, multiple maturities do not exist and the
Class A Assets cannot be a taxable mortgage pool. A comparable analysis
applies with respect to the Class B Assets.
Accordingly, the different classes of Membership Interests will not
result in the creation of a taxable mortgage pool within the meaning of
section 7701(i) of the Code.
In conclusion, in the opinion of Coopers & Lybrand L.L.P., MRC,LLC
will be classified as a partnership for federal income tax purposes under
section 301.7701-2 of regulations and will not be treated as a corporation
under either the publicly traded partnership rules of section 7704 of the Code
or as a taxable mortgage pool under section 7701(i) of the Code.
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Taxation of MRC, LLC Members
Items of income, gain, loss, deduction or credit of MRC, LLC will be
allocated proportionately (based on class of membership interests) to Members,
which will be treated as a partners for tax purposes. As partners for tax
purposes, Members may be subject to tax on their distributive share of income
or gain, without regard to whether they receive a distribution from MRC, LLC.
Under Section 704(d) of the Code, a Member's distributive share of
losses of MRC, LLC (including capital losses) is limited to such Member's
adjusted basis in the MRC, LLC interests, determined at the end of the taxable
year in which such loss occurred. A loss disallowed under this provision may
be deducted in the taxable year when it is repaid to MRC, LLC by the Member.
Under MRC, LLC's Operating Agreement, Class A Members generally will
be allocated items of income, deduction, gain and loss attributable to the
Class A Assets, and will receive distributions from income and other sources
attributable to the Class A Assets. Class B Members will receive similar
allocations and distributions attributable to the Class B Assets. In addition,
Class B Members may receive regular distributions of cash attributable to
principal repayments on mortgages constituting the Class B Assets. Certain
general expenses of MRC, LLC will be allocated proportionately among both
classes.
Under Section 731 of the Code, in the case of a distribution of money
to a Member, gain will not be recognized by such Member, except to the extent
that any money so distributed exceeds the adjusted basis of the Member's
interest in MRC, LLC immediately before the distribution. In addition, losses
will not be recognized by Members as a result of a distribution of money
(other than in liquidation of a Member's interest in MRC, LLC). Any gain or
loss recognized as a result of a distribution will be considered as gain or
loss from the sale or exchange of the Member's interest in MRC, LLC.
Member Tax Basis
The initial basis of an MRC, LLC interest for a Class A Member will be
the net fair market value of such interest, plus the Member's share of
liabilities of MRC, LLC following the admission of Class B Members. The
initial basis of Class B Member's interest will be the amount of cash
contributed by such Member, plus the Member's allocable share of liabilities.
Provided no Member is liable for the liabilities of MRC, LLC, such
liabilities will be considered non-recourse for purposes of determining a
Member's basis. Under Section 1.752-3 of the Income Tax Regulations,
non-recourse liabilities are allocated first to the extent of a Member's
Section 704(b) share of partnership minimum gain; second, to the extent a
Member would realize taxable gain under Section 704(c) if all of MRC, LLC's
property that is subject to non-recourse debt were sold for the amount of the
debt and no other consideration; and, third, in proportion to the Member's
share of profits of MRC, LLC. Following the organization of MRC, LLC, it will
have no section 704(b) minimum gain or Section 704(c) gain; thus, liabilities
will be allocated in accordance with a Member's profits interest.
The tax basis of a Membership Interest that is attributable to such
liabilities will be reduced as the result of the admission of new Members
(e.g., the admission of Class B Members following the initial
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admission of Class A Members), since the new Members will be entitled to their
allocable share of liabilities in accordance with their profits interests. To
the extent liabilities are thus shifted from a Member, such amount will be
treated as a distribution to such Member. This distribution is applied against
and reduces the tax basis of such Member's interest in MRC, LLC. To the extent
such deemed distribution exceeds a Member's basis, it could create taxable
gain.
However, it is anticipated that MRC, LLC's liabilities will be small
relative to its total assets (current liabilities are less than one percent of
what will be the Class A Assets). Assuming such liabilities remain de minimis,
a deemed distribution resulting from a liability shift will likewise be de
minimis and should not exceed a Member's basis.
Under Section 705 of the Code, a Member's basis in MRC, LLC Membership
Interests will also be adjusted for the Member's distributive share of MRC,
LLC's taxable income (based on the class of Membership Interest), tax-exempt
income, losses and non-capital expenditures that are not otherwise taken into
account in computing taxable income. In addition, under Section 733 a Member's
basis will be reduced (but not below zero) for non-liquidating distributions
by the amount of money distributed to such Member and by the amount of the
basis in the hands of the Member of any property distributed to such Member.
Minimum Gain Chargebacks and Qualified Income Offsets
For income tax regulatory compliance purposes, the Operating
Agreement contains minimum gain chargeback and qualified income offset
provisions. In the event that either of these mandatory allocations is
triggered, it could cause some Class A income to be allocated to Class B
Members, or Class B income to be allocated to Class A Members.
A minimum gain chargeback would be triggered upon a net decrease in
partnership minimum gain for a taxable year. Minimum gain is the amount by
which MRC, LLC's nonrecourse debt exceeds its basis in property subject to the
debt.* A decrease in minimum gain could occur, for example, as the result of
the payment of a liability or the sale of a property subject to nonrecourse
debt. If there is a reduction in MRC, LLC's minimum gain, then to the extent
of the minimum gain chargeback MRC, LLC may be required to allocate
proportionately each and every item of gain or income to any Member who was
previously allocated nonrecourse deductions.
MRC, LLC represents that it does not intend to maintain any
significant levels of debt and therefore does not anticipate creating any
minimum gain that could result in a chargeback. Nevertheless, no assurance can
be given that minimum gain chargebacks will not occur.
A qualified income offset could occur when a Member receives a
distribution from MRC, LLC at a time when such Member has an excess negative
capital account balance (i.e., a negative balance in excess of a Member's
obligation to make additional contributions). In this case, a portion of each
and every item of MRC, LLC's income or gain could be allocated to such Member
until the capital account is no longer
- --------
*Assuming no Member will bear the economic risk of loss for any debt of the
Company, it is likely that all of the Company's debt would be considered
nonrecourse.
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negative. Although MRC, LLC represents that it does not intend to make
distributions that would result in negative capital account balances for any
Member, no assurance can be given that qualified income offsets will never be
required.
Tax Allocations With Respect To Contributed Properties
Pursuant to Section 704(c) of the Code, income, gain, loss, and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership,
must be allocated in a manner such that the contributing partner is charged
with, or benefits from, respectively, the unrealized gain or unrealized loss
associated with the contributed property. The amount of such unrealized gain
or loss is generally equal to the difference between a property's fair market
value and its adjusted tax basis, and is referred to as the "book-tax
difference." Such allocations are solely for tax purposes, and do not affect
the book capital accounts or other economic or legal arrangements of the
parties.
MRC, LLC was formed by way of contributions of appreciated or
depreciated assets. However, as a result of the formation transactions, any
book-tax difference will be eliminated and special allocations should not be
required under Section 704(c). However, should other appreciated or
depreciated assets be contributed to MRC, LLC, or should a book-tax disparity
otherwise arise, special allocations could be required under Section 704(c).
Tax Exempt Investors
General
Income from unrelated trades or businesses may be subject to tax in
the hands of a tax exempt entity. Generally, income from a partnership is
deemed to be unrelated business taxable income ("UBTI") for most tax exempt
pension and profit-sharing funds, except that the Code specifically excludes
from UBTI all dividends, interest, amounts received as consideration for
entering into agreements to make loans, royalties, certain gains from sales of
investments, certain rents, certain other items, and all deductions directly
connected with such income.
Fees
Certain service fees that MRC, LLC may generate or be reimbursed for
(e.g., legal, accounting, appraisal and closing costs) do not represent
interest or other excluded forms of income and therefore may be included in
UBTI. Typically, these types of fees are reimbursements for costs incurred by
MRC, LLC and may be offset at least partially by expense deductions that are
directly connected to the fee income.
Real Property Rents
Although MRC, LLC does not intend to invest in real property for the
production of rents, it may nevertheless acquire such properties as a result
of foreclosure or other transactions. In such case, in order to avoid
generating UBTI, MRC, LLC may manage such properties in accordance with
certain restrictions
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set forth in the federal income tax regulations. These restrictions are not
materially different from certain REIT rules that MRC is currently required to
follow in managing real property it may hold.
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Debt-financed Property
Generally, a portion of any income from property that is
"debt-financed" is considered UBTI. The term "debt-financed" generally means
any debt that is incurred or carried in connection with the acquisition or
improvement of property. The portion of income that is included in UBTI is
that proportion of the total gross income that is derived from or on account
of debt-financed property as the average acquisition indebtedness bears to the
average amount of the property's adjusted basis throughout the year. To the
extent MRC, LLC has no acquisition indebtedness within the meaning of Section
514 of the Code, it should not produce any debt-financed income that is
includible in UBTI.
Dealer Property Sales
Gain or loss realized from the sale, exchange or other disposition of
property held primarily for sale to customers in the ordinary course of a
trade or business (i.e., dealer property sales) is UBTI. Whether a particular
transaction is a dealer property sale depends on all the relevant facts and
circumstances of the transaction. Although MRC, LLC does not intend to
generate UBTI from dealer property sales, no assurance can be given that such
UBTI will always be avoided.
Other Tax Considerations
MRC, LLC and its Members may be subject to state or local taxation in
various state or local jurisdictions. In addition, special tax considerations
may apply depending of the tax status and circumstances of particular
investors. Consequently, investors are urged to consult their own tax advisor
with respect to the Restructuring.
CONSIDERATIONS FOR PENSION FUND INVESTORS
The following summary of the material legal considerations regarding
an investment in Class A Membership Interests by certain pension fund
investors has been prepared by Bodman, Longley & Dahling LLP and is based on
current law. This discussion is general in nature and does not purport to deal
in detail with the legal considerations of particular shareholders or with all
of the ramifications of an investment in the Class A Membership Interests.
Pension Plans Subject to the Employee Retirement Income Security Act of 1974
A fiduciary of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA")
should consider the fiduciary standards under ERISA in the context of the
plan's particular circumstances before authorizing or continuing an investment
of a portion of such plan's assets in the Class A Membership Interests. Such
fiduciary should consider, among other factors, whether the investment
satisfies the ERISA prudence and diversification requirements, and whether the
investment is in accordance with the documents governing the plan.
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The fiduciary also should consider the ERISA prohibited transaction
rules, particularly those which prohibit self-dealing and the receipt of
compensation.
Moreover, the fiduciary should be aware that under Section 2510.3-101
of the United States Department of Labor regulations, 29 CFR ss.2510.3-101
(the "DOL Regulation"), the assets of an entity in which a plan invests may be
deemed, under certain circumstances, to be plan assets. In such an event, the
officers and directors of the entity will be required to manage the entity's
assets in accordance with the fiduciary standards of ERISA. If MRC's assets
were deemed to be plan assets, MRC, and its respective Members and Managing
Board Members, could be subject to the fiduciary standards under ERISA.
Compliance with these standards could interfere with MRC's own investment
objectives and policies.
The DOL Regulation provides that if securities are "publicly-offered
securities", within the meaning of such regulation, the assets of the issuer
of the securities will not be deemed to be plan assets. MRC has covenanted in
the Operating Agreement to do or cause to be done whatever is required so that
the Class A and Class B Membership Interests will be "publicly-offered
securities" within the meaning of the DOL Regulation, as amended, or any
successor provision.
Michigan Public Employee Retirement Systems
The investment of funds of public employee retirement systems under
Michigan law is governed by Act No. 314, Public Acts of Michigan, 1965, as
amended (the "Act"). The Act has not been amended since the enactment of the
Michigan Limited Liability Company Act, Act. No. 23, Public Acts of Michigan,
1993, as amended, which authorized the formation and operation of limited
liability companies in Michigan, and does not explicitly address the
investment of assets of public employee retirement systems in membership
interests of limited liability companies.
A fiduciary of a public employee retirement system subject to the Act
should consider the fiduciary standards under Section 13 of the Act, as
amended, in the context of the system's particular circumstances before
authorizing or continuing an investment of a portion of such plan's assets in
the Class A Membership Interests. Such fiduciary should consider, among other
factors, whether the investment is reasonably designed, as part of the
investments of the system, to further the purposes of the system, taking into
consideration the risk of loss and the opportunity for gain or other return
associated with the investment. The fiduciary should also give consideration
to the prudence and diversification requirements of the Act.
Further, the fiduciary should satisfy itself that the investment by
such public employee retirement system in the Class A Membership Interests
will not contravene the Act. In this regard, the fiduciary should review with
its counsel the applicability to the particular retirement system of Sections
20d of the Act, which provides that a fiduciary may invest up to a certain
percentage of the system's assets in investments not otherwise qualified under
the Act. That section provides, in part, that a fiduciary of a system having
assets of $250,000 or more may invest not more than 10% of the system's assets
in investments not otherwise qualified under the Act, and that the fiduciary
of a system who is the Treasurer of the State of Michigan may invest not more
than 15% of the system's assets in such investments. Because compliance with
Section 20d of the Act is an inherently factual, and not legal, matter,
neither MRC nor Bodman, Longley & Dahling LLP
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expresses any opinion as to whether or not the investment of any public
employee retirement system's assets in Class A Membership Interests will be in
compliance with the Act.
EACH FIDUCIARY OF A PLAN SUBJECT TO ERISA OR OF A PUBLIC EMPLOYEE RETIREMENT
SYSTEM IS URGED TO CONSULT ITS OWN LEGAL COUNSEL REGARDING THE SPECIFIC
CONSIDERATIONS UNDER FEDERAL AND STATE LAW CONCERNING AN INVESTMENT IN THE
CLASS A MEMBERSHIP INTERESTS AND OF ANY POTENTIAL CHANGES IN APPLICABLE LAWS.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. served as MRC's independent certified public
accountants for the year ended December 31, 1995 and has been selected by MRC
to serve in such capacity for 1996. Coopers & Lybrand L.L.P. is expected to
have representatives at the Special Meeting who will be available to respond
to appropriate questions at that time and have an opportunity to make a
statement if they so desire.
EXPERTS
The financial statements and the financial statement schedule of MRC
included in Form 10-K and in Form 10-K/A and incorporated by reference in this
Prospectus have been incorporated by reference herein in reliance on the
report of Coopers & Lybrand L.L.P., given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
Legal matters in connection with the Restructuring will be passed upon
by Bodman,Longley & Dahling LLP, 100 Renaissance Center, 34th Floor, Detroit,
Michigan 48243. F. Thomas Lewand, a member of Bodman, Longley & Dahling LLP,
is a director of MRC. As of June 30, 1996, no shares of MRC Common Stock
were beneficially owned by attorneys in the firm of Bodman, Longley & Dahling
LLP.
OTHER MATTERS
The MRC Board of Directors, at the date hereof, is not aware of any
business to be presented at the Special Meeting, other than that referred to
in the Notice of Special Meeting of Shareholders and discussed herein. If any
matters should properly come before the Special Meeting, the persons named as
proxies will have discretionary authority to vote the shares represented by
proxies in accordance with their discretion and judgment as to the best
interests of MRC.
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FURTHER INFORMATION
A registration statement under the Securities Act of 1933 has been
filed with the Securities and Exchange Commission, Washington, D.C. with
respect to the securities offered hereby. This Proxy Statement/Prospectus does
not contain all the information set forth in the registration statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information pertaining to the
securities offered hereby, reference is made to the registration statement,
including the exhibits filed as a part thereof. This Proxy
Statement/Prospectus contains a fair summary of documents referred to herein
and which are filed as exhibits to the registration statement.
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GLOSSARY
As used in this Prospectus, the following terms have the definitions
hereinafter indicated. Where applicable, calculations to be made pursuant to
any such definition will be made in accordance with generally accepted
accounting principles, except as otherwise provided in such definition.
"Act" means Act No. 314, Public Acts of Michigan, 1965, as amended.
"Adjusted Basis" shall have the meaning given such term in Section
1011 of the Code.
"Adjusted Capital Account Balance" shall mean with respect to each
Member, the balance of such Member's Capital Account at the end of the fiscal
year increased by any amount which the Member is deemed to be obligated to
restore pursuant to the penultimate sentences of Regulation Sections
1.704-2(g)(1) and (i)(5). In determining the amounts distributable to the
Members, it shall be presumed that (i) all of MRC's assets would be sold at
their Gross Asset Value, (ii) payments to any holder of a nonrecourse debt
would be limited to the Gross Asset Value of the assets secured by repayment
of such debt, and (iii) the proceeds of such hypothetical sale would be
applied and distributed in accordance with the Operating Agreement.
"AMEX" means the American Stock Exchange.
"Appraisal" means the limited appraisal in a summary format prepared
by C&W of the market value of each of the mortgage notes secured by mortgages
which constitute MRC's loan portfolio as of August 1, 1995 valuation date.
"Bankruptcy" shall mean, with respect to a person, the happening of
any of the following:
(a) the making of a general assignment for the benefit of
creditors;
(b) the filing of a voluntary petition in bankruptcy or the
filing of a pleading in any court of record admitting in writing an inability
to pay debts as they become due;
(c) the entry of an order, judgment or decree by any court of
competent jurisdiction adjudicating the person to be bankrupt or insolvent;
(d) the filing of a petition or answer seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation;
(e) the filing of an answer or other pleading admitting the
material allegations of, or consenting to, or defaulting in answering, a
bankruptcy petition filed against the Person in any bankruptcy proceeding;
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(f) the filing of an application or other pleading or any
action otherwise seeking, consenting to or acquiescing in the appointment of a
liquidating trustee, receiver or other liquidator of all or any substantial
part of the person's properties;
(g) the commencement of any proceeding seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation which has not been quashed or
dismissed within 180 days; or
(h) the appointment without consent of such person or
acquiescence of a liquidating trustee, receiver or other liquidator of all or
any substantial part of such person's properties without such appointment
being vacated or stayed within 90 days and, if stayed, without such
appointment being vacated within 90 days after the expiration of any such
stay.
"Board" or "Board of Directors" shall mean the board of directors of
MRC.
"Capital Contribution" shall mean, with respect to any Member, the
amount of money contributed by that Member to the Company and, if property
other than money is contributed, the initial Gross Asset Value of such
property, net of liabilities assumed or taken subject to by the Company.
"Class A Assets" will consist of the Capital Contributions of the
Class A Members, together with all additions, attachments, accretions,
accessions, mutations, replacements, substitutions, renewals, interest,
distributions, distributions, rights of any kind, products, or proceeds of or
pertaining to any of the foregoing. The Company shall establish and maintain a
separate bookkeeping account for the Class A Assets.
"Class A Capital Account" shall have the following meaning:
The Company will establish and maintain a separate capital account for
each Class A Member. Each such capital account will be:
(i) credited with such Class A Member's share, determined
in accordance with its Class A Percentage Interest,of the Class A
Assets, consisting of the amount of cash and the initial Gross Asset
Value (net of liabilities secured by such contributed property that
the Company assumes or takes subject to) of any other property which
is part of the Class A Assets, such Class A Member's distributive
share of Profits, and generally any items in the nature of income or
gain that are specially allocated to such Class A Member, and
(ii) debited with the amount of cash and the Gross Asset
Value (net of liabilities secured by such distributed property that
such Class A Member assumes or takes subject to) of any property
distributed to such Class A Member pursuant to any provision of the
Operating Agreement, such Class A Member's distributive share of
Losses, such Class A Member's share, determined in accordance with its
Class A Percentage Interest, of certain expenditures of the Company
and generally items in the nature of expenses or losses that are
specially allocated to such Class A Member.
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"Class A Cash Income" shall mean all cash or cash equivalents received
by the Company from Company operations attributable to the Class A Assets,
including, without limitation, interest received on Mortgage Loans and other
investments, less the sum of all expenses of the Company attributable solely
to the Class A Assets, less return of principal on Mortgage Loans or other
investments and proceeds from the sale of REO Property that do not represent
gain which are attributable solely to the Class A Assets, and less the sum of
the following items not attributable to a particular class or series, to the
extent paid or set aside by the Company, multiplied by a fraction, the
numerator of which is the total of the book value of any REO Property and the
outstanding principal balance of the Mortgage Loans which are part of the
Class A Assets and the denominator of which is the total of the book value of
any REO Property and the outstanding principal balance of all of the Mortgage
Loans of the Company:
(a) All principal and interest payments on indebtedness of the Company
and all other sums paid to lenders;
(b) All cash expenditures incurred incident to the normal operation of
the Company's business; and
(c) Such reserves as the Managing Board deems reasonably necessary to
the proper operation of the Company's business.
"Class A Expenses" means those expenses and debts incurred by the
Company that are attributable solely to the Class A Assets.
"Class A Member" means those persons admitted as Class A Members
pursuant to Section 4.1 of the Operating Agreement and any other person
admitted to the Company as a substituted Member of a Class A Member, that has
not made a disposition of such person's entire Interest.
"Class A Membership Interests" means the Class A limited liability
company membership interests of MRC, LLC.
"Class A Percentage Interest" shall mean the percentage identified as
such Member's Class A Percentage Interest, as the same may be increased or
decreased from time to time to the provisions of the Operating Agreement.
"Class A Return" shall mean all cash or cash equivalents received by
the Company from Company operations attributable to the Class A Assets which
does not constitute Class A Cash Income, including, without limitation, return
of principal on Mortgage Loans and other investments and the proceeds from the
sale of REO Property that do not represent gain; less, to the extent paid or
set aside but not taken into account when computing Class A Cash Income, the
sum of all expenses of the Company attributable solely to the Class A Assets,
and less the sum of the following items not attributable to a particular class
or series, to the extent paid or set aside by the Company, multiplied by a
fraction, the numerator of which is the total of the book value of any REO
Property and the outstanding principal balance of the Mortgage Loans which are
part of the Class B Assets and the denominator of which is the total of the
book value of any REO Property and the outstanding principal balance of all of
the Mortgage Loans of the Company:
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(a) All principal and interest payments on indebtedness of the Company
and all other sums paid to lenders;
(b) All cash expenditures incurred incident to the normal operation of
the Company's business; and
(c) Such reserves as the Managing Board deems reasonably necessary to
the proper operation of the Company's business.
"Class B Assets" will consist of the Capital Contributions of the
Class B Members, together with all additions, attachments, accretions,
accessions, mutations, replacements, substitutions, renewals, interest,
distributions, distributions, rights of any kind, products, or proceeds of or
pertaining to any of the foregoing. The Company will establish and maintain a
separate bookkeeping account for the Class B Assets.
"Class B Capital Account" shall have the following meaning:
The Company, will establish and maintain a separate account for each
Class B Member. Each such capital account will be:
(i) credited with such Class B Member's share, determined
in accordance with its Class B Percentage Interest, of the Class B
Assets, consisting of the amount of cash and the initial Gross Asset
Value (net of liabilities secured by such contributed property that
the Company assumes or takes subject to) of any other property which
is part of the Class B Assets, such Class B Member's distributive
share of Profits, and generally any items in the nature of income or
gain that are specially allocated to such Class B Member, and
(ii) debited with the amount of cash and the Gross Asset
Value (net of liabilities secured by such distributed property that
such Class B Member assumes or takes subject to) of any property
distributed to such Class B Member pursuant to any provision of the
Operating Agreement, such Class B Member's distributive share of
Losses, such Class B Member's share, determined in accordance with its
Class B Percentage Interest, of certain expenditures of the Company,
and generally any items in the nature of expenses or losses that are
specially allocated to such Class B Member.
"Class B Cash Income" shall mean all cash or cash equivalents received
by the Company from Company operations attributable to the Class B Assets,
including, without limitation, interest received on Mortgage Loans and other
investments, less the sum of expenses paid or set aside by the Company
attributable solely to the Class B Assets, less return of principal on
Mortgage Loans or other investments and proceeds from the sale of REO Property
that do not represent gain which are attributable to solely the Class B
Assets, and less the sum of the following items not attributable to a
particular class or series, to the extent paid or set aside by the Company,
multiplied by a fraction, the numerator of which is the total of the book
value of any REO Property and the outstanding principal balance of the
Mortgage Loans which are part of the Class B Assets and the denominator of
which is the total of the book value of any REO Property and the outstanding
principal balance of all of the Mortgage Loans of the Company:
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(a) All principal and interest payments on indebtedness of the Company
and all other sums paid to lenders;
(b) All cash expenditures incurred incident to the normal operation of
the Company's business; and
(c) Such reserves as the Managing Board deems reasonably necessary to
the proper operation of the Company's business.
"Class B Expenses" means those expenses and debts incurred by the
Company that are attributable solely to the Class B Assets.
"Class B Member" means those persons admitted as Class B Members
pursuant to Section 4.4 of the Operating Agreement, and any other person
admitted to the Company as a substituted Member of a Class B Member, that has
not made a disposition of such person's entire Interest.
"Class B Membership Interests" means the Class B limited liability
company membership interests of MRC, LLC.
"Class B Percentage Interest" shall mean the percentage identified as
such Member's Class B Percentage Interest, as the same may be increased or
decreased from time to time pursuant to the provisions of the Operating
Agreement.
"Class B Return" shall mean all cash or cash equivalents received by
the Company from Company operations attributable to the Class B Assets which
does not constitute Class B Cash Income, including, without limitation, return
of principal on Mortgage Loans and other investments and the proceeds from the
sale of REO Property that do not represent gain; less, to the extent paid or
set aside but not taken into account when computing Class B Cash Income, the
sum of all expenses of the Company attributable solely to the Class B Assets,
and less the sum of the following items not attributable to a particular class
or series, to the extent paid or set aside by the Company, multiplied by a
fraction, the numerator of which is the total of the book value of any REO
Property and the outstanding principal balance of the Mortgage Loans which are
part of the Class B Assets and the denominator of which is the total of the
book value of any REO Property and the outstanding principal balance of all of
the Mortgage Loans of the Company:
(a) All principal and interest payments on indebtedness of the Company
and all other sums paid to lenders;
(b) All cash expenditures incurred incident to the normal operation of
the Company's business; and
(c) Such reserves as the Managing Board deems reasonably necessary to
the proper operation of the Company's business.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Commission" means the Securities and Exchange Commission.
"Common Stock" shall mean shares of MRC's Common Stock, $.01 par
value.
"Company" shall mean MRC, LLC.
"C&W" means Cushman & Wakefield of Michigan, Inc.
"DLLCA" shall mean the Delaware Limited Liability Company Act.
"DOL Regulation" means Section 2510.3-101 of the United States
Department of Labor regulations, 29 CFR ss.2510.3-101.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"General Expenses" means those expenses and debts incurred by the
Company that are not attributable to a particular class of Membership
Interest, including but not limited to (a) all principal and interest payments
on indebtedness of the Company and all other sums paid to lenders, and (b) all
cash expenditures incurred incident to the normal operation of the Company's
business. General Expenses shall be allocated to the Class A Assets according
to the following formula: each item of General Expense shall be multiplied by
a fraction, the numerator of which is the total of the book value of any REO
Property and the outstanding principal balance of the Mortgage Loans which are
part of the Class A Assets and the denominator of which is the total of the
book value of any REO Property and the outstanding principal balance of all of
the Mortgage Loans of the Company. General Expenses shall be allocated to the
Class B Assets according to the following formula: each item of General
Expense shall be multiplied by a fraction, the numerator of which is the total
book value of any REO Property and the outstanding principal balance of the
Mortgage Loans which are part of the Class B Assets and the denominator is the
total of the book value of any REO Property and the outstanding principal
balance of all of the Mortgage Loans of the Company. The allocation of General
Expenses will be the same for GAAP and tax purposes.
"Gross Asset Value" shall mean with respect to any Company asset, the
asset's Adjusted Basis, except as follows:
(a) the initial Gross Asset Value of any asset contributed by a
Member to the Company shall be the gross fair market value of that asset, as
determined jointly by the contributing Member and the Managing Board;
(b) the Gross Asset Value of all Company assets shall be
adjusted to equal their respective gross fair market values as of the date
upon which any of the following occurs: (i) the acquisition of an additional
interest in the Company after the effective date of the Operating Agreement by
any new or existing Member, in exchange for more than a de minimis Capital
Contribution or the distribution by the Company to a Member of more than a de
minimis amount of Company property as consideration for an
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interest in the Company; and (ii) the liquidation of the Company within the
meaning of Regulation Section 1.704-1(b)(2)(ii)(g);
(c) the Gross Asset Value of any Company asset distributed to
any Member shall be the gross fair market value of that asset on the date of
distribution, as determined by the Member receiving that distribution and the
other Member; and
(d) if an election under Section 754 of the Code has been made,
the Gross Asset Value of Company assets shall be increased (or decreased) to
reflect any adjustments to the adjusted basis of the assets pursuant to Code
Section 734(b) or Code Section 743(b), but only to the extent that those
adjustments are taken into account in determining Capital Accounts pursuant to
Regulation Section 1.704-1(b)(2)(iv)(m) and Section 4.3; provided, however,
that Gross Asset Value shall not be adjusted pursuant to this subsection (d)
to the extent that an adjustment pursuant to subsection (b) is made in
connection with a transaction that would otherwise result in an adjustment
pursuant to this subsection (d).
If the Gross Asset Value of an asset has been determined or adjusted
hereby, that Gross Asset Value shall thereafter be further adjusted by the
Depreciation, if any, taken into account with respect to that asset for
purposes of computing Profits and Losses.
"IRS" means the Internal Revenue Service.
"LLC" means a limited liability company.
"Majority Shareholder" shall mean a holder of MRC common stock whose
total holdings both beneficially and of record are 50,000 shares or more and
who receives Class A Membership Interests in the Restructuring in exchange for
their MRC shares.
"Managing Board" shall mean the entity with the power, on behalf of
the Company, to do all things necessary or convenient to carry out the
business and affairs of the Company.
"Managing Board Member" shall mean a person appointed by a
Member-Manager to the Managing Board.
"MBCA" shall mean the Michigan Business Corporation Act, as amended.
"Member" shall mean any person that executes the Operating Agreement
as a Member of any class, and any other person admitted to the Company as a
substituted Member, that has not made a disposition of such person's entire
Interest.
"Member-Manager" shall mean (a) those Members with a Total Percentage
Interest at least equal to the Minimum Percentage and (b) to the extent not
previously taken into account, those Class A Members (but excluding their
assignees) which held sufficient shares of MRC's common stock immediately
prior to the initial Capital Contribution of the Class A Members to elect at
least one director at an annual meeting
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of the shareholders of MRC, and in either case which have not declined in
writing to serve as Member-Managers.
"Membership Interest" shall mean the interest of a Member in the
Company as a Member, representing such Member's rights, powers and privileges
as specified in the Operating Agreement.
"Minimum Gain" has the meaning set forth in Regulation Section
1.704-2(d)(1).
"Minority Shareholder" shall mean a holder of MRC common stock whose
total holdings both beneficially and of record are fewer than 50,000 shares
and who will receive cash equal to the book value of their MRC shares ($9.03
per share) in exchange for their MRC shares pursuant to the Restructuring
Agreement.
"Minimum Percentage" shall mean a Total Percentage Interest which
represents a positive Adjusted Capital Account Balance of $2,500,000.
"Mortgage" shall mean the security interest in Real Property granted
to secure a Mortgage Loan.
"Mortgage Loan" shall mean a note, bond or other evidence of
indebtedness or obligation which is secured or collateralized by an interest
in Real Property.
"MRC" shall mean Metropolitan Realty Corporation, a Michigan
corporation and the MRC, LLC's predecessor.
"MRC, LLC" or "Company" shall mean Metropolitan Realty Company,
L.L.C., a Delaware limited liability company and MRC's successor.
"NASDAQ" means the National Association Securities Dealers Automated
Quotation System.
"Offering" shall mean the offering by MRC, LLC of Units of its Class B
Membership Interests to create a new investment pool which will be segregated
on the books of MRC, LLC from the existing investment pool.
"Net Income" for any period shall mean total revenues applicable to
such period, less the expenses applicable to such period other than additions
to reserves for depreciation or bad debts or similar non-cash reserves. If the
Advisor receives an incentive fee, Net Income, for the purposes of calculating
Total Operating Expenses shall exclude the gain from the sale of the Company's
assets.
"Operating Agreement" shall mean the Operating Agreement of the
Company, dated as of September 24, 1996, as the same may be amended from time
to time.
"Percentage Interest" shall mean the percentage identified as such
Member's Percentage Interest, as the same may be increased or decreased from
time to time pursuant to the provisions of the Operating Agreement.
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"Profits" and "Losses" shall mean, for each class or series of
Membership Interest and for each fiscal year or other period, an amount equal
to the Company's taxable income or loss for that year or period which is
attributable for the assets of such class or series of Membership Interest,
determined in accordance with Code Section 703(a). For this purpose, expenses
of the Company which are attributable to only one class or series of
Membership Interest shall be taken into account only by such class or series.
Each class or series shall also take into account only that amount of the
general expenses of the Company equal to the total sum of such general
expenses, multiplied by a fraction, the numerator of which is the total of the
outstanding principal balance of the Mortgage Loans which are part of the
assets of such class or series and the denominator of which is the total of
the outstanding principal balance of all of the Mortgage Loans of the Company.
Further, all items of income, gain, loss or deduction required to be stated
separately pursuant to Code Section 703(a)(1) shall be included in taxable
income or loss), with the following adjustments:
(a) any income of the Company exempt from federal income tax
not otherwise taken into account in computing Profits or Losses shall be added
to that taxable income or loss;
(b) any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulation Section 1.704-1(b)(2)(iv)(i), shall be subtracted from that taxable
income or loss;
(c) in the event the Gross Asset Value of any Company asset is
adjusted as required by subsections (b) or (c) of the definition of Gross
Asset Value, the amount of that adjustment shall be taken into account as gain
or loss from the disposition of that asset (assuming the asset was disposed of
just prior to the adjustment) for purposes of computing Profits or Losses in
the fiscal year of adjustment;
(d) gain or loss resulting from any disposition of Company
property with respect to which gain or loss is recognized for federal income
tax purposes shall be computed by reference to the Gross Asset Value of the
property disposed of, notwithstanding that the Adjusted Basis of that property
may differ from its Gross Asset Value;
(e) in lieu of the depreciation, amortization and other cost
recovery deductions taken into account in computing the taxable income or
loss, there shall be taken into account the Depreciation for the fiscal year
or other period; and
(f) any items of income, gain, loss or deduction that are
specially allocated pursuant to certain provisions of the Operating Agreement
shall not be taken into account in computing Profits or Losses.
"Proxy Statement/Prospectus" means this Proxy Statement/Prospectus.
"PTP" means a publicly traded partnership under Section 7704 of the
Code.
"Public Offering Expenses" means all expenses incurred by the Company
and the Corporation (other than Restructuring Expenses) in connection with the
preparation and filing of the Form S-11 registration statement by the Company
under the Securities Act of 1933, as amended, and the sale of Units of Class B
Membership Interests pursuant to said registration statement.
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"Real Estate Investment" shall mean any interest in land, rights and
interests in land, including an equity, mortgage or leasehold interest, and
any buildings, structures, improvements, fixtures and equipment and
furnishings located on or used in connection with the land or rights or
interests therein.
"Real Property" shall mean and include land, rights, and interests in
land, leasehold interests (including but not limited to interests of a lessor
or lessee therein), and any buildings, structures, improvements, fixtures and
equipment and furnishings located on or to be located on or used or to be used
in connection with land, leasehold interests and rights or interests in land,
but does not include Mortgages, Mortgage Loans or interest therein.
"Record Date" for the MRC Special Meeting shall mean October 7,
1996.
"Registration Statement" means the registration statement on Form S-4,
File No. 33-99694 under the Securities Act, of which this Proxy
Statement/Prospectus forms a part.
"Regulations" shall mean pronouncements, as amended from time to time,
or their successor pronouncements, which clarify, interpret and apply the
provisions of the Code, and which are designated as "Treasury Regulations" by
the United States Department of the Treasury.
"REIT" means a real estate investment trust under the Code.
"REO Property" shall mean all Real Property acquired by the Company or
its nominee through foreclosure or deed in lieu of foreclosure in connection
with a defaulted Mortgage Loan.
"Restricted Membership Interest" shall mean a Membership Interest (or
portion thereof) that represents at least 21% of a particular class.
"Restructuring" shall mean the transaction whereunder (i) all the
assets and liabilities of MRC will be assigned to and assumed by the Company
in exchange for all the Class A Membership Interests of the Company, (ii)
MRC's Majority Shareholders will receive in dissolution of MRC their MRC
shares for all the Class A Membership Interests, and (iii) MRC's Minority
Shareholders will exchange their MRC shares for an amount equal to the book
value of their shares ($9.03 per share) pursuant to the Restructuring
Agreement.
"Restructuring Agreement" shall mean the Agreement and Plan of
Dissolution and Restructuring between the Company and MRC and dated , 1996
which sets forth the terms and conditions of the Restructuring.
"Restructuring Expenses" means all expenses incurred by the Company
and the Corporation in connection with the preparation, execution and
implementation of that certain Agreement and Plan of Reorganization entered
into between the Company and the Corporation and the Form S-4 registration
statement filed by the Corporation under the Securities Act of 1933, as
amended.
"Restructuring Proposal" means the proposal to approve and adopt the
Restructuring Agreement.
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"Schedule 13E-3" means the Schedule 13E-3, File No. 5-40234, filed by
MRC under the Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Meeting" means the special meeting of the shareholders of MRC
held at the _______________________, on December 6, 1996 at ________, and
any adjournments thereof.
"Short-term Investments" shall mean short-term government guaranteed
mortgage-backed securities or other short-term investments permitted for a
qualified real estate investment trust under Section 856 of the Code.
"TMP" means a taxable mortgage pool under Section 7701(i) of the Code.
"Total Percentage Interest" shall mean with respect to any Member as
of any date of determination, a fraction (expressed as a percentage), the
numerator of which is the Member's positive Adjusted Capital Account Balance,
if any, and the denominator of which is the total positive Adjusted Capital
Account Balances of all of the Members, with such adjustments, if any, thereto
as a majority of the Managing Board Members shall deem appropriate in the
interest of fairness under the circumstances.
"Transferable Membership Interest" shall mean a Membership Interest
(or portion thereof) that is not a Restricted Membership Interest.
"UBTI" means unrelated business taxable income.
"Unaffiliated Representative" shall mean persons who are not
Affiliates of, directly or indirectly, nor have a material business or
professional relationship with, the Advisory Company. An indirect relationship
shall include circumstances in which a member of the immediate family of a
Managing Board Member has one of the foregoing relationships with the Advisory
Company.
"Uninterested Representative" shall mean a Managing Board Member who
has no interest, either directly or through an Affiliate, in the Real Estate
Investment or other transaction. In the case of a Real Estate Investment or
other transaction in which the Advisory Company, a Member-Manager or an
Affiliate thereof has an interest, or in which a Managing Board Member who is
an Affiliate of the Advisory Company has an interest, "Uninterested
Representative" shall mean an Unaffiliated Representative.
"Unit" shall mean each $500,000 unit of a Class B Membership Interest
subscribed to by a Class B Member.
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APPENDIX A
OPERATING AGREEMENT
<PAGE>
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[ LOGO ART ]
METROPOLITAN REALTY COMPANY, L.L.C.
A DELAWARE LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
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<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE I - ORGANIZATION.................................................. 1
1.1 Formation...................................................... 1
1.2 Name........................................................... 1
1.3 Purpose........................................................ 1
1.4 Duration....................................................... 1
1.5 Principal Place of Business, Registered Office
and Resident Agent........................................... 1
1.6 Title to Company Property...................................... 2
1.7 Intention for Company.......................................... 2
1.8 Definitions.................................................... 2
ARTICLE II - BOOKS, RECORDS AND ACCOUNTING................................ 2
2.1 Books and Records.............................................. 2
2.2 Fiscal Year; Accounting........................................ 3
2.3 Bank Accounts.................................................. 3
2.4 Reports........................................................ 3
2.5 Tax Returns.................................................... 3
ARTICLE III - MEMBERS AND MEETINGS OF MEMBERS............................. 3
3.1 Classes of Members............................................. 3
3.2 Membership Certificates........................................ 4
3.4 Meetings of Members............................................ 5
3.5 Notice of Meetings............................................. 5
3.6 Record Dates................................................... 5
3.7 List of Members................................................ 5
3.8 Quorum......................................................... 5
3.9 Proxies........................................................ 6
3.10 Inspectors of Election......................................... 6
3.11 Manner of Voting............................................... 6
3.12 Consent........................................................ 6
ARTICLE IV - CAPITAL CONTRIBUTIONS........................................ 7
4.1 Initial Class A Contributions and Members...................... 7
4.2 Class A Assets................................................. 7
4.3 Class A Capital Accounts....................................... 7
4.4 Class B Contributions and Members.............................. 8
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TABLE OF CONTENTS
(Continued)
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4.5 Class B Assets................................................. 8
4.6 Class B Capital Accounts....................................... 8
4.7 Capital Accounts and Capital Contributions in General.......... 9
ARTICLE V - ALLOCATIONS OF PROFITS AND LOSSES............................. 9
5.1 Timing and Effect.............................................. 9
5.2 Allocation..................................................... 9
5.3 Allocation In the Event of Section 754 Election................ 9
5.4 Special Tax Allocations........................................ 9
5.5 Regulatory and Curative Allocations............................ 10
5.6 Adjustment to Allocations...................................... 11
5.7 Required Ownership of Member-Managers. ........................ 11
5.8 Allocation of Expenses......................................... 12
ARTICLE VI - DISTRIBUTIONS
6.1 Distributions To Class A Members............................... 12
6.2 Distributions To Class B Members............................... 13
6.3 Distributions of Uninvested Class B Assets..................... 13
6.4 Limitations on Distributions....................................13
ARTICLE VII - DISPOSITION OF MEMBERSHIP INTERESTS......................... 13
7.1 General........................................................ 13
7.2 Prohibited Dispositions........................................ 14
7.3 Permitted Dispositions......................................... 14
7.4 Admission of Substitute........................................ 14
ARTICLE VIII - MANAGEMENT................................................. 15
8.1 Management of Business......................................... 15
8.2 Managing Board................................................. 15
8.3 General Powers of Managing Board............................... 17
8.4 Limitations.................................................... 17
8.5 Executive and Loan Committees.................................. 18
8.6 Power and Authority of Committees.............................. 18
8.7 Dissents....................................................... 20
8.8 Compensation and Expense Reimbursement......................... 20
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TABLE OF CONTENTS
(Continued)
Page
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8.9 Officers....................................................... 20
8.10 Term of Office, Resignation and Removal........................ 21
8.11 Vacancies...................................................... 21
8.12 Authority...................................................... 21
8.13 Compensation................................................... 21
8.14 Chairman....................................................... 21
8.15 Vice Chairman.................................................. 21
8.16 President...................................................... 21
8.17 Vice Presidents................................................ 21
8.18 Secretary...................................................... 22
8.19 Treasurer...................................................... 22
8.20 Assistant Secretaries and Treasurers........................... 22
8.21 Standard of Care............................................... 22
8.22 Liability...................................................... 22
8.23 Other Interests................................................ 22
ARTICLE IX - INVESTMENT OBJECTIVES AND POLICIES........................... 23
9.1 Duties and Responsibilities; Investment Allocation............. 23
9.2 Prohibited Investments and Activities.......................... 23
9.3 Annual Review.................................................. 24
9.4 Borrowing Policies............................................. 25
9.5 Consideration for Realty....................................... 25
9.6 Arrangements with Advisory Company............................. 25
9.7 Conflicts of Interest.......................................... 26
ARTICLE X - INDEMNIFICATION............................................... 27
10.1 Indemnification................................................ 27
10.2 Certain Actions................................................ 27
10.3 Expenses of Successful Defense................................. 28
10.4 Determination that Indemnification is Proper................... 28
10.5 Indemnification for Portion of Expenses........................ 29
10.6 Expense Advances............................................... 29
10.7 Indemnification of Employees and Agents of the Company......... 29
10.8 Former Managing Board Members, Officers, Employees and Agents.. 29
10.9 Insurance...................................................... 30
10.10 Contract Right to Indemnity.................................... 30
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TABLE OF CONTENTS
(Continued)
Page
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10.11 Exclusivity; Other Indemnification............................. 30
10.12 Amendment or Deletion.......................................... 30
ARTICLE XI - DISSOLUTION, WINDING UP AND REDEMPTION....................... 30
11.1 Dissolution.................................................... 30
11.2 Winding Up..................................................... 30
11.3 Redemption..................................................... 31
11.4 Adjustments to Percentage Interests............................ 31
ARTICLE XII - MISCELLANEOUS PROVISIONS.................................... 31
12.1 Counterparts................................................... 31
12.2 Entire Agreement............................................... 31
12.3 Severability................................................... 31
12.4 Amendment...................................................... 31
12.5 Power of Attorney.............................................. 32
12.6 Notices........................................................ 32
12.7 Binding Effect................................................. 33
12.8 Governing Law.................................................. 33
ARTICLE XIII - DEFINITIONS................................................ 33
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<PAGE>
OPERATING AGREEMENT
FOR
METROPOLITAN REALTY COMPANY, L.L.C.
A Delaware Limited Liability Company
THIS OPERATING AGREEMENT is made as of _____________, 199 by
Metropolitan Realty Company, L.L.C. (the "Company"), and the persons executing
this Agreement as members of the Company and those persons who will hereafter
be admitted as members (the "Members"), who agree as follows:
ARTICLE I
ORGANIZATION
1.1 Formation. The Company has been organized as a Delaware limited
liability company pursuant to the laws of the State of Delaware, including the
Delaware Limited Liability Company Act, all as the same may be amended from
time to time (all of such applicable law being hereinafter referred to as the
"Limited Liability Company Law"), by the filing of a Certificate of Formation
("Certificate") with the Office of the Secretary of State of the State of
Delaware as required by the Limited Liability Company Law. The Managing Board
shall cause the execution, filing, and recording of all such other
certificates and documents, including amendments to the Certificate of the
Company, and shall do or cause to be done such other acts as may be
appropriate to comply with all requirements for the formation, continuation,
and operation of a limited liability company, the ownership of property, and
the conduct of business under the laws of the State of Delaware and any other
jurisdiction in which the Company may own property or conduct business.
1.2 Name. The name of the Company will be Metropolitan Realty
Company, L.L.C.. The Company may also conduct its business under one or more
assumed names.
1.3 Purpose. The purpose of the Company is to engage for a
competitive profit in any activity within the purposes for which limited
liability companies may be organized under the Limited Liability Company Law,
and in particular to strengthen the economy in the Detroit metropolitan area
by enabling developers, business owners and other qualified borrowers to
create jobs, including, to the extent permitted by law, union jobs, by
financing construction or rehabilitation projects. Where possible, the
majority of the Company's investments shall be in the City of Detroit, with
the balance being in the eight county metropolitan region constituting
Southeast Michigan. The Company will have all the powers necessary or
convenient to effect that purpose, including all powers granted by the Limited
Liability Company Law.
1.4 Duration. The Company will continue in existence for the period
fixed in the Certificate for the duration of the Company or until the Company
is sooner dissolved and its affairs wound up in accordance with the Limited
Liability Company Law or this Agreement.
1.5 Principal Place of Business, Registered Office and Resident
Agent. The principal office of the Company shall be located at 535 Griswold,
Suite 748, Detroit, Michigan 48226, or such other address as may be designated
from time to time by the Managing Board. The Company shall have
<PAGE>
METROPOLITAN REALTY COMPANY, L.L.C. Page 2
an office at such other address(es) as may be designated from time to time by
the Managing Board. The address of the office of the Company in the State of
Delaware required to be maintained pursuant to the Limited Liability Company
Law is c/o The Corporation Trust Company, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware, or such other address as may be
designated from time to time by the Managing Board. The name and address of
the registered agent for service of process on the Company in the State of
Delaware is The Corporation Trust Company, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware, or such other agent and address as
may be designated from time to time by the Managing Board. The name and
address of the registered agent for service of process on the Company in the
State of Michigan is F. Thomas Lewand, 100 Renaissance Center, 34th Floor, in
the City of Detroit, County of Wayne, Michigan, or such other agent and
address as may be designated from time to time by the Managing Board. If a
resident agent resigns, the Company will promptly appoint a successor.
1.6 Title to Company Property. All property owned by the Company,
whether real or personal, tangible or intangible, shall be deemed to be owned
by the Company as an entity, and no Member, individually, shall have any
ownership of such property. The Company may hold any of its assets in its own
name or in the name of a nominee.
1.7 Intention for Company. The Members have formed the Company as a
limited liability company under the Limited Liability Company Law. The Members
specifically agree that, except for purposes of federal income tax
classification, the Company will not be a partnership (including a limited
partnership) or any other venture, but a limited liability company under the
Limited Liability Company Law. Except for purposes of federal income tax
classification, no Member or Managing Board Member will be construed to be a
partner in the Company or a partner of any other Member or person; and the
Certificate, and this Agreement and the relationship it creates, will not be
construed to suggest otherwise.
1.8 Definitions. Certain capitalized terms used in this Agreement
are defined in Article XIII.
ARTICLE II
BOOKS, RECORDS AND ACCOUNTING
2.1 Books and Records. The Company will maintain at its principal
office complete and accurate books of account and records of the Company's
business and affairs as required by the Limited Liability Company Law, and
showing by class of Membership Interest the assets, liabilities, costs,
expenditures, receipts, profits and losses of the Company, and which books of
account and records shall include provision for separate Capital Accounts by
class of Membership Interest for the Members and for each Member within a
class, and shall provide for such other matters and information as a Member
shall reasonably request, together with copies of all documents executed on
behalf of the Company. Each Member and its representatives, duly authorized in
writing, shall have the right to inspect and examine, at all reasonable times,
at the Company's principal office, all such books of account, records, and
documents. The Managing Board shall appoint a firm of certified public
accountants to audit the Company's annual financial statements.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 3
2.2 Fiscal Year; Accounting. The Company's fiscal year will be the
calendar year. The Company shall follow generally accepted accounting
principles and use the accrual method of accounting in preparation of its
financial statements and the appropriate tax method in preparation of its tax
returns.
2.3 Bank Accounts. One or more accounts in the name of the Company
shall be maintained in such bank or banks as the Managing Board may from time
to time select. Any checks of the Company may be signed by any person(s)
designated, from time to time, by the Managing Board.
2.4 Reports. The Managing Board will provide reports concerning the
financial condition and results of operation of the Company and the Capital
Accounts of the Members to the Members as required by applicable law and
otherwise in the time, manner, and form as the Managing Board determines. The
Managing Board will at a minimum provide annual financial statements audited
by the Company's accountant. Each annual report will include a statement by
class of Membership Interest of each Member's share of profits and other items
of income, gain, loss, deduction and credit, and will be prepared and
delivered as soon as practicable after the end of the period to which it
pertains.
2.5 Tax Returns. As soon as practicable after the end of each
fiscal year, the Company shall cause to be prepared and transmitted to the
Members federal and appropriate state and local Partnership Income Tax
Schedules "K-1," or any substitute therefor, with respect to such fiscal year
on appropriate forms prescribed.
ARTICLE III
MEMBERS AND MEETINGS OF MEMBERS
3.1 Classes of Members.
(a) The Company shall have two classes of Members, Class A
Members and Class B Members. Each such class of Members shall have equal
rights, powers and duties, except as otherwise provided in this Agreement.
Class A Membership Interests shall be issued to shareholders of the
Corporation pursuant to that certain Agreement and Plan of Reorganization
entered into between the Company and the Corporation. Except as otherwise
provided in this Section 3.1(a), no additional Class A Membership Interests
shall thereafter be issued by the Company at any time. Class B Membership
Interests shall be issued pursuant to the Company's Form S-11 registration
statement filed by the Company under the Securities Act of 1933, as amended
(Registration No. 33-99696). Except as otherwise provided in this Section
3.1(a), no additional Class B Membership Interests shall thereafter be issued
by the Company. Notwithstanding any contrary provision of this Agreement, the
Company shall do or cause to be done whatever is required so that the Class A
and Class B Membership Interests shall be "Publicly-offered Securities" within
the meaning of Section 2510.3-101 of the Department of Labor Regulations, 29
CFR section 2510.3-101, as amended, or any successor provision. The Managing
Board may, in its discretion, in order to comply with the foregoing
requirement, issue for such consideration as it may determine (including by
gift)
<PAGE>
METROPOLITAN REALTY COMPANY, L.L.C. Page 4
Class A Membership Interests and/or Class B Membership Interests to such
persons and in such Percentage Interests as it may determine.
(b) Notwithstanding any contrary provision of this Agreement,
the Managing Board may from time to time, without the vote or approval of any
Member or class or group of Members, amend this Agreement to provide for
additional classes or groups of Members having such relative rights, powers
and duties as may be established, excluding rights, powers and duties senior
to existing classes and groups of Members with respect to the assets of the
Company attributable to such classes and groups, and to grant to all or
certain identified Members or a specified class or group of the Members the
right to vote separately or with all or any class or group of the Members, on
any matter. Voting by such Members may be on a per capita, number, financial
interest, class group or any other basis.
3.2 Membership Certificates.
(a) Every holder of a Membership Interest in the Company shall
be entitled to have a certificate signed, in the name of the Company (i) by
the Chairman, the President or a Vice President and (ii) by the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Company, certifying the Membership Interest owned by him in the Company.
(b) Where a certificate is countersigned by (i) a transfer
agent other than the Company or its employee, or (ii) a registrar other than
the Company or its employee, any other signature on the certificate may be a
facsimile. In any case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Company with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
(c) The Managing Board may direct a new certificate to be
issued in place of any certificate theretofore issued by the Company alleged
to have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming the certificate to be lost, stolen or
destroyed. When authorizing such issue of a new certificate, the Managing
Board may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate, or
his legal representative, to give the Company a bond in such sum as it may
direct as indemnity against any claim that may be made against the Company
with respect to the certificate alleged to have been lost, stolen or
destroyed.
(d) Membership Interests of the Company shall be transferable
in the manner prescribed by law and in this Agreement. Transfers of Membership
Interests shall be made on the books of the Company only by the person named
in the certificate or by his attorney lawfully constituted in writing and upon
the surrender of the certificate therefor, which shall be cancelled before a
new certificate shall be issued.
3.3 Place of Meetings. All meetings of Members shall be held at the
principal office of the Company or at such other place as shall be determined
by the Managing Board and stated in the notice of meeting.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 5
3.4 Meetings of Members. Meetings of all Members or of a class or
classes of Members may be called by the Managing Board, the Executive
Committee or by the Chairman of the Managing Board (if such office is filled),
and shall be called upon the written request to the Managing Board of Members
holding in the aggregate at least ten percent (10%) of the Total Percentage
Interests of the Company or of the Percentage Interests of the applicable
class or classes. The request shall state the purpose or purposes for which
the meeting is to be called.
3.5 Notice of Meetings. In the case of a meeting requested by
Members holding at least ten percent (10%) in the aggregate of the Total
Percentage Interests of the Company, the notice shall be delivered to the
Members of the Company or class of Members, as applicable, within 10 business
days of receipt of such request. Except as otherwise provided by statute,
written notice of the time, place and purposes of a meeting of Members or
class or classes of Members shall be given not less than 10 nor more than 60
days before the date of the meeting to each Member or Member of such
applicable class or classes, either personally or by mailing such notice to
its last address as it appears on the books of the Company. No notice need be
given of an adjourned meeting provided the time and place to which such
meeting is adjourned are announced at the meeting at which the adjournment is
taken and at the adjourned meeting only such business is transacted as might
have been transacted at the original meeting. However, if after the
adjournment a new record date is fixed for the adjourned meeting a notice of
the adjourned meeting shall be given to each applicable Member of record on
the new record date entitled to notice as provided in this Agreement.
3.6 Record Dates. The Managing Board or the Chairman of the
Managing Board (if such office is filled) may fix in advance a date as the
record date for the purpose of determining Members entitled to notice of and
to vote at a meeting of Members or class or classes of Members or an
adjournment thereof, or to express consent or to dissent from a proposal
without a meeting, or for the purpose of determining Members entitled to
receive payment of a distribution or allotment of a right, or for the purpose
of any other action. The date fixed shall not be more than 60 nor less than 20
days before the date of the meeting, nor more than 60 days before any other
action. In such case only such Members as shall be Members of record, or
Members of record of an applicable class or classes, on the date so fixed
shall be entitled to notice of and to vote at such meeting or adjournment
thereof, or to express consent or to dissent from such proposal, or to receive
payment of such distribution or to receive such allotment of rights, or to
participate in any other action, as the case may be, notwithstanding any
transfer of any Membership Interests on the books of the Company, or
otherwise, after any such record date. Nothing in this Agreement shall affect
the rights of a Member and its transferee or transferor as between themselves.
3.7 List of Members. The Secretary of the Company or the agent of
the Company having charge of the transfer records for Membership Interests of
the Company shall make and certify a complete list of the Members entitled to
vote at a Members' meeting or any adjournment thereof. The list shall be
arranged alphabetically within each class and series, with the address of, and
the Percentage Interest of, each Member; shall be produced at the time and
place of the meeting; shall be subject to inspection by any Member during the
whole time of the meeting; and shall be prima facie evidence as to who are the
Members entitled to examine the list or vote at the meeting.
3.8 Quorum. Unless a greater or lesser quorum is required in the
Certificate or by the Limited Liability Company Law, the Members present at a
meeting in person or by proxy who, as
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METROPOLITAN REALTY COMPANY, L.L.C. Page 6
of the record date for such meeting, were holders of a majority of the Total
Percentage Interests of the Company entitled to vote at the meeting shall
constitute a quorum at the meeting. Whether or not a quorum is present, a
meeting of Members may be adjourned by a vote of the Membership Interests
present in person or by proxy. The holders of a class or series of Membership
Interests may vote separately on any item of business which does not
materially affect any other class or series, and as otherwise provided in this
Agreement, and in such event this Section 3.7 shall be applied in determining
the presence of a quorum of such class or series for transaction of such item
of business.
3.9 Proxies. A Member entitled to vote at a meeting of Members or
to express consent or dissent without a meeting may authorize other persons to
act for it by proxy. A proxy shall be signed by the Member or its authorized
agent or representative and shall not be valid after the expiration of three
years from its date unless otherwise provided in the proxy. A proxy is
revocable at the pleasure of the Member executing it except as otherwise
provided by the Limited Liability Company Law.
3.10 Inspectors of Election. The Managing Board, in advance of a
Members' meeting, may, and on request of a Member entitled to vote thereat
shall, appoint one or more inspectors. In case a person appointed fails to
appear or act, the vacancy may be filled by appointment made by the Managing
Board in advance of the meeting or at the meeting by the person presiding
thereat. If appointed, the inspectors shall determine the Total Percentage
Interests represented at the meeting, the existence of a quorum and the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine challenges or consents, determine the result, and do such
acts as are proper to conduct the election or vote with fairness to all
Members. On request of the person presiding at the meeting or a Member
entitled to vote thereat, the inspectors shall make and execute a written
report to the person presiding at the meeting of any of the facts found by
them and matters determined by them. The report shall be prima facie evidence
of the facts stated and of the vote as certified by the inspectors.
3.11 Manner of Voting. Votes shall be cast in writing, signed by the
Member or its proxy. When an action is to be taken by a vote of the Members,
it shall be authorized by the affirmative vote of the holders of a majority of
the Total Percentage Interests entitled to vote thereon, unless a greater
plurality is required by the Certificate or by the Limited Liability Company
Law. When the holders of a class or series of Membership Interests are
entitled to vote separately on an item of business, this Section 3.10 applies
with respect to the Percentage Interests of such class or series for
transaction of such item of business.
3.12 Consent. Any action required or permitted to be taken at a
meeting of the Members may be taken without a meeting, without prior notice,
and without a vote, if consents in writing, setting forth the action so taken,
are signed by all of the Members entitled to vote with respect to such matter.
Each written consent will bear the date and signature of each Member who signs
the consent.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 7
ARTICLE IV
CAPITAL CONTRIBUTIONS
4.1 Initial Class A Contributions and Members. Concurrently with
the execution of this Agreement, the Company and the Corporation have entered
into that certain Agreement and Plan of Reorganization, whereby all of the
assets of the Corporation, subject to its liabilities, have been contributed
to the Company as the Capital Contribution of the Class A Members.
4.2 Class A Assets. The Class A Assets shall consist of the Capital
Contribution of the Class A Members, together with all additions, attachments,
accretions, accessions, mutations, replacements, substitutions, renewals,
interest, dividends, distributions, rights of any kind, products, or proceeds
of or pertaining to any of the foregoing. The Company shall establish and
maintain a separate bookkeeping account for the Class A Assets.
4.3 Class A Capital Accounts.
(a) The Company shall establish and maintain a separate capital
account for each Class A Member ("Class A Capital Account"), including a
substituted Class A Member who shall pursuant to the provisions hereof acquire
a Class A Membership Interest, which Class A Capital Account shall be:
(i) credited with such Class A Member's share, determined
in accordance with its Percentage Interest, of the Class A Assets,
consisting of the amount of cash and the initial Gross Asset Value
(net of liabilities secured by such contributed property that the
Company assumes or takes subject to) of any other property which is
part of the Class A Assets, such Class A Member's distributive share
of Profits, and any items in the nature of income or gain that are
specially allocated to such Class A Member (other than pursuant to
Section 5.4 hereof), and
(ii) debited with the amount of cash and the Gross Asset
Value (net of liabilities secured by such distributed property that
such Class A Member assumes or takes subject to) of any property
distributed to such Class A Member pursuant to any provision of this
Agreement, such Class A Member's distributive share of Losses, such
Class A Member's share, determined in accordance with its Percentage
Interest, of any expenditures of the Company described in Section
705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B)
expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and
any items in the nature of expenses or losses that are specially
allocated to such Class A Member (other than pursuant to Section 5.4
hereof).
(b) This definition of Class A Capital Account and the other
provisions in this Agreement relating to the maintenance of Class A Capital
Accounts are intended to comply with Regulation Sections 1.704-1(b) and
1.704-2 and shall be interpreted and applied in a manner consistent with those
Regulation Sections, and in the event of any conflict, those Regulation
Sections shall prevail.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 8
4.4 Class B Contributions and Members. The Company intends to issue
and sell in a public offering pursuant to a Form S-11 registration statement
under the Securities Act of 1933 as amended, not less than $25,000,000 nor
more than $50,000,000 in Class B Membership Interests and to admit as Class B
Members the persons who contribute cash to the capital of the Company for such
Class B Membership Interests. Class B Membership Interests shall be issued in
Units of $500,000 each (a "Unit"). A minimum of 50 Units and a maximum of 100
Units shall be issued pursuant to said registration statement.
4.5 Class B Assets. The Class B Assets shall consist of the Capital
Contributions of the Class B Members, together with all additions,
attachments, accretions, accessions, mutations, replacements, substitutions,
renewals, interest, dividends, distributions, rights of any kind, products, or
proceeds of or pertaining to any of the foregoing. The Company shall establish
and maintain a separate bookkeeping account for the Class B Assets.
4.6 Class B Capital Accounts.
(a) The Company shall establish and maintain a separate capital
account for each Class B Member ("Class B Capital Account"), including a
substituted Class B Member who shall pursuant to the provisions hereof acquire
a Class B Membership Interest, which Class B Capital Account shall be:
(i) credited with such Class B Member's share, determined
in accordance with its Percentage Interest, of the Class B Assets,
consisting of the amount of cash and the initial Gross Asset Value
(net of liabilities secured by such contributed property that the
Company assumes or takes subject to) of any other property which is
part of the Class B Assets, such Class B Member's distributive share
of Profits, and any items in the nature of income or gain that are
specially allocated to such Class B Member (other than pursuant to
Section 5.4 hereof), and
(ii) debited with the amount of cash and the Gross Asset
Value (net of liabilities secured by such distributed property that
such Class B Member assumes or takes subject to) of any property
distributed to such Class B Member pursuant to any provision of this
Agreement, such Class B Member's distributive share of Losses, such
Class B Member's share, determined in accordance with its Percentage
Interest, of any expenditures of the Company described in Section
705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B)
expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and
any items in the nature of expenses or losses that are specially
allocated to such Class B Member (other than pursuant to Section 5.4
hereof).
(b) This definition of Class B Capital Account and the other
provisions in this Agreement relating to the maintenance of Class B Capital
Accounts are intended to comply with Regulation Sections 1.704-1(b) and
1.704-2 and shall be interpreted and applied in a manner consistent with those
Regulation Sections, and in the event of any conflict, those Regulation
Sections shall prevail.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 9
4.7 Capital Accounts and Capital Contributions in General.
(a) In the event that a Member's Membership Interest or a
portion thereof is transferred in accordance with the provisions of this
Agreement, the transferee shall succeed to the Capital Account of the
transferor to the extent that it relates to the Membership Interest or portion
thereof so transferred.
(b) Except as otherwise provided in this Agreement, (i) no
interest will accrue on any Capital Contribution or on the positive balance,
if any, in any Capital Account, (ii) no Member will have any right to withdraw
any part of its Capital Account or to demand or receive the return of its
Capital Contribution, or to receive any distributions from the Company, (iii)
no Member shall be required to make any contribution to the capital of, or any
loan to, the Company, and (iv) no Member shall have any liability for the
return of any other Member's Capital Account or Capital Contributions.
(c) Anything to the contrary in this Agreement notwithstanding,
Member- Managers in the aggregate must maintain throughout the entire
existence of the Company a minimum Capital Account balance equal to the lesser
of (i) one (1) percent of the total positive Capital Account balances, or (ii)
$500,000.
ARTICLE V
ALLOCATIONS OF PROFITS AND LOSSES
5.1 Timing and Effect. Except as otherwise provided in this
Article V, Profits and Losses shall be allocated to the Members for any fiscal
year in a manner so as to comply with the requirements of Regulation Section
1.704-1(b)(2)(iv).
5.2 Allocation. Profits and Losses will be allocated to the Members
of each respective class or series in proportion to their Percentage Interests
of such class or series. Public Offering Expenses and Restructuring Expenses
will be allocated in accordance with Section 5.8.
5.3 Allocation In the Event of Section 754 Election. To the extent
an adjustment to the adjusted tax basis of any Company asset pursuant to Code
Section 734(b) or Code Section 743(b) is required pursuant to Regulation
Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital
Accounts, the amount of that adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases the basis of the asset), then that
gain or loss shall be specially allocated to the Members of the applicable
class in the manner consistent with the manner in which their Capital Accounts
are required to be adjusted pursuant to that Regulation.
5.4 Special Tax Allocations.
(a) Contributed Property. In accordance with Code Section
704(c) and the Regulations thereunder, income, gain, loss and deduction with
respect to any property contributed to the assets of a particular class of the
Company shall, solely for tax purposes, be allocated among
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METROPOLITAN REALTY COMPANY, L.L.C. Page 10
the Members of the applicable class so that a contributing Member, to the
maximum extent possible, recognizes the variation, if any, between the
Adjusted Basis and the initial Gross Asset Value of the property contributed
by that Member.
(b) Adjusted Property. In the event the Gross Asset Value of
any Company asset is adjusted pursuant to subsection (b) of the definition of
Gross Asset Value, subsequent allocations of income, gain, loss and deduction
with respect to that asset shall take into account any variation between the
Gross Asset Value of that asset before such adjustment and its Gross Asset
Value after such adjustment in the same manner as the variation between
Adjusted Basis and Gross Asset Value is taken into account under Section
5.4(a) with respect to contributed property, and such variation shall be
allocated in accordance with the principles of Regulation Section
1.704-1(b)(2)(iv)(f).
(c) Recapture of Deductions and Credits. If any "recapture" of
deductions or credits previously claimed by the Company is required under the
Code upon the sale or other taxable disposition of any property, those
recaptured deductions or credits shall, to the extent possible, be allocated
to the Members of the applicable class pro rata in the same manner that the
deductions and credits giving rise to the recapture items were originally
allocated using the "first-in, first-out" method of accounting; provided,
however, that this Section 5.4(c) shall only affect the characterization of
income allocated among the Members for tax purposes.
5.5 Regulatory and Curative Allocations.
(a) Qualified Income Offset. In the event any Member
unexpectedly receives any adjustment, allocation or distribution described in
Regulation Sections 1.704-1(b)(2)(ii)(d) (4), (5) or (6), items of Company
income and gain shall be specially allocated to the Members in an amount and
manner sufficient to eliminate, to the extent required by the Regulations, the
Adjusted Capital Account Deficit of that Member as quickly as possible.
(b) Gross Income Allocation. In the event that any Member has a
deficit Capital Account at the end of any Company fiscal year that is in
excess of the sum of (i) the amount that such Member is obligated to restore
and (ii) the amount that the Member is deemed to be obligated to restore
pursuant to the penultimate sentence of Regulation Sections 1.704-2(g)(1) and
(i)(5), that Member shall be specially allocated items of Company income and
gain in the amount of such excess as quickly as possible, provided that an
allocation pursuant to this Section 5.5(b) shall be made only if and to the
extent that such Member would have a deficit Capital Account in excess of such
sum after all other allocations provided for in this Article V have been made
as if Sections 5.5(a) and 5.5(b) were not in the Agreement.
(c) Minimum Gain Chargeback. To the extent required under
Regulation Section 1.704-2(f), if there is a net decrease in the Minimum Gain
during any fiscal year, each Member shall be allocated, before any other
allocation of Company items for such taxable year, items of income and gain
for such year (and, if necessary, subsequent years), in proportion to, and to
the extent of, an amount equal to the portion of such Member's share of such
net decrease in Minimum Gain as determined under Regulation Section
1.704-2(g). The items so allocated shall be determined in accordance with
Regulation Section 1.704-2(j)(2)(i). This Section 5.5(c) is intended to comply
with
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METROPOLITAN REALTY COMPANY, L.L.C. Page 11
the minimum gain chargeback requirements of the Regulations and shall be
interpreted consistently therewith.
(d) Member Minimum Gain Chargeback. To the extent required
under Regulation Section 1.704-2(i), if there is a net decrease in minimum
gain attributable to Member nonrecourse debt during a Company taxable year,
any Member with a share of that Member nonrecourse debt minimum gain
(determined under Regulation Section 1.704-2(i)(5)) as of the beginning of the
year must be allocated items of income and gain for the year (and if
necessary, for subsequent years) equal to that Member's share of the net
decrease in the Member nonrecourse debt minimum gain. A Member's share of the
net decrease in Member nonrecourse debt minimum gain is determined in a manner
consistent with the provisions of Regulation Section 1.704-2(i)(5). The items
so allocated shall be determined in accordance with Regulation Section
1.704-2(j)(2)(ii). This Section 5.5(d) is intended to comply with the minimum
gain chargeback requirements of the Regulations and shall be interpreted
consistently therewith.
(e) Curative Allocation. The allocations set forth in Sections
5.5(a), (b), (c) and (d) (the "Regulatory Allocations") are intended to comply
with certain requirements of Regulation Sections 1.704-1(b) and 1.704-2.
Notwithstanding any other provision of this Article V (other than the
Regulatory Allocations), the Regulatory Allocations shall be taken into
account in allocating other items of income, gain, loss and deduction among
the Members so that, to the extent possible, the net amount of such allocation
of other items and the Regulatory Allocations to each Member should be equal
to the net amount that would have been allocated to each such Member if the
Regulatory Allocations had not occurred.
5.6 Adjustment to Allocations. It is the intention of the Members
that the Profit or Loss for each fiscal year will be allocated to the Members
in such a manner that would cause each Member's "Adjusted Capital Account
Balance" to equal the amount that would be distributed to such Member pursuant
to Section 11.2 upon a hypothetical liquidation of the Company. For purposes
of this Section 5.6, the "Adjusted Capital Account Balance" of a Member equals
the balance of such Member's Capital Account at the end of the fiscal year
increased by any amount which the Member is deemed to be obligated to restore
pursuant to the penultimate sentences of Regulation Sections 1.704-2(g)(1) and
(i)(5). In determining the amounts distributable to the Members under Section
11.2 upon a hypothetical liquidation, it shall be presumed that (i) all of the
Company's assets would be sold at their Gross Asset Value, (ii) payments to
any holder of a nonrecourse debt would be limited to the Gross Asset Value of
the assets secured by repayment of such debt, and (iii) the proceeds of such
hypothetical sale would be applied and distributed in accordance with Section
11.2. If, upon the advice of the public accounting firm retained to prepare
the income tax returns of the Company, it is determined that the intentions
set forth in this Section 5.6 are not being met by the allocations in Sections
5.1 and 5.2, the Members shall make such allocations of Profit or Loss, or
items of income, gain, loss, or deduction comprising such Profit or Loss, as
necessary to achieve the intention set forth in this Agreement.
5.7 Required Ownership of Member-Managers. Anything to the contrary
in this Agreement notwithstanding, Member-Managers in the aggregate must own
at least a one (1) percent interest in each material item of the Company's
income, gain, loss, deduction or credit during the Company's entire existence.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 12
5.8 Allocation of Expenses.
(a) Class A Assets shall be used and applied solely for the
benefit of the Class A Members. Except to the extent required by applicable
law, Class A Assets shall be used only to pay Class A Expenses, and the
Restructuring Expenses, and the allocable share of General Expenses.
(b) Class B Assets shall be used and applied solely for the
benefit of the Class B Members. Except to the extent required by applicable
law, Class B Assets shall be used only to pay Class B Expenses, and the
Restructuring Expenses, and the allocable share of General Expenses.
ARTICLE VI
DISTRIBUTIONS
6.1 Distributions To Class A Members.
(a) Class A Cash Income. Subject to the provisions of Section
6.4, the Company shall make distributions of its Class A Cash Income to its
Class A Members from time to time, as follows. The Class A Members shall
receive a distribution of 100% of Class A Cash Income, pro rata based on their
Class A Percentage Interests. This amount shall be paid (i) within 90 days
after and as of the end of the Company's first fiscal year, and each fiscal
year thereafter, and (ii) within 90 days after and as of the end of each of the
Company's fiscal quarters commencing with the first fiscal quarter ending in
1996, and each fiscal quarter thereafter (other than the last fiscal quarter
of each year).
(b) Uninvested Cash and Class A Return. Subject to the
provisions of Section 6.4, each Class A Member may (but shall not be required
to) elect to receive annual distributions of its pro rata share of uninvested
cash or cash equivalents and Class A Return each fiscal year.
Distributions of Class A Return will be made as follows:
(i) prior to January 1, 2001, the Company may, at its sole
option, reinvest any Class A Return; and
(ii) commencing with the fiscal year beginning January 1, 2001, a
Class A Member may elect with respect to a fiscal year to receive its pro rata
share of (x) the Class A Return with respect to such fiscal year, and (y) any
cash or cash equivalents which are part of the Class A Assets. Any part of the
Class A Assets which is not distributed pursuant to the foregoing may, at the
option of the Company, be reinvested in Real Estate Investments, and pending
such reinvestment, shall be invested by the Company as permitted under the
terms of this Agreement.
The election described in clause (ii) above must be made in writing by the
electing Class A Member, and must be received by the Company by the November 1
preceding the fiscal year for which such election is to be effective. By way
of example, an election by a Class A Member to receive a distribution of the
Class A Return with respect to the fiscal year beginning January 1,
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METROPOLITAN REALTY COMPANY, L.L.C. Page 13
2001 must be received by the Company by November 1, 2000. The number of
elections which a Class A Member may make shall be unlimited; provided,
however, that an election will be effective only with respect to the fiscal
year for which such election was made. An amount to be paid pursuant to this
Section 6.1(b) shall be paid within days after and as of the end of the
Company's fiscal year in which such amount became distributable.
6.2 Distributions To Class B Members.
(a) Class B Cash Income. Subject to the provisions of Section
6.4, the Company shall make distributions of its Class B Cash Income to its
Class B Members from time to time, as follows.
(b) Class B Return. Subject to the provisions of Section 6.4,
the Company shall make distributions of its Class B Return to its Class B
Members from time to time, as follows. The amount of the Class B Return shall
be paid within 90 days after and as of the end of each of the Company's fiscal
years, commencing after the Company's fiscal year beginning January 1, 2000.
6.3 Distributions of Uninvested Class B Assets.
Subject to the provisions of Section 6.4, all cash or cash
equivalents which constitute part of the Class B Assets which have not been
invested in Real Estate Investments by December 31, 1999 shall be distributed
to the Class B Members, pro rata based on their Class B Percentage Interests
within days after and as of the end of such year.
6.4 Limitations on Distributions. The distributions to be made
pursuant to this Article VI are subject to the limitations of this Section
6.4. Distributions may be made only if the Managing Board determines in its
reasonable judgment that the Company has sufficient cash on hand exceeding the
current and the anticipated needs of the Company to fulfill its business
purposes (including needs for operating expenses, debt service to third
parties, acquisitions, reserves, and mandatory distributions, if any).
Distributions will be made in cash. No distribution will be declared or made
if, after giving it effect, the Company would not be able to pay its debts as
they become due in the usual course of business or the Company's total assets
would be less than the sum of its total liabilities plus the amount that would
be needed if the Company were to be dissolved at the time of the distribution,
to satisfy the preferential rights of other Members on dissolution that are
superior to the rights of the Members receiving the distribution.
ARTICLE VII
DISPOSITION OF MEMBERSHIP INTERESTS
7.1 General. Every sale, assignment, transfer, exchange, mortgage,
pledge, grant, hypothecation, or other disposition of any Membership Interest
will be made only in compliance with this Article VII. No Membership Interest
will be disposed of unless and until:
(a) such instruments as may be required by the Limited
Liability Company Law or other applicable law or to effect the continuation of
the Company and the Company's ownership of its properties are executed and
delivered and/or filed;
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METROPOLITAN REALTY COMPANY, L.L.C. Page 14
(b) the instrument of assignment binds the assignee to all of
the terms and conditions of this Agreement, and all amendments thereto, as if
the assignee were a signatory party hereto; and
(c) the instrument of assignment is manually signed by the
assignee and assignor and is otherwise acceptable in form and substance to the
Managing Board.
7.2 Prohibited Dispositions. Any attempted sale, assignment,
transfer, exchange, mortgage, pledge, grant, hypothecation, or other
disposition of any Membership Interest will be null and void if it is not made
in compliance with this Article VII or:
(a) if the disposition would cause a termination of the Company
under the Code;
(b) if the disposition would, in the opinion of tax counsel to
the Company, jeopardize the status of the Company as a partnership for federal
income tax purposes; or
(c) if the disposition would not be in compliance with any and
all state and federal securities laws and regulations.
7.3 Permitted Dispositions. Subject to applicable law, and the
provisions of this Article VII, a Member may assign its Membership Interest in
the Company in whole or in part. The assignment of a Membership Interest does
not itself entitle the assignee to participate in the management and affairs
of the Company or to become a Member. Such assignee is entitled only to
receive, to the extent assigned, the distributions to which the assigning
Member would otherwise be entitled.
7.4 Admission of Substitute.
(a) An assignee of a Transferable Membership Interest pursuant
to an assignment permitted in this Agreement shall, subject to the provisions
of this Article VII, be admitted as a member in the Company in the place and
stead of the assignor Member in respect of the Membership Interest acquired
from the assignor Member and shall have all of the rights, powers,
obligations, and liabilities, and be subject to all of the restrictions, of
the assignor Member, including, without limitation, but without release of the
assignor Member, the liability of the assignor Member for any existing
unperformed obligations of the assignor Member.
(b) An assignee of a Restricted Membership Interest pursuant to
an assignment permitted in this Agreement shall, subject to the provisions of
this Article VII, and with the consent of not less than a majority of the
non-transferring Member-Managers, be admitted as a member in the Company in
the place and stead of the assignor Member in respect of the Membership
Interest acquired from the assignor Member and shall have all of the rights,
powers, obligations, and liabilities, and be subject to all of the
restrictions, of the assignor Member, including, without limitation, but
without release of the assignor Member, the liability of the assignor Member
for any existing unperformed obligations of the assignor Member.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 15
(c) If admitted, the substitute Member has, to the extent
assigned, all of the rights and powers and is subject to all of the
restrictions and liabilities of a Member of its class.
(d) No persons will be admitted as additional Members of any
class.
ARTICLE VIII
MANAGEMENT
8.1 Management of Business. The business and affairs of the Company
shall be managed by its Members-Managers through the Managing Board. The
Member-Managers are (a) those Members with a Total Percentage Interest of at
least the Minimum Percentage and (b) to the extent not previously taken into
account, those Class A Members (but excluding their assignees) which held
sufficient shares of the Corporation's common stock immediately prior to the
initial Capital Contribution of the Class A Members to elect at least one
director at an annual meeting of the shareholders of the Corporation, and in
either case which have not declined in writing to serve as Member-Managers.
The Member-Managers hereby delegate to the Managing Board all of their rights
and powers to manage and control the business and affairs of the Company,
including to delegate to agents and employees of a Member or the Company, and
to delegate by a management agreement or another agreement with, or otherwise
to, other persons. No Member, in its individual capacity, shall have the power
or authority to legally bind the Company, except as otherwise provided herein.
8.2 Managing Board.
(a) Number and Eligibility. Each Member-Manager shall be
entitled, but shall not be required, to appoint the greater of one (1)
Managing Board Member to the Managing Board or that number obtained by
dividing such Member-Manager's Total Percentage Interest by the Minimum
Percentage, rounded down to the nearest whole number. By way of example, if
the Minimum Percentage is two and one-half percent (2.5%), a Member-Manager
with a Total Percentage Interest of seven percent (7.0%) may appoint two
Managing Board Members to the Managing Board. In the event the Managing Board
Members appointed by the Member- Managers do not represent 100% of the Total
Percentage Interests, whether because a Member- Manager has declined to
appoint a Managing Board Member or otherwise, the Managing Board may appoint
one (1) at large Managing Board Member for each full Minimum Percentage of the
Membership Interests which would otherwise be unrepresented on the Managing
Board. The Managing Board shall consist of that number of Managing Board
Members appointed from time to time pursuant to the terms hereof by the
Member-Managers of the Company and the Managing Board, but in no event shall
the number of Managing Board Members be fewer than three (3) or greater than
forty (40). In the event that fewer than three (3) Managing Board Members have
been appointed by the Member-Managers, each of the Managing Board Members, in
order of their Total Percentage Interests beginning with the largest Total
Percentage Interest, will be given the opportunity to appoint one Managing
Board Member, until the Managing Board consists of three Managing Board
Members. A Managing Board Member may resign by written notice to the Company.
The resignation is effective upon its receipt by the Company or a subsequent
time as set forth in the notice of resignation.A Member-Manager may at any
time upon written notice to the Managing Board replace a Member Representative
appointed by it, or fill an opening on the Managing Board (i) which exists
because it did not appoint
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METROPOLITAN REALTY COMPANY, L.L.C. Page 16
the full number of Member Representatives to which it is entitled (in which
event the Managing Board shall remove the corresponding number of at large
Managing Board Members, to the extent necessary to reduce the number of
Managing Board Members to forty (40)), (ii) which was created by the death,
resignation or removal by such Member-Manager of a Managing Board Member
previously appointed by such Member-Manager, or (iii) which was created by an
increase in such Member-Manager's Total Percentage Interest. A person is not
eligible to be a Managing Board Member if such person serves as a trustee of
an employee benefit plan that owns any of the Company's Membership Interests.
A Managing Board Member need not be a resident of Michigan or a Member of the
Company.
(b) Removals. Upon the reduction by any Member-Manager of its
Total Percentage Interest to the extent that it no longer has a Total
Percentage Interest sufficient to appoint as many Managing Board Members as it
had appointed in accordance with Section 8.2(a) above, there shall be an
immediate and corresponding removal of from the Managing Board of that number
of Managing Board Members such Member-Manager no longer has the ability to
elect. The person(s) to be removed shall be determined by such Member-Manager
and in the event it shall fail to do so, by the action of the Managing Board.
(c) Composition and Affiliation. A majority of the Managing
Board Members shall at all times be persons who are not Affiliates of,
directly or indirectly, nor have a material business or professional
relationship with, the Advisory Company ("Unaffiliated Representative"). An
indirect relationship shall include circumstances in which a member of the
immediate family of a Managing Board Member has one of the foregoing
relationships with the Advisory Company. No person may be appointed as a
Managing Board Member if, after such appointment, the requirements of this
Section 8.2(c) would not be met.
(d) Annual Meeting. The Managing Board shall meet each year on
a business day during the fifth or sixth calendar month after the end of the
Company's fiscal year, on a date, at a time and at a location to be fixed by
the Managing Board, for the purpose of appointing officers, employees and
agents of the Company and consideration of such business that may properly
come before the meeting; provided, that if less than a majority of the
Managing Board Members appear for an annual meeting of the Managing Board the
holding of such annual meeting shall not be required, and the matters which
might have been taken up therein may be taken up at any later annual or
special meeting or by written consent. Special meetings of the Managing Board
may be called by the Chairman of the Managing Board (if such office is filled)
or any member of the Executive Committee and shall be called by the Chairman
upon the written request of any two Managing Board Members.
(e) Notices. No notice shall be required for annual or regular
meetings of Managing Board or for adjourned meetings, whether regular or
special. Three days' written notice shall be given for special meetings of the
Managing Board, and such notice shall state the time, place and purpose or
purposes of the meeting.
(f) Quorum and Voting. A majority of the Managing Board Members
then in office (including a majority of the Unaffiliated Representatives)
constitutes a quorum for the transaction of business. Each Managing Board
Member shall be entitled to one vote. The vote of a majority of the
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METROPOLITAN REALTY COMPANY, L.L.C. Page 17
Managing Board Members present at any meeting at which there is a quorum shall
be the acts of the Managing Board, except as a larger vote may be required by
the Limited Liability Company Law.
(g) Participation via Telecommunications Equipment. A member of
the Managing Board or of a committee designated by the Managing Board may
participate in a meeting by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting in this manner
constitutes presence in person at the meeting.
8.3 General Powers of Managing Board. Except as may otherwise be
provided in this Agreement, the ordinary and usual decisions concerning the
business and affairs of the Company will be made by the Managing Board. The
Managing Board has the power, on behalf of the Company, to do all things
necessary or convenient to carry out the business and affairs of the Company,
including, without limitation, the power to: (a) make Mortgage Loans; (b)
purchase, lease or otherwise acquire any real or personal property; (c) sell,
convey, mortgage, grant a security interest in, pledge, lease, exchange, or
otherwise dispose or encumber any real or personal property; (d) open one or
more depository accounts and make deposits into and checks and withdrawals
against such accounts; (e) borrow money, incur liabilities, and other
obligations; (f) enter into agreements and execute contracts, documents, and
instruments; (g) engage employees and agents, define their duties, and
establish their compensation or remuneration; (h) obtain insurance covering
the business and affairs of the Company and its property and its employees and
agents; and (i) prosecute or defend any proceeding in the Company's name.
8.4 Limitations. Notwithstanding the foregoing or any other
provision contained in this Agreement to the contrary, no act will be taken,
sum expended, decision made, obligation incurred, or power exercised by the
Managing Board or any officer on behalf of the Company except by the
affirmative vote of Members holding at least 66 2/3% of the Total Percentage
Interests, based upon each Member's Total Percentage Interests as of the end
of the Company's most recent fiscal __________, with respect to (a) the
adoption of an agreement of merger or consolidation; (b) the sale, lease or
exchange of all or substantially all of the Company's property and assets; (c)
the dissolution of the Company or revocation of a dissolution, provided, that
the Managing Board shall have the power to liquidate the assets attributable
to a particular class or series and to distribute such assets in accordance
with Section 11.1 upon a determination by the Managing Board that it is no
longer in the best interest of the Company or the Members of such class or
series to maintain such class or series; (d) any amendment or restatement of
the Certificate or this Agreement, unless required, in the opinion of tax
counsel to the Company, to permit the Company to be taxed as a partnership for
federal income tax purposes, and except as provided in Section 3.1(b) of this
Agreement; (e) any matter other than a distribution of Class A Return or Class
B Return to Members in the ordinary course of the Company's business
character of the Company's capital; (f) any change in the character of the
business and affairs of the Company; (g) the commission of any act that would
make it impossible for the Company to carry on its ordinary business and
affairs; or (h) any act that would contravene any provision of the
Certificate, this Agreement, or the Limited Liability Company Law.
In the event any of the foregoing actions shall materially affect less
than all of the Company's classes or series of Membership Interests, the
holders of such affected classes or series shall be
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METROPOLITAN REALTY COMPANY, L.L.C. Page 18
pursuant to this Agreement which could result in a change in the amount or
entitled to vote separately on such an item of business. The voting as a class
or series shall be in addition to any other vote required by this Agreement.
8.5 Executive and Loan Committees. The Managing Board shall appoint
an Executive Committee and a Loan Committee as follows:
(a) Loan Committee. The Loan Committee shall be comprised of
nine (9) regular members (a majority of whom shall be Unaffiliated
Representatives) and three (3) alternate members (a majority of whom shall be
Unaffiliated Representatives). The regular and alternate members of the Loan
Committee shall be selected by the Managing Board as a whole from among its
number.
(b) Executive Committee. The Executive Committee shall be
comprised of seven (7) members, a majority of whom shall be Unaffiliated
Representatives, to be selected by the Managing Board as a whole from among
its number.
(c) Exclusivity. No Managing Board Member may serve as a
regular member on both the Executive Committee and on the Loan Committee.
Members of the Executive Committee may serve as alternate members of the Loan
Committee.
(d) Removals and Vacancies. Upon the reduction by any
Member-Manager of its Total Percentage Interest to the extent that it no
longer has a Total Percentage Interest sufficient to appoint as many Managing
Board Members as it had appointed in accordance with Section 8.2(a) above,
there shall be an immediate and corresponding removal of any member of the
Executive Committee or of the Loan Committee who was so appointed by such
Member- Manager as a Managing Board Member and subsequently selected as a
member of the Executive Committee or of the Loan Committee pursuant to
subsection (a) above or (b) above, respectively, on the basis of one (1)
committee member for each one (1) Managing Board Member such Member-Manager no
longer has the ability to elect. Any vacancy occurring in the membership of
the Executive Committee or of the Loan Committee as a result of such a removal
or otherwise shall be filled by the action of the Managing Board of the
Company, as a whole.
8.6 Power and Authority of Committees.
(a) Executive Committee. The Executive Committee shall
exercise all power and authority of the Managing Board in the management of
the business and affairs of the Company, except that the Executive Committee
shall not have power or authority to take any action or recommend to any
Members that any action be taken which requires approval of any Members
pursuant to this Agreement.
(b) Loan Committee. The Loan Committee shall have such power
and authority as the Managing Board shall from time to time delegate to it.
(c) Audit Committee. The Managing Board shall, through
nominations made by the Chairman with approval by resolution passed by a
majority of the whole Managing Board, appoint from among its members an Audit
Committee composed of three (3) or more Managing Board Members. All members of
the Audit Committee shall be composed of Unaffiliated Representatives.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 19
The duties of the Audit Committee shall include, in addition to any other
duties approved by the Managing Board: (i) recommending independent auditors
to the Company; (ii) reviewing with the Company's independent auditors the
scope of the audit, audit fees, the report of audit and the management letter;
(iii) reviewing with management and the independent auditors the financial
statements for the year; (iv) reviewing and approving non-audit services by
the independent auditors; and (v) consulting with the independent auditors
and, if necessary, with internal financial personnel of the Advisory Company,
with regard to the adequacy of internal controls.
(d) Other Committees. The Managing Board from time to time may,
through nominations made by the Chairman and through approval by resolution
passed by a majority of the whole Managing Board, appoint such other
committees of one or more Managing Board Members and one or more persons who
are not Managing Board Members to have such authority as shall be specified by
the Managing Board in the resolution making such appointments including,
without limitation, the authority to advise and make recommendations to the
Managing Board, the Executive Committee or other committees concerning actions
to be taken by such committees in connection with their responsibilities and
obligations to the Company, provided that the majority of the members of each
such committee shall be Unaffiliated Representatives.
(e) Alternate Members. A member of any committee other than
Executive, Loan or Audit Committee may, unless the Executive Committee acts in
such member's stead (through nominations made by the Chairman and through
approval by resolution passed by a majority of the Executive Committee),
designate an alternate member from among the Managing Board or from outside
the Managing Board as the case may be, but not among such committee, with such
alternate member to have full power and authority, in the absence of the
appointed member, to attend meetings, to receive applicable attendance fees,
and in all other ways, to act in the place of the appointed member at any such
meeting thereof.
(f) Quorum. A majority of the whole voting membership of the
Loan Committee then designated (including alternate members when applicable)
constitutes a quorum for the transaction of business. One-third of the whole
voting membership of any other committee then designated (including alternate
members when applicable) constitutes a quorum for the transaction of business.
Notwithstanding anything in this Agreement to the contrary, the Chairman of
the Managing Board or, if the Chairman is unavailable, the Vice Chairman, may
appoint any member of the Managing Board to serve as an ad hoc member of any
committee in order to permit a committee to obtain a quorum for any given
meeting. Ad hoc members may be appointed notwithstanding any limitations on
committee memberships contained in this Agreement. No more than one ad hoc
member may be appointed to the Loan Committee for any one meeting.
(g) Voting.
(i) General. Each member of a committee shall be
entitled to one vote. The vote of a majority of the whole voting membership of
a committee (including alternate members when applicable) shall be the act of
a committee, except as provided in subsection (ii) below and except as a
larger vote may be required by the Limited Liability Company Law.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 20
(ii) Loan Committee. The affirmative vote of at least
six (6) members of the Loan Committee, whether regular members or alternate
members entitled to vote as provided below, shall constitute acts of the Loan
Committee. The alternate members of the Loan Committee shall be entitled to
attend and to participate in all meetings of the Loan Committee; provided,
however, that alternate members shall not be entitled to vote at such meetings
unless one or more of the regular members are not present at such a meeting,
in which case one (1) alternate member, in the order designated by the
majority of regular members present (which may be by lot), shall be entitled
to vote in the place of each regular member that is not present at any
meeting.
(h) Chairman of Committees. The Managing Board may appoint a
chairman of each committee. If the Managing Board does not appoint a chairman
of any committee, such committee shall select a chairman from among its
regular members. The Chairman of the Managing Board shall not be eligible to
serve as the chairman of any committee.
8.7 Dissents. A Managing Board Member who is present at a meeting of
the Managing Board, or a Managing Board Member or a person who is not a
Managing Board Member who is present at a meeting of a committee, at which
action on a Company matter is taken, is presumed to have concurred in that
action unless his or her dissent is entered in the minutes of the meeting or
unless he or she files his or her written dissent to the action with the
person acting as secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the Secretary of the Company
promptly after the adjournment of the meeting. Such right to dissent does not
apply to a person who voted in favor of such action. A person who is absent
from a meeting of the Managing Board, or a committee thereof of which he or
she is a member, at which any such action is taken is presumed to have
concurred in the action unless he or she files his or her written dissent with
the Secretary of the Company within a reasonable time after he or she has
knowledge of the action.
8.8 Compensation and Expense Reimbursement. No member of the
Managing Board or any other committee shall be entitled to receive
compensation for serving as a Managing Board Member in connection with regular
or special meetings of the Managing Board or any other committee; provided,
however, that the Managing Board, by affirmative vote of a majority of
Managing Board Members in office and irrespective of any personal interest of
any of them, may:
(a) Reimburse the Managing Board Members and committee members
for their reasonable out-of-pocket expenses incurred in connection with
attending meetings or otherwise in connection with their duties as Managing
Board Members and committee members; and
(b) Establish reasonable compensation of Managing Board Members
for serving as members of the Executive Committee, Loan Committee or other
committees established hereunder.
8.9 Officers. The Managing Board shall elect a Chairman, Vice
Chairman, a President, a Secretary and a Treasurer, and may elect an Executive
Vice President, one or more additional Vice Presidents, Assistant Secretaries
and/or Assistant Treasurers. The Chairman, the Vice Chairman, the Secretary
and the Treasurer shall be selected from members of the Managing Board. If the
President is not selected from members of the Managing Board, the President
shall be a non-voting, ex-officio member of the Managing Board. Any two of the
above officers, except those of President and Vice
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METROPOLITAN REALTY COMPANY, L.L.C. Page 21
President and those of Chairman and Vice Chairman, may be held by the same
person, but no officer shall execute, acknowledge or verify an instrument in
more than one capacity.
8.10 Term of Office, Resignation and Removal. An officer shall hold
office for the term for which he or she is elected or appointed and until his
or her successor is elected or appointed and qualified, or until his or her
resignation or removal. An officer may resign by written notice to the
Company. The resignation is effective upon its receipt by the Company or at a
subsequent time specified in the notice of resignation. An officer may be
removed by the Managing Board with or without cause. The removal of an officer
shall be without prejudice to his or her contract rights, if any. The election
or appointment of an officer does not of itself create contract rights.
8.11 Vacancies. The Managing Board may fill any vacancies in any
office occurring for whatever reason.
8.12 Authority. All officers, employees and agents of the Company
shall have such authority and perform such duties in the conduct and
management of the business and affairs of the Company as may be designated by
the Managing Board and this Agreement.
8.13 Compensation. The salaries of all officers of the Company
shall be fixed by the Managing Board.
8.14 Chairman. The Chairman shall preside at all meetings of the
Members and of the Managing Board at which he or she is present. He or she
shall further perform such other duties as the Managing Board may from time to
time prescribe.
8.15 Vice Chairman. The Vice Chairman shall preside at all meetings
of the Members and of the Managing Board in the absence of the Chairman at
which time he is present. He or she shall further perform such other duties as
the Managing Board may from time to time prescribe.
8.16 President. The President shall be the chief executive officer
of the Company. The President shall see that all orders and resolutions of the
Managing Board are carried into effect and shall have the general powers of
supervision and management usually vested in the chief executive officer of a
company, including, without limitation, the authority to vote all securities
of other corporations and business organizations which are held by the
Company.
8.17 Vice Presidents. The Executive Vice President shall have such
authority and perform such duties in the conduct and management of the
business and affairs of the Company as may be designated by the Managing Board
or the President of the Company. The Executive Vice President shall, in the
absence or disability of the President, perform the duties and exercise the
powers of the President. The other Vice Presidents, in order of their
seniority, shall, in the absence or disability of the President and the
Executive Vice President, perform the duties and exercise the powers of the
President and the Executive Vice President and shall perform such other duties
as the Managing Board or the President may from time to time prescribe.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 22
8.18 Secretary. The Secretary shall attend all meetings of the
Managing Board and of Members and shall record all votes and minutes of all
proceedings in a book to be kept for that purpose. He or she shall give or
cause to be given notice of all meetings of the Members and of the Managing
Board. The Secretary may delegate any of his or her duties, powers and
authorities to one or more Assistant Secretaries, unless such delegation is
disapproved by the Board.
8.19 Treasurer. The Treasurer shall have the custody of the
Company's funds and securities; shall keep full and accurate accounts of
receipts and disbursements in books of the Company; and shall deposit all
monies and other valuable effects in the name and to the credit of the Company
in such depositories as may be designated by the Managing Board. He or she
shall render to the President and Managing Board Members, whenever they may
require it, an account of his or her transactions as Treasurer and of the
financial condition of the Company. The Treasurer may delegate any of his or
her duties, powers and authorities to one or more Assistant Treasurers unless
such delegation be disapproved by the Managing Board.
8.20 Assistant Secretaries and Treasurers. The Assistant
Secretaries, in order of their seniority, shall perform the duties and
exercise the powers and authorities of the Secretary in case of his or her
absence or disability. The Assistant Treasurers, in the order of their
seniority, shall perform the duties and exercise the powers and authorities of
the Treasurer in case of his or her absence or disability. The Assistant
Secretaries and Assistant Treasurers shall also perform such duties as may be
delegated to them by the Secretary and Treasurer, respectively, and also such
duties as the Managing Board may prescribe.
8.21 Standard of Care. Each Managing Board Member, officer and
person appointed by the Managing Board or any committee thereof to perform
duties for the Company will discharge his or her duties in good faith, with
the care an ordinarily prudent person in a like position would exercise under
similar circumstances, and in a manner he or she reasonably believes to be in
the best interests of the Company.
8.22 Liability. To the extent that, at law or in equity, a Member,
Managing Board Member, officer or other person has duties (including fiduciary
duties) and liabilities thereto to the Company or to another Member, Managing
Board Member or officer, any such Member, Managing Board Member, officer or
other person acting under this Agreement shall not be liable to the Company or
to any such other Member, Managing Board Member or officer for the Member's,
Managing Board Member's, officer's or other person's good faith reliance on
the provisions of this Agreement. No Member, Managing Board Member, officer or
any other person shall be liable for any monetary damages to the Company for
any breach of such duties except for receipt of a financial benefit to which
the Member, Managing Board Member, officer or other person is not entitled,
voting for or assenting to a distribution to Members in violation of this
Agreement or the Limited Liability Company Law, or a knowing violation of law.
8.23 Other Interests. Subject to Section 9.7 and applicable law,
each of the Members, Managing Board Members and officers may engage in or
possess an interest in other business ventures (unconnected with the Company)
of every kind and description, independently or with others including, but not
limited to, participation in other limited liability companies and
partnerships engaged in the business of the Company. Neither the Company, the
Managing Board
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METROPOLITAN REALTY COMPANY, L.L.C. Page 23
Members, the officers nor any of the Members shall have any rights in and to
such independent ventures or the income or profits therefrom by reason of any
position in the Company.
ARTICLE IX
INVESTMENT OBJECTIVES AND POLICIES
9.1 Duties and Responsibilities; Investment Allocation. It shall be
the duty of the Managing Board to ensure that the purchase, sale, retention
and disposal of the Company's assets, and the investment policies of the
Company and the limitations thereon or amendment thereof are at all times
consistent with such policies, limitations and restrictions as are contained
in this Article IX. Except as specifically restricted in this Agreement, the
investment objectives and policies of the Company shall be controlled by the
Managing Board (including a majority of the Unaffiliated Representatives),
which has the power to modify or alter such policies without the consent of
the Members. It is understood that the Managing Board's duties and
responsibilities hereunder are with respect to more than one class of
Membership Interest. The Members agree that the Managing Board may take action
in the performance of its duties with respect to any class, which may differ
from the timing or nature of any action taken with respect to any other class,
so long as the Managing Board, to the extent practical, allocates investment
opportunities between each of the classes over a period of time on a fair and
equitable basis.
9.2 Prohibited Investments and Activities. Unless approved by the
Members of the Company, the Company shall not engage in investment practices
or activities involving conflicts of interest, and, in particular, shall not
engage in any of the following activities:
(a) Invest in commodities or commodity future contracts; except
that such limitation shall not apply to interest rate futures or options
therefor when used solely for hedging purposes.
(b) Invest in or make Mortgage Loans unless an appraisal is
obtained concerning the underlying property. In cases in which a majority of
the Unaffiliated Representatives so determines, and in all cases in which the
transaction is with the Advisory Company, a Managing Board Member, a
Member-Manager or an Affiliate thereof, such appraisal must be obtained from
an independent, qualified appraiser and such appraisal shall be maintained in
the Company's records for a period of five (5) years and shall be available
for inspection by the Company's Members. In addition to an appraisal, a
mortgagee's or owner's title insurance policy or commitment as to the priority
of the Mortgage or the condition of the title must be obtained.
(c) Invest in real estate contracts of sale, unless such
contracts of sale are in recordable form and are appropriately recorded in the
chain of title.
(d) Make or invest in Mortgage Loans, including Construction
Loans, on any one property if the aggregate amount of all Mortgage Loans
outstanding on the property, including the loans of the Company, would exceed
an amount equal to ninety-five percent (95%) of the appraised value of the
property as determined by appraisal, unless a higher percentage is approved by
a majority vote of the Managing Board (including a majority of the
Unaffiliated Representatives).
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METROPOLITAN REALTY COMPANY, L.L.C. Page 24
(e) Make or invest in any Mortgage Loans that are subordinate
to any Mortgage or equity interest of the Advisory Company, a Managing Board
Member, a Member-Manager, or an Affiliate thereof.
(f) Issue equity securities that are redeemable at the option
of the holder thereof.
(g) Issue debt securities unless the historical debt service
coverage (in the most recently completed fiscal year) as adjusted for known
charges is sufficient to properly service that higher level of debt.
(h) Invest in the equity securities of any nongovernmental
issuer, including real estate investment trusts or limited partnerships, for a
period in excess of eighteen (18) months.
(i) Issue Membership Interests on a deferred payment basis or
similar arrangement.
(j) Purchase property from the Advisory Company, any director
or Affiliate thereof, unless a majority of the Uninterested Representatives
approve the transaction as being fair and reasonable to the Company and at a
price to the Company no greater than the cost of the asset to such Advisory
Company, Managing Board Member or Affiliate thereof, or, if the price to the
Company is in excess of such cost, that substantial justification for such
excess exists and such excess is not unreasonable. In no event shall the cost
of such asset to the Company exceed its current appraised value.
(k) Sell property to the Advisory Company, any director or
Affiliate thereof.
(l) Make loans to or borrow money from the Advisory Company,
any director or Affiliate thereof, unless a majority of the Uninterested
Representatives approve the transaction as being fair, competitive, and
commercially reasonable and no less favorable to the Company than loans
between unaffiliated lenders and borrowers under the same circumstances.
(m) Invest in joint ventures with the Advisory Company, any
director or Affiliate thereof, unless a majority of the Uninterested
Representatives approve the transaction as being fair and reasonable to the
Company, and on substantially the same terms and conditions as those received
by the other joint venturers.
(n) Invest in assets or receive income (to the extent of 90% of
the Company's gross income), except as would be permitted for a qualified real
estate investment trust under Section 856 of the Code.
(o) Enter into any other transactions with the Advisory
Company, any director or Affiliate thereof, unless a majority of the
Uninterested Representatives approve the transaction as being fair and
reasonable to the Company and on terms and conditions not less favorable to
the Company than those available from unaffiliated third parties.
9.3 Annual Review. The Unaffiliated Representatives shall review
the investment policies of the Company at least annually to determine that the
policies then being followed by the Company
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METROPOLITAN REALTY COMPANY, L.L.C. Page 25
are in the best interests of its Members and that investment opportunities are
being allocated equitably between the classes. Each such determination and the
basis therefor shall be set forth in the minutes of the Managing Board.
9.4 Borrowing Policies. The Members acknowledge that funds may be
required in addition to the Capital Contributions made pursuant to Sections
4.1 and 4.3 hereof in order to meet the operating expenses of the Company. All
additional funds required for such purpose shall be obtained from the proceeds
of secured or unsecured loans pursuant to such terms, provisions and
conditions and in such manner as the Managing Board shall determine. The
Company shall not borrow funds for any other purpose, including, without
limitation, for the purpose of acquiring or holding any Real Estate
Investments. The aggregate borrowings of the Company, secured and unsecured,
shall not exceed $1,000,000 and shall be reviewed by the Managing Board at
least quarterly.
9.5 Consideration for Realty. The consideration paid for real
property acquired by the Company shall ordinarily be based on the fair market
value of the property as determined by a majority of the Managing Board. In
cases in which a majority of the Uninterested Representatives so determines,
and in all cases in which assets are acquired from the Advisory Company, a
Managing Board Member, a Member-Manager or an Affiliate of same, such fair
market value shall be as determined by a qualified independent real estate
appraiser selected by a majority of the Uninterested Representatives.
9.6 Arrangements with Advisory Company.
(a) Delegation of Duty and Supervision of Relationship. The
Managing Board may delegate the duty of management of the assets and the
administration of the Company's day-to-day operations to an advisory company
(the "Advisory Company") pursuant to a written contract or contracts, or any
renewal thereof, which have obtained the requisite approvals of the Managing
Board, including a majority of the Unaffiliated Representatives, and as may be
required under the Limited Liability Company Act. The Managing Board shall
have a duty to supervise such advisory relationship in the interest of the
Company and the Members.
(b) Evaluation of Performance. The Managing Board shall
evaluate the performance of the Advisory Company before entering into or
renewing any management arrangements. The minutes of meetings with respect to
such evaluation shall reflect the criteria used by the Managing Board in
making such evaluation. Upon any termination of the initial advisory
arrangements, the Managing Board shall determine that any successor Advisory
Company possess sufficient qualifications (i) to perform the management
function for the Company and (ii) to justify the compensation provided for in
its contract with the Company.
(c) Term of Arrangement. Each contract for the services of an
Advisory Company entered into by the Managing Board shall have a term of no
more than one (1) year and may be renewed for successive one (1) year terms at
or prior to the expiration of the contract. For the initial term of each
contract, unless otherwise determined by the Managing Board, such contract
shall be terminable by a majority vote of the Managing Board or of the
Unaffiliated Representatives in the event the Advisory Company shall have
violated any provision of its agreement and, after notice of such violation,
shall have failed to cure such default within sixty (60) days. After the
initial term of
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METROPOLITAN REALTY COMPANY, L.L.C. Page 26
each contract, unless otherwise determined by the Managing Board, such
contract shall be terminable by the Advisory Company upon one hundred twenty
(120) days' written notice to the Company and shall be terminable by the
Company, at its option for any reason, upon sixty (60) days' written notice to
the Advisory Company. The Managing Board shall determine that any successor
Advisory Company possesses sufficient qualifications to perform the advisory
function for the Company and to justify the compensation provided for in its
contract with the Company.
(d) Compensation of Advisory Company. The Unaffiliated
Representatives shall determine at least annually that the compensation which
the Company contracts to pay the Advisory Company is reasonable in relation to
the nature and quality of services performed and shall also supervise
performance of the Advisory Company and the compensation paid to it by the
Company to determine that the provisions of such contract are being carried
out. Each such determination shall be based upon the following factors, and
all other factors the Unaffiliated Representatives may deem relevant, which
findings of the Unaffiliated Representatives on each of such factors shall be
recorded in the minutes of the Managing Board:
(i) The size of the management fee in relation to the
size, composition and profitability of the investment portfolio of the
Company;
(ii) The success of the Advisory Company in generating
opportunities that meet the investment objectives of the Company;
(iii) The rates charged to other companies similar to the
Company and to other investors by advisors performing similar
services;
(iv) Additional revenues realized by the Advisory Company
and its Affiliates through their relationship with the Company,
including loan administration, underwriting or broker commissions,
servicing, engineering, inspection and other fees, whether paid by the
Company or by others with whom the Company does business;
(v) The quality and extent of service and advice furnished
to the Company; and
(vi) The performance of the investment portfolio of the
Company, including income, conservation or appreciation of capital,
frequency of problem investments and competence in dealing with
distress situations.
9.7 Conflicts of Interest.
(a) No Duty to Disclose Business Opportunities to the Company.
If a Member or Managing Board Member becomes aware of a Real Estate Investment
opportunity, the Managing Board Member shall not be obligated to notify the
Company of such opportunity.
(b) Duty to Disclose Interest in Real Estate Investments. If a
Managing Board Member becomes aware of the fact that he or she, individually,
the Member-Manager which appointed such Managing Board Member or an Affiliate
has a direct or indirect interest in a Real
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METROPOLITAN REALTY COMPANY, L.L.C. Page 27
Estate Investment which is under consideration by the Company, the Managing
Board Member shall disclose such interest to the Managing Board or any
committee of the Managing Board reviewing such Real Estate Investment,
promptly, but in all events prior to a vote by the Managing Board or committee
with respect to the transaction.
(c) Duty to Abstain From Deliberations and Voting. When any
Managing Board Member becomes aware of the fact that he or she, individually,
the Member-Manager which appointed such Managing Board Member or an Affiliate
has a direct or indirect interest in a Real Estate Investment which is under
consideration by the Company, the Managing Board Member shall excuse himself
or herself from any deliberations of the Managing Board or any committee of
the Managing Board with respect to a Real Estate Investment in which he or she
has an interest.
(d) Majority Vote of Uninterested Managing Board Members
Required. Any Real Estate Investment as to which a Managing Board Member has
disclosed an interest as provided above must be approved by a majority of the
members of the Managing Board or committee thereof who are Uninterested
Representatives.
ARTICLE X
INDEMNIFICATION
10.1 Indemnification. Subject to all of the other provisions of this
Article, the Company shall indemnify a person who was or is a party or is
threatened to be made a party to a threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
and whether formal or informal, other than an action by or in the right of the
Company, by reason of the fact that he or she is or was a Managing Board
Member or officer of the Company, or is or was serving at the request of the
Company as a director, officer, partner, trustee, employee or agent of another
foreign or domestic limited liability company, corporation, partnership, joint
venture, trust or other enterprise, whether for profit or not, against
expenses, including attorneys' fees, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him or her in
connection with the action, suit or proceeding, if the person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Company or its Members, and with respect to a
criminal action or proceeding, if the person had no reasonable cause to
believe his or her conduct was unlawful. The termination of an action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contenders or its equivalent, does not, itself, create a presumption that the
person did not act in good faith and in a manner which he or she reasonable
believed to be in or not opposed to the best interests of the Company or its
Members, and, with respect to a criminal action or proceeding, had reasonable
cause to believe that his or her conduct was unlawful.
10.2 Certain Actions. Subject to all of the provisions of this
Article, the Company shall indemnify a person who was or is a party to or is
threatened to be made a party to a threatened, pending or completed action or
suit by or in the right of the Company to procure a judgment in its favor by
reason of the fact that he or she is or was a Managing Board Member or officer
of the Company, or is or was serving at the request of the Company as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic limited liability company, corporation, partnership, joint venture,
trust or other enterprise, whether for profit or not, against expenses,
including actual
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METROPOLITAN REALTY COMPANY, L.L.C. Page 28
and reasonable attorneys' fees, and amounts paid in settlement incurred by the
person in connection with the action or suit, if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed
to the best interests of the Company or its Members. However, indemnification
shall not be made for a claim, issue, or matter in which the person has been
found liable to the Company unless and only to the extent that the court in
which the action or suit was brought has determined upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, the person is fairly and reasonably entitled to indemnification for the
expenses which the court considers proper.
10.3 Expenses of Successful Defense. To the extent that a person has
been successful on the merits or otherwise in defense of an action, suit, or
proceeding referred to in Section 10.1 or 10.2 of this Agreement, or in
defense of a claim, issue or matter in the action, suit, or proceeding, he or
she shall be indemnified against expenses, including actual and reasonable
attorneys' fees, incurred by him or her in connection with the action, suit or
proceeding and an action, suit, or proceeding brought to enforce the mandatory
indemnification provided in this Section 10.3.
10.4 Determination that Indemnification is Proper. An
indemnification under Section 10.1 or 10.2 of this Agreement, unless ordered
by a court, shall be made by the Company only as authorized in the specific
case upon a determination that indemnification of the person is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in Section 10.1 or 10.2, whichever is applicable. Determination that
indemnification is proper shall be made as follows:
(a) Managing Board Members and Advisors. For the
indemnification of Managing Board Members and Advisors of the Company, such
determination shall be made only if all of the following conditions shall be
satisfied:
(i) The Managing Board Member or Advisor has determined,
in good faith, that the course of conduct which caused the loss or
liability was in the best interests of the Company.
(ii) Such liability or loss was not the result of gross
negligence or misconduct by the Managing Board Member or Advisor.
(iii) Such indemnification or agreement to hold harmless
is recoverable only out of the assets of the Company and not from the
Members.
(iv) Such determination shall be made in any of the
following ways: (A) by a majority vote of a quorum of the Managing
Board consisting of Managing Board Members who were not parties to the
action, suit or proceeding; (B) if such quorum is not obtainable, then
by a majority vote of a committee of Managing Board Members who are
not a party to the action, with such committee consisting of not less
than two disinterested Managing Board Members; (C) by independent
legal counsel in a written opinion: or (D) by the Members.
If and only to the extent prohibited by applicable law,
indemnification will not be allowed on any liability imposed by judgment, and
costs associated therewith, including attorneys' fees,
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METROPOLITAN REALTY COMPANY, L.L.C. Page 29
arising from or out of a violation of state or federal securities laws
associated with the offer and sale of the Company's Membership Interests.
Indemnification will be allowed for settlements and related expenses of
lawsuits alleging securities law violations, and for expenses incurred in
successfully defending such lawsuits, provided that a court either: (1)
approves the settlement and finds that indemnification of the settlement and
related costs should be made; or (2) approves indemnification of litigation
costs if a successful defense is made.
(b) Others. For the indemnification of all persons other than
Managing Board Members and Advisors of the Company, such determination shall
be made in any of the following ways:
(i) By a majority vote of a quorum of the Managing
Board consisting of Managing Board Members who were not parties to the
action, suit or proceeding;
(ii) If such quorum is not obtainable, then by a majority
vote of a committee of Managing Board Members who are not a party to
the action, with such committee consisting of not less than two
disinterested Managing Board Members;
(iii) By independent legal counsel in a written opinion; or
(iv) By the Members.
10.5 Indemnification for Portion of Expenses. If a person is
entitled to indemnification under Section 10.1 or Section 10.2 of this
Agreement for a portion of expenses including attorneys' fees, judgments,
penalties, fines and amounts paid in settlement, but not for the total amount
thereof, the Company may indemnify the person for the portion of the expenses,
judgments, penalties, fines or amounts paid in settlement for which the person
is entitled to be indemnified.
10.6 Expense Advances. Expenses incurred in defending a civil or
criminal action, suit or proceeding described in Section 10.1 or 10.2 of this
Agreement may be paid by the Company in advance of the final disposition of
the action, suit or proceeding upon receipt of an undertaking by or on behalf
of the person involved to repay the expenses if it is ultimately determined
that the person is not entitled to be indemnified by the Company. The
undertaking shall be by unlimited general obligation of the person on whose
behalf advances are made but need not be secured.
10.7 Indemnification of Employees and Agents of the Company. The
Company may, to the extent authorized from time to time by the Managing Board,
grant rights to indemnification and to the advancement of expenses to any
employee or agent of the Company to the fullest extent of the provisions of
this Article X with respect to the indemnification and advancement of expenses
of Managing Board Members and officers of the Company.
10.8 Former Managing Board Members, Officers, Employees and Agents.
The indemnification provided in the foregoing Sections of this Article X
continues as to a person who has ceased to be a Managing Board Member,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 30
10.9 Insurance. The Company may purchase and maintain insurance on
behalf of any person who is or was a Managing Board Member, officer, employee
or agent of the Company, or is or was serving at the request of the Company as
a director, officer, employee or agent of another limited liability company,
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him or her in any such capacity
or arising out of his or her status as such, whether or not the Company would
have power to indemnify him or her against such liability under this Agreement
or the laws of the State of Delaware.
10.10 Contract Right to Indemnity. The right to indemnification
conferred in this Article X shall be a contract right, and shall apply to
services of a Managing Board Member or officer as an employee or agent of the
Company as well as in such person's capacity as a Managing Board
Member or officer. Except as provided in Section 10.3 of this Agreement, the
Company shall have no obligations under this Article X to indemnify any person
in connection with any proceeding, or part thereof, initiated by such person
without authorization by the Managing Board.
10.11 Exclusivity; Other Indemnification. The indemnification or
advancement of expenses provided under this Article X is not exclusive of
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under a contractual arrangement with the Company.
However, the total amount of expenses advanced or indemnified from all sources
combined shall not exceed the amount of actual expenses incurred by the person
seeking indemnification or advancement of expenses.
10.12 Amendment or Deletion. No amendment or deletion of this Article
X shall apply to or have any effect on any Managing Board Member or officer of
the Company for or with respect to any acts or omissions of any such person
occurring prior to such amendment or repeal.
ARTICLE XI
DISSOLUTION, WINDING UP AND REDEMPTION
11.1 Dissolution. The Company will dissolve and its affairs will be
wound up on the first to occur of the following events: (a) December 31, 2025;
(b) the entry of a decree of judicial dissolution, as provided under the
Limited Liability Company Law; (c) by the consent of Members holding at least
seventy-five percent (75%) of the Membership Interests; (d) upon the death,
retirement, resignation, expulsion, Bankruptcy, or dissolution of a
Member-Manager or the occurrence of any other event that terminates the
continued membership of a Member-Manager in the Company, unless, in the case
of disassociation of membership described in clause (d) above, remaining
Members representing either a majority of the Total Percentage Interests of
the Company (provided such majority represents a majority of the profits
interests of the Company) or, alternatively, a majority of the Percentage
Interests of each class or series, consent to the continuation of the business
of the Company within 90 days after the disassociation.
11.2 Winding Up. Upon dissolution, the Company will cease carrying
on its business and affairs, will commence the winding up of the Company's
business and affairs, and will complete the winding up as soon as practicable.
Upon the winding up of the Company, the assets of the Company will be
distributed first to creditors to the extent permitted by law in satisfaction
of the Company's
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METROPOLITAN REALTY COMPANY, L.L.C. Page 31
debts, liabilities, and obligations; and then to Members and former Members,
in accordance with Article VI and their relative positive Adjusted Capital
Account Balances, by class. Such proceeds will be paid to such Members as soon
as practicable after the date of winding up.
11.3 Redemption. The Company may acquire, by purchase, redemption or
otherwise, any Membership Interest, on such terms and conditions as may be
approved by the Managing Board. Any interest so acquired shall be deemed
canceled, unless otherwise determined by the Managing Board.
11.4 Adjustments to Percentage Interests. In the event of any
distribution of Class A Return or Class B Return pursuant to Article VI of
this Agreement, or redemption, reorganization or similar event in respect of
any Membership Interest, then the Percentage Interests and the Total
Percentage Interests of the Members shall be appropriately adjusted, as of the
effective date of such event.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same.
12.2 Entire Agreement. This Agreement constitutes the entire agreement
among the parties and contains all of the agreements among the parties with
respect to its subject matter. This Agreement supersedes all other agreements,
either oral or written, among the parties with respect to its subject matter.
12.3 Severability. The invalidity or unenforceability of any
particular provision of this Agreement will not affect its other provisions,
and this Agreement will be construed in all respects as if such invalid or
unenforceable provisions were omitted.
12.4 Amendment.
(a) In General. Subject to Sections 3.1(b) and 8.4 and the
limitations provided in Section 12.4(b), this Agreement may be amended, in
whole or in part, by the Members or by the Managing Board at any meeting duly
held in accordance with this Agreement, provided that notice of the meeting
includes notice of the proposed amendment, and provided further that the
Managing Board shall not make or alter any provisions of this Agreement fixing
its number, qualifications, classifications or term of office.
(b) Limitations. The Managing Board shall not alter, modify or
delete any of the following provisions of this Agreement, which provisions may
be substantively altered, modified or deleted only by the affirmative vote of
Members holding at least 66 2/3% of the Total Percentage Interests:
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METROPOLITAN REALTY COMPANY, L.L.C. Page 32
(i) Section 3.4, relating to the Percentage Interests
of Members entitled to call a meeting;
(ii) the first and second sentences of Section 3.5;
(iii) Section 8.2(c);
(iv) The provisions of Section 8.5(b) and Section 8.6(c)
which provide that a majority of the members of the Executive
Committee shall be Unaffiliated Directors and all members of the Audit
Committee shall be Unaffiliated Directors;
(v) Article IX, except as may be necessary to insure that
the Company will be taxed as a partnership for federal income tax
purposes; and
(vi) this Section 12.4.
Further, any alteration, modification or deletion of Section 9.4 shall
require the unanimous consent of all of the Members.
(c) Adoption. Any amendment adopted pursuant to this Agreement
shall be executed by the Chairman, President or Secretary on behalf of the
Company and by the Members pursuant to the power of attorney granted in
Section 12.5 and maintained with the records of the Company. A copy of each
such amendment shall be promptly provided to each Member.
12.5 Power of Attorney. Each Member constitutes and appoints the
Chairman of the Managing Board and the President of the Company, and each of
them, with full power of substitution, its true and lawful attorney to make,
execute, and acknowledge and file in its name, place and stead:
(a) Any certificate or other instrument, including
registrations or filings concerning the use of fictitious names and necessary
or appropriate filings under the federal and state securities laws;
(b) Documents required to dissolve and terminate the Company;
(c) Amendments and modifications to the Certificate or any of
the instruments described above;
(d) Amendments and modifications to this Agreement which have
been approved pursuant to the terms hereof; and
(e) All loan and security agreements, notes, instruments, deeds
of trust, and other similar documents which are necessary or desirable for the
Company to conduct its business as contemplated by this Agreement.
This power of attorney is coupled with an interest and is irrevocable.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 33
12.6 Notices. Any notice permitted or required under this Agreement
will be conveyed to the party at the address given below and will be deemed to
have been given when deposited in the United States mail, postage paid, or
when delivered in person, by courier, or by facsimile transmission.
12.7 Binding Effect. Subject to the provisions of this Agreement
relating to transferability, this Agreement will be binding upon and will
inure to the benefit of the parties and their distributees, heirs, successors,
and assigns.
12.8 Governing Law. This Agreement will be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware.
ARTICLE XIII
DEFINITIONS
The following terms used in this Agreement shall have the meanings
described below:
"Adjusted Basis" shall have the meaning given such term in Section
1011 of the Code.
"Adjusted Capital Account Balance" shall have the meaning given such
term in Section 5.6.
"Adjusted Capital Account Deficit" means with respect to any Member,
the deficit balance, if any, in that Member's Capital Account as of the end of
the relevant fiscal year, after giving effect to the following adjustments:
(a) credit to that Capital Account the amount by which that Member is
obligated to restore or is deemed to be obligated to restore pursuant to the
penultimate sentence of Regulation Sections 1.704-2(g)(1) and (i)(5) and (b)
debit to that Capital Account the items described in paragraphs (4), (5) and
(6) in section 1.704-1(b)(2)(ii)(d) of the Regulations. This definition of
Adjusted Capital Account Deficit is intended to comply with the provisions of
Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted
consistently therewith.
"Advisor" or "Advisory Company" shall mean a person retained by the
Company pursuant to Section 9.6 of this Agreement.
"Affiliate" of another person shall mean (a) any person directly or
indirectly controlling, controlled by or under common control with, another
person, (b) any person directly or indirectly owning or controlling ten
percent (10%) or more of the outstanding voting securities or beneficial
interests of such other person, (c) any officer, director, trustee or partner
of such other person, and (d) if such other person is an officer, director,
trustee or partner of another entity, then the entity for which such other
person acts in such capacity.
"Agreement" means this Operating Agreement, as the same may be amended
from time to time.
"Audit Committee" means the committee established pursuant to Section
8.6, as the same may be constituted from time to time.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 34
"Bankruptcy" means, with respect to a person, the happening of any of
the following:
(a) the making of a general assignment for the benefit of
creditors;
(b) the filing of a voluntary petition in bankruptcy or the
filing of a pleading in any court of record admitting in writing an inability
to pay debts as they become due;
(c) the entry of an order, judgment or decree by any court of
competent jurisdiction adjudicating the person to be bankrupt or insolvent;
(d) the filing of a petition or answer seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation;
(e) the filing of an answer or other pleading admitting the
material allegations of, or consenting to, or defaulting in answering, a
bankruptcy petition filed against the person in any bankruptcy proceeding;
(f) the filing of an application or other pleading or any
action otherwise seeking, consenting to or acquiescing in the appointment of a
liquidating trustee, receiver or other liquidator of all or any substantial
part of the person's properties;
(g) the commencement of any proceeding seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation which has not been quashed or
dismissed within 180 days; or
(h) the appointment without consent of such person or
acquiescence of a liquidating trustee, receiver or other liquidator of all or
any substantial part of such person's properties without such appointment
being vacated or stayed within 90 days and, if stayed, without such
appointment being vacated within 90 days after the expiration of any such
stay.
"Capital Contribution" means, with respect to any Member, the amount
of money contributed by that Member to the Company and, if property other than
money is contributed, the initial Gross Asset Value of such property, net of
liabilities assumed or taken subject to by the Company.
"Certificate" shall have the meaning given such term in Section 1.1.
"Class A Assets" shall have the meaning given such term in Section
4.2.
"Class A Capital Account" shall have the meaning given such term in
Section 4.3.
"Class A Cash Income" shall mean all cash or cash equivalents received
by the Company from Company operations attributable to the Class A Assets,
including, without limitation, interest received on Mortgage Loans and other
investments, less the sum of all expenses of the Company attributable solely
to the Class A Assets, less return of principal on Mortgage Loans or other
investments and proceeds from the sale of REO Property that do not represent
gain which are attributable solely to
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METROPOLITAN REALTY COMPANY, L.L.C. Page 35
the Class A Assets, and less the sum of the following items not attributable
to a particular class or series, to the extent paid or set aside by the
Company, multiplied by a fraction, the numerator of which is the total of the
book value of any REO Property and the outstanding principal balance of the
Mortgage Loans which are part of the Class A Assets and the denominator of
which is the total of the book value of any REO Property and the outstanding
principal balance of all of the Mortgage Loans of the Company:
(a) All principal and interest payments on indebtedness of the Company
and all other sums paid to lenders;
(b) All cash expenditures incurred incident to the normal operation
of the Company's business; and
(c) Such reserves as the Managing Board deems reasonably necessary to
the proper operation of the Company's business.
"Class A Expenses" means those expenses and debts incurred by the
Company that are attributable solely to the Class A Assets.
"Class A Member" means those persons admitted as Class A Members
pursuant to Section 4.1, and any other person admitted to the Company as a
substituted Member of a Class A Member, that has not made a disposition of
such person's entire Interest.
"Class A Percentage Interest" means the percentage set forth across
from a Class A Member's name on Schedule 1 attached hereto, and identified as
such Member's Class A Percentage Interest, as the same may be increased or
decreased from time to time pursuant to the provisions of this Agreement.
"Class A Return" shall mean all cash or cash equivalents received by
the Company from Company operations attributable to the Class A Assets which
does not constitute Class A Cash Income, including, without limitation, return
of principal on Mortgage Loans and other investments and the proceeds from the
sale of REO Property that do not represent gain; less, to the extent paid or
set aside but not taken into account when computing Class A Cash Income, the
sum of all expenses of the Company attributable solely to the Class A Assets,
and less the sum of the following items not attributable to a particular class
or series, to the extent paid or set aside by the Company, multiplied by a
fraction, the numerator of which is the total of the book value of any REO
Property and the outstanding principal balance of the Mortgage Loans which are
part of the Class A Assets and the denominator of which is the total of the
book value of any REO Property and the outstanding principal balance of all of
the Mortgage Loans of the Company:
(a) All principal and interest payments on indebtedness of the Company
and all other sums paid to lenders;
(b) All cash expenditures incurred incident to the normal operation
of the Company's business; and
<PAGE>
METROPOLITAN REALTY COMPANY, L.L.C. Page 36
(c) Such reserves as the Managing Board deems reasonably necessary to
the proper operation of the Company's business.
"Class B Assets" shall have the meaning given such term in Section
4.5.
"Class B Capital Account" shall have the meaning given such term in
Section 4.6.
"Class B Cash Income" shall mean all cash or cash equivalents received
by the Company from Company operations attributable to the Class B Assets,
including, without limitation, interest received on Mortgage Loans and other
investments, less the sum of expenses paid or set aside by the Company
attributable solely to the Class B Assets, less return of principal on
Mortgage Loans or other investments and proceeds from the sale of REO Property
that do not represent gain which are attributable to solely the Class B
Assets, and less the sum of the following items not attributable to a
particular class or series, to the extent paid or set aside by the Company,
multiplied by a fraction, the numerator of which is the total of the book
value of any REO Property and the outstanding principal balance of the
Mortgage Loans which are part of the Class B Assets and the denominator of
which is the total of the book value of any REO Property and the outstanding
principal balance of all of the Mortgage Loans of the Company:
(a) All principal and interest payments on indebtedness of the
Company and all other sums paid to lenders;
(b) All cash expenditures incurred incident to the normal operation
of the Company's business; and
(c) Such reserves as the Managing Board deems reasonably necessary to
the proper operation of the Company's business.
"Class B Expenses" means those expenses and debts incurred by the
Company that are attributable solely to the Class B Assets.
"Class B Member" means those persons admitted as Class B Members
pursuant to Section 4.1 of this Agreement, and any other person admitted to
the Company as a substituted Member of a Class B Member, that has not made a
disposition of such person's entire Interest.
"Class B Percentage Interest" means the percentage set forth across
from a Class B Member's name on Schedule 1 attached hereto, and identified as
such Member's Class B Percentage Interest, as the same may be increased or
decreased from time to time pursuant to the provisions of this Agreement.
"Class B Return" shall mean all cash or cash equivalents received by
the Company from Company operations attributable to the Class B Assets which
does not constitute Class B Cash Income, including, without limitation, return
of principal on Mortgage Loans and other investments and the proceeds from the
sale of REO Property that do not represent gain; less, to the extent paid or
set aside but not taken into account when computing Class B Cash Income, the
sum of all expenses of the Company attributable solely to the Class B Assets,
and less the sum of the following
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METROPOLITAN REALTY COMPANY, L.L.C. Page 37
items not attributable to a particular class or series, to the extent paid or
set aside by the Company, multiplied by a fraction, the numerator of which is
the total of the book value of any REO Property and the outstanding principal
balance of the Mortgage Loans which are part of the Class B Assets and the
denominator of which is the total of the book value of any REO Property and
the outstanding principal balance of all of the Mortgage Loans of the Company:
(a) All principal and interest payments on indebtedness of the Company
and all other sums paid to lenders;
(b) All cash expenditures incurred incident to the normal operation
of the Company's business; and
(c) Such reserves as the Managing Board deems reasonably necessary to
the proper operation of the Company's business.
"Code" shall mean the Internal Revenue Code of 1986 (or successor
thereto), as amended from time to time.
"Company" shall mean Metropolitan Realty Company, L.L.C., a Delaware
limited liability company.
"Construction Loan" shall mean a short-term Mortgage Loan, the
proceeds of which are to provide funds for the actual construction of real
estate projects, or acquisition and/or redevelopment of Real Property, and for
carrying costs paid or incurred by the borrower during the term of this loan.
"Corporation" shall mean Metropolitan Realty Corporation, a Michigan
corporation.
"Depreciation" shall mean, for each fiscal year or other period, an
amount equal to the depreciation, amortization or other cost recovery
deduction allowable with respect to an asset for that year or other period,
except that if the Gross Asset Value of an asset differs from its adjusted
basis for federal income tax purposes at the beginning of the fiscal year or
other period, Depreciation shall be an amount which bears the same ratio to
that different Gross Asset Value (as originally computed) as the federal
income tax depreciation, amortization, or other cost recovery deduction for
that fiscal year or other period bears to the adjusted tax basis (as
originally computed); provided, however, that if the federal income tax
depreciation, amortization or other cost recovery deduction for the applicable
year or period is zero, Depreciation shall be determined with reference to the
Gross Asset Value (as originally computed) using any reasonable method
selected by the Managing Board.
"Executive Committee" means the committee established pursuant to
Section 8.5, as the same may be constituted from time to time.
"General Expenses" means those expenses and debts incurred by the
Company that are not attributable to a particular class of Membership
Interest, including but not limited to (a) all principal and interest payments
on indebtedness of the Company and all other sums paid to lenders, and (b) all
cash expenditures incurred incident to the normal operation of the Company's
business. General
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METROPOLITAN REALTY COMPANY, L.L.C. Page 38
Expenses shall be allocated to the Class A Assets according to the following
formula: each item of General Expense shall be multiplied by a fraction, the
numerator of which is the total of the book value of any REO Property and the
outstanding principal balance of the Mortgage Loans which are part of the
Class A Assets and the denominator of which is the total of the book value of
any REO Property and the outstanding principal balance of all of the Mortgage
Loans of the Company. General Expenses shall be allocated to the Class B
Assets according to the following formula: each item of General Expense shall
be multiplied by a fraction, the numerator of which is the total book value of
any REO Property and the outstanding principal balance of the Mortgage Loans
which are part of the Class B Assets and the denominator is the total of the
book value of any REO Property and the outstanding principal balance of all of
the Mortgage Loans of the Company.
"Gross Asset Value" shall mean with respect to any Company asset, the
asset's Adjusted Basis, except as follows:
(a) the initial Gross Asset Value of any asset contributed by a
Member to the Company shall be the gross fair market value of that asset, as
determined jointly by the contributing Member and the Managing Board;
(b) the Gross Asset Value of all Company assets shall be
adjusted to equal their respective gross fair market values as of the date
upon which any of the following occurs: (i) the acquisition of an additional
interest in the Company after the effective date of this Agreement by any new
or existing Member, in exchange for more than a de minimis Capital
Contribution or the distribution by the Company to a Member of more than a de
minimis amount of Company property as consideration for an interest in the
Company; and (ii) the liquidation of the Company within the meaning of
Regulation Section 1.704-1(b)(2)(ii)(g);
(c) the Gross Asset Value of any Company asset distributed to
any Member shall be the gross fair market value of that asset on the date of
distribution, as determined by the Member receiving that distribution and the
Managing Board; and
(d) if an election under Section 754 of the Code has been made,
the Gross Asset Value of Company assets shall be increased (or decreased) to
reflect any adjustments to the adjusted basis of the assets pursuant to Code
Section 734(b) or Code Section 743(b), but only to the extent that those
adjustments are taken into account in determining Capital Accounts pursuant to
Regulation Section 1.704-1(b)(2)(iv)(m) and Section 4.3 and Section 4.6;
provided, however, that Gross Asset Value shall not be adjusted pursuant to
this subsection (d) to the extent that an adjustment pursuant to subsection
(b) is made in connection with a transaction that would otherwise result in an
adjustment pursuant to this subsection (d).
If the Gross Asset Value of an asset has been determined or adjusted
hereby, that Gross Asset Value shall thereafter be further adjusted by the
Depreciation, if any, taken into account with respect to that asset for
purposes of computing Profits and Losses.
"Limited Liability Company Law" shall have the meaning given such term
in Section 1.1.
<PAGE>
METROPOLITAN REALTY COMPANY, L.L.C. Page 39
"Loan Committee" means the committee established pursuant to Section
8.5, as the same may be constituted from time to time.
"Managing Board" means the board established pursuant to Section 8.3,
as it may be constituted from time to time.
"Managing Board Member" means a person appointed by a Member-Manager
to the Managing Board pursuant to Section 8.2.
"Member" means any person admitted as a Member of any class, and any
other person admitted to the Company as a substituted Member, that has not
made a disposition of such person's entire Interest.
"Member-Manager" shall have the meaning given such term in Section
8.1.
"Membership Interest" means the interest of a Member in the Company as
a Member, representing such Member's rights, powers and privileges as
specified in this Agreement.
"Minimum Gain" has the meaning set forth in Regulation Section
1.704-2(d)(1).
"Minimum Percentage" shall mean a Total Percentage Interest which
represents a positive Adjusted Capital Account Balance of $2,500,000.
"Mortgage" shall mean the security interest in Real Property granted
to secure a Mortgage Loan.
"Mortgage Loan" shall mean a note, bond or other evidence of
indebtedness or obligation which is secured or collateralized by an interest
in Real Property.
"Percentage Interest" means the percentage set forth across from a
Member's name on Schedule 1 attached hereto, and identified as such Member's
Class A or Class B Percentage Interest, as the same may be increased or
decreased from time to time pursuant to the provisions of this Agreement.
"Profits" and "Losses" shall mean, for each class or series of
Membership Interest and for each fiscal year or other period, an amount equal
to the Company's taxable income or loss for that year or period which is
attributable for the assets of such class or series of Membership Interest,
determined in accordance with Code Section 703(a). For this purpose, expenses
of the Company which are attributable to only one class or series of
Membership Interest shall be taken into account only by such class or series.
Each class or series shall also take into account only that amount of the
general expenses of the Company equal to the total sum of such general
expenses, multiplied by a fraction, the numerator of which is the sum of the
total of the outstanding principal balance of the Mortgage Loans and the total
book value of any REO Property which is part of the assets of such class or
series and the denominator of which is the sum of the total of the outstanding
principal balance of all of the Mortgage Loans and the total book value of any
REO Property of the Company.
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METROPOLITAN REALTY COMPANY, L.L.C. Page 40
Further, all items of income, gain, loss or deduction required to be stated
separately pursuant to Code Section 703(a)(1) shall be included in taxable
income or loss), with the following adjustments:
(a) any income of the Company exempt from federal income tax
not otherwise taken into account in computing Profits or Losses shall be added
to that taxable income or loss;
(b) any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulation Section 1.704-1(b)(2)(iv)(i), shall be subtracted from that
taxable income or loss;
(c) in the event the Gross Asset Value of any Company asset is
adjusted as required by subsections (b) or (c) of the definition of Gross
Asset Value, the amount of that adjustment shall be taken into account as gain
or loss from the disposition of that asset (assuming the asset was disposed of
just prior to the adjustment) for purposes of computing Profits or Losses in
the fiscal year of adjustment;
(d) gain or loss resulting from any disposition of Company
property with respect to which gain or loss is recognized for federal income
tax purposes shall be computed by reference to the Gross Asset Value of the
property disposed of, notwithstanding that the Adjusted Basis of that property
may differ from its Gross Asset Value;
(e) in lieu of the depreciation, amortization and other cost
recovery deductions taken into account in computing the taxable income or
loss, there shall be taken into account the Depreciation for the fiscal year
or other period; and
(f) any items of income, gain, loss or deduction that are
specially allocated pursuant to Sections 4.3, 4.4, 4.5 or 4.6 shall not be
taken into account in computing Profits or Losses.
"Public Offering Expenses" means all expenses incurred by the Company
and the Corporation (other than Restructuring Expenses) in connection with the
preparation and filing of the Form S-11 registration statement by the Company
under the Securities Act of 1933, as amended, and the sale of Units of Class B
Membership Interests pursuant to said registration statement.
"Real Estate Investment" shall mean any interest in land, rights and
interests in land, including an equity, mortgage or leasehold interest, and
any buildings, structures, improvements, fixtures and equipment and
furnishings located on or used in connection with the land or rights or
interests therein.
"Real Property" shall mean and include land, rights, and interests in
land, leasehold interests (including but not limited to interests of a lessor
or lessee therein), and any buildings, structures, improvements, fixtures and
equipment and furnishings located on or to be located on or used or to be used
in connection with land, leasehold interests and rights or interests in land,
but does not include Mortgages, Mortgage Loans or interest therein.
<PAGE>
METROPOLITAN REALTY COMPANY, L.L.C. Page 41
"REO Property" shall mean all Real Property acquired by the Company or
its nominee through foreclosure or deed in lieu of foreclosure in connection
with a defaulted Mortgage Loan.
"Regulations" shall mean pronouncements, as amended from time to time,
or their successor pronouncements, which clarify, interpret and apply the
provisions of the Code, and which are designated as "Treasury Regulations" by
the United States Department of the Treasury.
"Regulatory Allocations" are the allocations set forth in Section 5.5.
"Restricted Membership Interest" means a Membership Interest (or
portion thereof) that represents at least 21% of a particular class, as
identified in Schedule 1 attached hereto.
"Restructuring Expenses" means all expenses incurred by the Company
and the Corporation in connection with the preparation, execution and
implementation of that certain Agreement and Plan of Reorganization entered
into between the Company and the Corporation and the Form S-4 registration
statement filed by the Corporation under the Securities Act of 1933, as
amended.
"Total Percentage Interest" means with respect to any Member as of any
date of determination, a fraction (expressed as a percentage), the numerator
of which is the Member's positive Adjusted Capital Account Balance, if any,
and the denominator of which is the total positive Adjusted Capital Account
Balances of all of the Members.
"Transferable Membership Interest" means a Membership Interest (or
portion thereof) that is not a Restricted Membership Interest.
"Unaffiliated Representative" shall mean a person as defined in
Section 8.2(c) of this Agreement.
"Uninterested Representative" shall mean a Managing Board Member who
has no interest, either directly or through an Affiliate, in the Real Estate
Investment or other transaction. In the case of a Real Estate Investment or
other transaction in which the Advisory Company, a Member-Manager or an
Affiliate thereof has an interest, or in which a Managing Board Member who is
an Affiliate of the Advisory Company has an interest, "Uninterested
Representative" shall mean an Unaffiliated Representative.
"Unit" shall mean each $500,000 Unit of Class B Membership Interest
subscribed to by a Class B Member.
<PAGE>
METROPOLITAN REALTY COMPANY, L.L.C. Page 42
IN WITNESS WHEREOF, the parties execute this Agreement on the dates
set below their names, to be effective on the date first above written.
THE COMPANY
METROPOLITAN REALTY COMPANY, L.L.C.
By:__________________________________________
Wayne S. Doran, Initial Member
By:__________________________________________
Robert H. Naftaly, Initial Member
<PAGE>
APPENDIX B
AGREEMENT AND PLAN OF DISSOLUTION
AND RESTRUCTURING
<PAGE>
AGREEMENT AND PLAN OF DISSOLUTION AND RESTRUCTURING
AGREEMENT AND PLAN OF DISSOLUTION AND RESTRUCTURING (the "Agreement")
dated as of _________, 1995, among METROPOLITAN REALTY CORPORATION, a Michigan
corporation ("MRC") and METROPOLITAN REALTY COMPANY, LLC, a Delaware limited
liability company ("MRC,LLC"). MRC and MRC,LLC are hereinafter collectively
referred to as the "Constituent Organizations".
WHEREAS, the Board of Directors of MRC and the Members of MRC,LLC have
approved the restructuring of MRC into MRC,LLC, upon the terms and subject to
the conditions set forth herein;
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties and agreements herein contained, and intending to
be legally bound hereby, MRC and MRC,LLC agree as follows:
ARTICLE I
THE RESTRUCTURING
1.1 The Restructuring. Subject to the terms and conditions of this
Agreement, all of the assets and liabilities of MRC shall be assigned to and
assumed by MRC,LLC, in exchange for all of the Class A Membership Interests of
MRC,LLC (hereinafter referred to as the "Restructuring"). Immediately
thereafter, MRC shall be dissolved and the Class A Membership Interests of
MRC,LLC shall be distributed pro rata to certain shareholders of MRC in
liquidation, with MRC,LLC being the surviving organization (hereinafter
referred to with respect to the period following the Reorganization as the
"Surviving Organization"), effective upon the filing of a Certificate of
Dissolution with the Michigan Department of Commerce, Corporation & Securities
Bureau (the time of such filing is hereinafter referred to as the "Effective
Date of the Restructuring").
1.2 Certificate of Formation. The Certificate of Formation of
MRC,LLC as in effect on the Effective Date of the Reorganization shall
continue in full force and effect as the Operating Agreement of the Surviving
Organization, until amended as provided therein and by law.
1.3 Operating Agreement. The Operating Agreement of MRC,LLC, as in
effect on the Effective Date of the Restructuring, shall be the Operating
Agreement of the Surviving Organization, until the same shall be altered,
amended, or repealed in accordance with law, the Certificate of Formation of
the Surviving Organization or such Operating Agreement.
1.4 Managing Board Members. Each director of MRC who was nominated
by those shareholders of MRC which held sufficient shares to elect at least
one (1) director at an annual meeting of shareholders of MRC pursuant to
Section 5.02 of the Bylaws of MRC immediately prior to the Effective Date of
the Restructuring shall be an initial Managing Board Member of the Surviving
Organization after the Effective Date of the Restructuring. Thereafter, the
appointment, resignation
<PAGE>
and removal of Managing Board Members shall be governed by the provisions of
the Operating Agreement.
1.5 Officers. The officers of MRC immediately prior to the
Effective Date of the Restructuring shall be the officers of the Surviving
Organization until their respective successors shall have been duly appointed
by the Managing Board.
1.6 Required Actions and Effect of the Restructuring.
(a) Upon the Effective Date of the Restructuring, (i) the
Surviving Organization shall issue all of its Class A Membership Interests to
MRC in accordance with the provisions hereof, and (ii) the Constituent
Organizations shall execute and deliver all such proper deeds, assignments and
assurances in law and do all acts necessary or proper to vest, perfect or
confirm title to and possession in the Surviving Organization of any and all
singular rights, privileges, immunities, powers and franchises of MRC, whether
of a public or of a private nature, and all the property, real, personal and
mixed, of MRC, and all debts due to MRC on whatever account, including
subscriptions to shares and all other things in action, or belonging to MRC,
and all such rights, properties or assets shall be taken and deemed to be
transferred to, and shall be vested in, the Surviving Organization; and all
property, rights, privileges, immunities, powers and franchises and all and
every other interest shall thereafter as effectually be the property of the
Surviving Organization as they were of MRC, and the title to any real estate
which had been vested by deed or otherwise in MRC prior to the Effective Date
of the Restructuring shall not revert or be in any way impaired by reason of
the Restructuring.
(b) The Constituent Organizations shall execute and deliver all
such proper assumption agreements and assurances in law and do all acts
necessary or proper so that the Surviving Corporation will thenceforth be
liable for all debts, liabilities, obligations, duties and penalties of MRC,
and all said debts, liabilities, obligations, duties and penalties shall
thenceforth attach to the Surviving Organization and may be enforced against
it to the same extent as if said debts, liabilities, obligations, duties and
penalties had been incurred or contracted by it; provided, however, that all
such liens shall attach only to those assets to which they were attached prior
to the Effective Date. No liability or obligation due or to become due at the
Effective Date of the Restructuring, or any claim or demand for any cause then
existing against MRC or any stockholder, officer, director or agent thereof,
shall be released or impaired by the Restructuring and all rights of creditors
and all liens upon any property of MRC shall be preserved and unimpaired.
(c) Any action or proceeding, whether civil, criminal or
administrative, pending by or against MRC, shall be prosecuted as if the
Restructuring had not taken place, and the Constituent Organizations shall do
or cause to be done all acts necessary or proper so that the Surviving
Organization shall be substituted as a party in such action or proceeding in
place of MRC.
(d) If, at any time after the Effective Date of the
Restructuring, the Surviving Organization shall consider or be advised that
any further assignments or assurances in law or any other acts are necessary
or desirable to (i) vest, perfect or confirm, of record or otherwise, in the
Surviving Organization its rights, title or interest in, to or under any of
the rights, properties or assets
2
<PAGE>
of MRC acquired or to be acquired by the Surviving Organization as a result
of, or in connection with, the Restructuring, or (ii) otherwise carry out the
purposes of this Agreement, MRC and its proper officers and directors shall be
deemed to have granted to the Surviving Organization an irrevocable power of
attorney to execute and deliver all such proper deeds, assignments and
assurances in law and to do all acts necessary or proper to vest, perfect or
confirm title to and possession of such rights, properties or assets in the
Surviving Organization and otherwise carry out the purposes of this Agreement;
and the proper officers and directors of the Surviving Organization are fully
authorized in the name of MRC or otherwise to take any and all such action.
ARTICLE II
DISSOLUTION AND LIQUIDATION
2.1 Cancellation of Shares. Upon the Effective Date of the
Restructuring and without any action on the part of any holder thereof:
(a) Each share of MRC Common Stock, $0.01 par value ("Common
Stock") held by a Majority Stockholder on the Record Date shall be cancelled
and retired, and cease to exist, and MRC shall distribute to such Majority
Stockholders in proportion to the number of shares of MRC Common Stock owned
by them on the Record Date, in liquidation, the Class A Membership Interests.
A "Majority Stockholder" is a holder of MRC Common Stock whose total holdings
both beneficially and of record are 50,000 shares or more on the Record Date.
The "Record Date" means _________, 1995, or such later date as may be
determined by the Executive Committee of MRC. Each Majority Shareholder shall,
at and after the Effective Date of the Restructuring, cease to have any rights
as a shareholder of MRC, except for the right to surrender such holder's
shares pursuant to Section 2.2 of this Article II.
(b) Each share of MRC Common Stock held by a Minority
Shareholder (as hereinafter defined) on the Record Date shall be cancelled and
retired, and cease to exist, but shall automatically be converted into and the
holder thereof will be entitled to receive upon presentation of the
certificate or certificates therefor to MRC,LLC, cash in the amount of Nine
and 03/100 Dollars ($9.03) per share of MRC Common Stock, without any interest
thereon. A "Minority Shareholder" is a holder of MRC Common Stock whose total
holdings both beneficially and of record are fewer than 50,000 shares
on the Record Date. Each Minority Shareholder shall, at and after the
Effective Date of the Restructuring, cease to have any rights as a shareholder
of MRC, except for the right to surrender such holder's shares pursuant to
Section 2.2 of this Article II.
2.2 Surrender of MRC Certificates.
(a) At and after the Effective Date of the Restructuring, the
Surviving Organization shall make available from time to time such funds as
are necessary to make the payments provided for by Section 2.1(b) of this
Article II. Promptly after the Effective Date of the Restructuring, the
Surviving Organization shall (i) mail to each
3
<PAGE>
Majority Shareholder a form letter of transmittal and instructions for use in
effecting the surrender for Class A Membership Interests of certificates which
prior to the Restructuring represented MRC Common Stock, and (ii) mail to each
Minority Shareholder a form letter of transmittal and instructions for use in
effecting the surrender for payment therefor of certificates which prior to
the Restructuring represented MRC Common Stock.
(b) After the Effective Date of the Restructuring and until so
surrendered and exchanged, each outstanding certificate which prior to the
Effective Date of the Restructuring represented shares of MRC Common Stock
owned by a Majority Shareholder shall be deemed for all purposes to represent
only a right to receive Class A Membership Interests as provided for by
Section 2.1(a) of this Article II, and no interest or other sums will be paid
or accrued and a Majority Shareholder shall have no rights as a Class A Member
of MRC,LLC or with respect to such Class A Membership Interests until
surrender of such certificate. Upon surrender to the Surviving Organization of
such certificate, together with such letter of transmittal duly executed and
such other documents or instruments as the Surviving Organization may
reasonably require to evidence such Majority Shareholder's agreement to be
bound by the provisions of the Operating Agreement, such Majority Shareholder
shall be admitted as a Class A Member of MRC,LLC.
(c) After the Effective Date of the Restructuring and until so
surrendered and exchanged, each outstanding certificate which prior to the
Effective Date of the Restructuring represented shares of MRC Common Stock
owned by a Minority Shareholder shall be deemed for all purposes to represent
only a right to receive payment as provided for by Section 2.1(b) of this
Article II and no interest will be paid or accrued on the amount payable upon
surrender of such certificate. Upon surrender to the Surviving Organization of
such certificates, together with such letter of transmittal duly executed, the
Surviving Organization shall pay to the persons entitled thereto, in cash or
equivalent, the amount to which such persons are entitled. If payment is to be
made to a person other than the one in whose name the certificate surrendered
is registered, it shall be a condition of such payment that the certificate so
surrendered shall be properly endorsed or otherwise in proper form for
transfer and that the person requesting such payment shall pay to the
Surviving Organization any transfer or other taxes required by reason of the
payment to a person other than the registered holder of the certificate
surrendered, or establish to the satisfaction of the Surviving Organization
that such tax has been paid or is not applicable.
(d) If any holder of MRC Common Stock shall be unable to
surrender such holder's MRC certificates because such certificates have been
lost or destroyed, such holder may deliver in lieu thereof an Affidavit, and,
if required by the Surviving Organization, an indemnity bond in form and
substance and with surety reasonably satisfactory to the Surviving
Organization.
2.3 Closing of Transfer Books. From the Record Date to and
including the Effective Date of the Restructuring, no transfer of shares of
MRC Common Stock shall be made on the stock transfer books of MRC.
2.4 Payment in Exchange for MRC Certificates. After the Effective
Date of the Restructuring, each Minority Shareholder of MRC Common Stock, upon
presentation and surrender of the certificate thereof to the Surviving
Organization, shall be entitled to receive in exchange therefor the payment
from the Surviving Organization to which it is entitled as provided in Section
4
<PAGE>
2.1(b). Until so presented and surrendered, the certificate which represented
issued and outstanding shares of MRC Common Stock on the Effective Date of the
Restructuring shall be deemed for all purposes to evidence the right to
receive such payment from the Surviving Organization into which such MRC
Common Stock has been converted pursuant to the Restructuring.
2.5 Cessation of Business. MRC will cease to carry on any business
on and after the Effective Date, except as may be necessary for the
accomplishment of the transactions contemplated hereby. MRC's Board of
Directors and its officers shall be authorized and empowered to take any and
all actions necessary or appropriate to complete the liquidation of MRC.
ARTICLE III
CONDUCT PENDING THE RESTRUCTURING
3.1 Conduct of MRC. MRC covenants with MRC,LLC that between the
date of this Agreement and the Effective Date of the Restructuring:
(a) No change will be made in the Articles of Incorporation
or Bylaws of MRC;
(b) MRC will not make any change in its authorized or issued
capital stock, declare or pay any dividend or other distribution other than in
the ordinary course of business in order to maintain its status as a qualified
real estate investment trust under Section 856 of the Internal Revenue Code of
1986, as amended, or issue, encumber, purchase or otherwise acquire any of its
capital stock;
(c) MRC will submit this Agreement to its stockholders at a
meeting called for the purpose of voting upon this Agreement. MRC agrees to
take all steps necessary to duly call, give notice of and hold such meeting.
MRC agrees that its Board of Directors will recommend that its stockholders
approve this Agreement and the Restructuring;
(d) MRC will use its best efforts to maintain and preserve its
business organization, employee relationships and goodwill intact, and will
not, without the prior written consent of MRC,LLC, enter into any material
commitment, except in the ordinary course of its business.
3.2 Conduct of MRC,LLC. MRC,LLC covenants with MRC that between the
date of this Agreement and the Effective Date of the Restructuring:
(a) No change will be made in the Certificate of Formation or
Operating Agreement of MRC,LLC;
(b) MRC,LLC will submit this Agreement to its members at a
meeting called for that purpose (or for approval by action without a meeting);
5
<PAGE>
(c) MRC,LLC will not, without the prior written consent of MRC,
enter into any material commitment, except in the ordinary course of its
business.
ARTICLE IV
CONDITIONS TO CONSUMMATION OF THE RESTRUCTURING
4.1 Conditions to Each Party's Obligation to Effect the
Restructuring. The respective obligations of each party to effect the
Restructuring are subject to the satisfaction at or prior to the Effective
Date of each of the following conditions:
(a) This Agreement shall have been approved and adopted by the
affirmative vote of the stockholders of MRC and the members of MRC,LLC by the
requisite vote in accordance with applicable law.
(b) No statute, rule, regulation, executive order, decree,
order or injunction shall have been enacted, entered, promulgated or enforced
by any court or governmental authority which prohibits or materially and
adversely restricts the consummation of the Restructuring.
(c) the Registration Statement on Form S-4 with respect to the
Class A Membership Interests and the Restructuring and the Registration
Statement on Form S-11 with respect to the Class B Membership Interests shall
have become effective under the Securities Act and no stop order suspending
the effectiveness of either such registration statement shall have been issued
and no proceeding for that purpose shall have been undertaken or threatened by
the SEC;
(d) MRC,LLC shall have received subscriptions and there shall
have been deposited into escrow the purchase price for Class B Membership
Interests in a minimum amount of $25,000,000.
ARTICLE V
CLOSING
5.1 Closing. The closing of the Restructuring contemplated hereby
shall take place at the offices of Bodman, Longley & Dahling LLP, 100
Renaissance Center, 34th Floor, Detroit, Michigan, on the first business day
after the satisfaction of the conditions set forth in Article IV hereof, or at
such other time or place as mutually agreed upon by the parties. At the
closing, the parties shall cause the Certificate of Dissolution to be filed in
accordance with the provisions of the Michigan Business Corporation Act and
shall take any and all other lawful actions and do any and all other lawful
things necessary to effect the Restructuring and to enable the Restructuring
to become effective.
ARTICLE VI
TERMINATION AND ABANDONMENT
6.1 Termination. Notwithstanding approval and adoption of this
Agreement by the stockholders of MRC and the members of MRC,LLC, this
Agreement may be terminated, and the
6
<PAGE>
Restructuring abandoned, at any time prior to the Effective Date of the
Restructuring:
(a) by the consent of MRC and MRC,LLC; or
(b) by either MRC or MRC,LLC, if any court of competent
jurisdiction or other governmental body in the United States shall have issued
an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Restructuring and such
order, judgment or decree shall have become final and nonappealable.
6.2 Effect of Termination. In the event of the termination of this
Agreement and the Restructuring pursuant to Section 6.1, this Agreement shall
become void and there shall be no liability hereunder on the part of either
party.
ARTICLE VII
MISCELLANEOUS
7.1 Expenses. All costs and expenses incurred in connection with
this Agreement, and the transactions contemplated hereby shall be paid by the
party incurring such costs and expenses.
7.2 Headings. The descriptive headings of the several articles and
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
7.3 Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor
any of the rights, interests, or obligations hereunder, shall be assigned by
any of the parties hereto without the prior written consent of the other
party.
7.4 Complete Agreement. This Agreement contains the entire
understanding of the parties with respect to the Restructuring and the related
transactions and supersede all prior arrangements or understandings with
respect thereto.
7.5 Modifications, Amendments and Waivers. At any time prior to the
Effective Date of the Restructuring (notwithstanding any stockholder or member
approval), if authorized by MRC and MRC,LLC and to the extent permitted by
law, (i) the parties hereto may, by written agreement, modify, amend or
supplement any term or provision of this Agreement and (ii) any term or
provision of this Agreement may be waived by the party which is entitled to
the benefits thereof, provided that after such stockholder approval by MRC, no
amendment shall be made which decreases the consideration to be paid in the
Restructuring without stockholder approval.
7.6 Governing Law. This Agreement shall be governed by the laws of
the State of Michigan.
7.7 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon
7
<PAGE>
any other person any rights or remedies of any nature whatsoever under or by
reason of this Agreement.
7.8 Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
8
<PAGE>
IN WITNESS WHEREOF, MRC and MRC,LLC have caused this Agreement to be
signed by their respective officers or members thereunto duly authorized, all
as of the date first written above.
METROPOLITAN REALTY CORPORATION
By:________________________________
Jay B. Rising, President
METROPOLITAN REALTY COMPANY, LLC
By:_______________________________
Wayne S. Doran, Member
By:_______________________________
Robert H. Naftaly, Member
9
<PAGE>
STATE OF MICHIGAN )
) SS.
COUNTY OF WAYNE )
The foregoing instrument was acknowledged before me this day of
, 1995 by Jay B. Rising, the President of Metropolitan Realty
Corporation, a Michigan corporation, on behalf of said entity.
_________________________________
Notary Public
________________ County, Michigan
My commission expires:
STATE OF MICHIGAN )
) SS.
COUNTY OF WAYNE )
The foregoing instrument was acknowledged before me this day of , 1995
by Wayne S. Doran and Robert H. Naftaly, the members of Metropolitan Realty
Company, a Delaware limited liability company, on behalf of said entity.
__________________________________
Notary Public
_________________ County, Michigan
My commission expires:
10
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS AND SCHEDULE
---------
PAGES
-----
REPORT OF INDEPENDENT ACCOUNTANTS F-2
BALANCE SHEET, DECEMBER 31, 1995 AND 1994 F-3
STATEMENT OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 F-4
STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1995, 1994 AND 1993 F-5
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 F-6
NOTES TO FINANCIAL STATEMENTS F-7 - F-30
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts F-31
BALANCE SHEET, JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31,
1995 F-32
STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1995 F-33
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1995 (UNAUDITED) F-34
NOTES TO UNAUDITED FINANCIAL STATEMENTS F-35 - F-40
F-1
<PAGE>
[Letterhead of Coopers & Lybrand L.L.P.]
Report of Independent Accountants
To the Board of Directors and Shareholders
of Metropolitan Realty Corporation:
We have audited the financial statements and the financial statement schedule
of Metropolitan Realty Corporation listed on page F-1 of this Form 10-K. These
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Metropolitan Realty
Corporation as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information required
to be included therein.
/s/ Coopers & Lybrand L.L.P.
Detroit, Michigan
March 15, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY CORPORATION
BALANCE SHEET, December 31, 1995 and 1994
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents ......................................... $ 2,446,221 $ 3,529,334
Marketable securities ............................................. 13,326,733 10,783,048
Mortgage notes receivable:
Notes, earning ................................................. 22,757,998 22,155,822
Notes, related party ........................................... 4,206,330 4,238,157
Allowance for loan losses ...................................... (1,600,000) (1,000,000)
------------ ------------
25,364,328 25,393,979
Real estate owned:
Foreclosed property held for sale, net of accumulated
depreciation of $65,866 at December 31, 1994 .................. -- 2,034,134
Valuation allowance ............................................ -- (1,134,134)
------------ ------------
-- 900,000
Accrued interest and other receivables ............................ 282,620 255,724
Other assets ...................................................... 340,999 163,083
------------ ------------
Total assets ................................. $ 41,760,901 $ 41,025,168
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable:
Shareholder ................................................... $ 5,500 $ 9,036
Trade ......................................................... 120,032 175,869
Deferred income ................................................. 153,952 129,552
Deposits from borrowers for property taxes ...................... 146,385 163,452
Security deposits ............................................... -- 66,087
Other ........................................................... 1,705 1,748
------------ ------------
Total liabilities ............................ 427,574 545,744
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding .................. -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; 4,532,169 shares issued and
outstanding ................................................... 45,322 45,322
Additional paid-in-capital ...................................... 43,355,529 43,355,529
Unrealized holding gains (losses) on marketable securities
available for sale ........................................... 47,690 (356,949)
Distributions in excess of net investment income ................ (2,115,214) (2,564,478)
------------ ------------
Total shareholders' equity ................... 41,333,327 40,479,424
------------ ------------
Total liabilities and shareholders' equity $ 41,760,901 $ 41,025,168
============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY CORPORATION
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income:
Interest income:
From mortgage notes $ 2,363,121 $ 2,678,387 $ 2,705,726
From mortgage notes, related party 391,854 394,843 408,150
Investment income 866,168 555,849 475,322
Miscellaneous income 142,916 228,949 126,787
----------- ----------- -----------
Total income 3,764,059 3,858,028 3,715,985
----------- ----------- -----------
Operating expenses:
Change in allowance for loan losses 600,000 (461,500) --
General and administrative 841,903 436,562 583,925
Net loss from foreclosed
property held for sale 331,953 1,295,416 337,699
Amortization of organization costs -- -- 93,463
----------- ----------- -----------
Total operating expenses 1,773,856 1,270,478 1,015,087
----------- ----------- -----------
Net investment income $ 1,990,203 $ 2,587,550 $ 2,700,898
=========== =========== ===========
Net investment income per share $ .44 $ .57 $ .60
=========== =========== ===========
Weighted average shares of common stock
outstanding 4,532,169 4,532,169 4,532,169
=========== =========== ===========
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1995, 1994 and 1993
Common Stock Unrealized Distributions
------------ Holding Gains in Excess of
Additional (Losses) on Net Total
Paid-in Marketable Investment Shareholders'
Shares Amount Capital Securities Income1 Equity
------ ------ ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 4,532,169 $45,322 $ 43,355,529 $ (2,550,289) $ 40,850,562
Net investment income 2,700,898 2,700,898
Cash dividend of $.54 per share (2,447,371) (2,447,371)
--------- ------- ------------ ------------ ------------
Balances at December 31, 1993 4,532,169 45,322 43,355,529 (2,296,762) 41,104,089
Net investment income 2,587,550 2,587,550
Cash dividend of $.63 per share (2,855,266) (2,855,266)
Adjustment to beginning balance $ 3,624 3,624
for change in accounting
principle (Note 2)
Change in unrealized holding (360,573) (360,573)
gains (losses) on marketable
securities
--------- ------- ------------ ------------ ------------ ------------
Balances at December 31, 1994 4,532,169 45,322 $ 43,355,529 (356,949) (2,564,478) 40,479,424
Net investment income 1,990,203 1,990,203
Change in unrealized holding 404,639 404,639
gains (losses) on marketable
securities
Cash dividend of $.34 per share (1,540,939) (1,540,939)
--------- ------- ------------ ------------ ------------ ------------
Balances at December 31, 1995 4,532,169 $45,322 $ 43,355,529 $ 47,690 $ (2,115,214) $ 41,333,327
========= ======= ============ ============ ============ ============
<FN>
- ---------
1 See Note 7 to the financial statements.
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY CORPORATION
STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net investment income ................................................ $ 1,990,203 $ 2,587,550 $ 2,700,898
----------- ----------- -----------
Adjustments to reconcile net investment income to net cash provided by
operating activities:
Amortization of net loan origination fees .......................... (50,095) (104,008) (83,832)
Allowance for loan losses (recovery) expense ....................... 600,000 (461,500) --
Valuation provision for foreclosed property ........................ 314,421 994,134 --
Depreciation and amortization expense .............................. 43,702 71,012 98,641
Expiration of commitment and application fees ...................... (15,000) (22,838) (21,000)
Other .............................................................. 23,263 16,557 24,223
(Increase) decrease in assets:
Accrued interest and other receivables ........................... (26,896) (33,784) 40,085
Other assets ..................................................... (181,926) (131,293) 190
Increase (decrease) in liabilities:
Accounts payable ................................................. (59,373) 16,615 28,566
Other liabilities ................................................ (83,197) 24,566 57,050
----------- ----------- -----------
Total adjustments ........................... 564,899 369,461 143,923
----------- ----------- -----------
Net cash provided by operating
activities ................................ 2,555,102 2,957,011 2,844,821
----------- ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities ................................... (3,507,381) (4,767,232) --
Collections of principal from marketable securities .................. 1,345,072 1,093,691 1,874,708
Loan disbursements ................................................... (444,293) (150,000) (1,800,000)
Loan repayments ...................................................... 355,151 4,876,191 211,043
Commitment and loan extension fees received .......................... 73,525 38,000 40,223
Cash proceeds from sale of foreclosed property, net .................. 92,157 -- --
Loan origination expenses paid ....................................... (10,237) -- (15,601)
Capital expenditures ................................................. (1,270) -- --
Other receivable repayments .......................................... -- -- 16,785
----------- ----------- -----------
Net cash provided by (used in)
investing activities ...................... (2,097,276) 1,090,650 327,158
----------- ----------- -----------
Cash flows used in financing activities,
dividends paid ....................................................... (1,540,939) (2,855,266) (2,447,371)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents .......................................................... (1,083,113) 1,192,395 724,608
Cash and cash equivalents, beginning of year ........................... 3,529,334 2,336,939 1,612,331
----------- ----------- -----------
Cash and cash equivalents, end of year ................................. $ 2,446,221 $ 3,529,334 $ 2,336,939
=========== =========== ===========
Supplemental disclosure of cash flow information, noncash investing
activities: Receivable from sale of foreclosed property - $455,000.
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-6
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Metropolitan Realty Corporation (the "Company"), incorporated
November 13, 1986, was organized to qualify as a real estate
investment trust ("REIT") under the provisions of the Internal
Revenue Code. As a REIT, the Company is required to invest most of
its assets in real estate assets, cash and government securities.
The Company intends to invest substantially all of its assets in
mortgage loans to real estate projects located in southeastern
Michigan in the counties of Wayne and Macomb. At December 31, 1995,
the Company's total mortgage loan portfolio is invested 74% in
projects located in the City of Detroit, 11% in projects located in
the County of Macomb, and 15% in projects located in the County of
Wayne outside of the City of Detroit.
The Company's mortgage loans include financing for industrial and
mixed-use facilities, office buildings, and retail and residential
centers. The Company has favored investments that will provide a
competitive return and permanent financing for projects which
create construction jobs and stimulate the Southeast Michigan
economy. All mortgage loans to date are collateralized by a first
lien on real property. At December 31, 1995, the Company's largest
loan approximates 10% of its total assets, and the carrying value
of all mortgage loans approximates 61% of its total assets.
2. ACCOUNTING POLICIES:
The preparation of these financial statements, in order to be
presented in conformity with generally accepted accounting
principles, requires that management use estimates and assumptions
regarding events anticipated and transpired, together with their
potential effects upon the reported amounts of assets and
liabilities, as well as the disclosures and assessments of
contingent liabilities at the date of the financial statements, and
in determining the reported amounts of revenues, costs and expenses
of the reporting periods.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or
less to be cash equivalents.
Marketable Securities
The Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115), effective
January 1, 1994. Under SFAS No. 115, marketable
securities available for sale are carried at market
value, and unrealized gains and losses are included in a
separate component of shareholders' equity. Shareholders'
equity includes net unrealized holding gains on
marketable securities of $47,690 at December 31, 1995
($38,133 related to mortgage-backed securities and $9,557
related to U.S. Treasury
Continued
F-7
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES, continued:
Marketable Securities, continued:
notes) and net unrealized holdings losses on marketable
mortgage-backed securities of $356,949 at December 31,
1994. Realized gains or losses on sales of securities are
determined based upon specific identification. The
realized net loss on marketable securities, included in
investment income in the accompanying statement of
operations, resulted from called mortgaged-backed
securities and aggregated $23,263 for the year ended
December 31, 1995 and $16,557 for the year ended December
31, 1994. At December 31, 1995 and 1994, all marketable
securities are considered available for sale.
Allowance for Loan Losses
The Company adopted SFAS 114, "Accounting by Creditors
for Impairment of a Loan", on January 1, 1995. Under the
new standard, a loan is considered impaired, based on
current information and events, if it is probable that
the Company will be unable to collect the scheduled
payments of principal or interest when due according to
the contractual terms of the loan agreement. The
measurement of impaired loans is generally based on the
present value of expected future cash flows discounted at
the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment
based on the fair value of the collateral. The cumulative
effect of adopting the provisions of SFAS 114 was not
significant.
The Company provides for possible losses on its portfolio
of mortgage notes receivable based on an evaluation of
each mortgage note. In determining the allowance for
possible losses, the Company has considered various
indicators of value, including market evaluations of the
underlying collateral, the cost of money, operating cash
flow from the property during the projected holding
period and expected capitalization rates applied to the
stabilized net operating income of the specified
property.
The allowance for loan losses is established through
charges to earnings in the form of a provision for credit
losses. Increases and decreases in the allowance due to
changes in the measurement of the impaired loans are
included in the provision for credit losses. Loans
continue to be classified as impaired unless they are
brought fully current and the collection of scheduled
interest and principal is considered probable. When a
loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is
charged against the allowance and subsequent recoveries,
if any, are credited to the allowance.
Continued
F-8
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES, continued:
Allowance for Loan Losses, continued:
The allowance is based upon management's estimates and
ultimate losses may vary from the current estimates.
These estimates are reviewed by management at least
quarterly, and as adjustments become necessary, they are
reported in the statement of operations in the period in
which they become known.
Foreclosed Property Held for Sale
Property acquired through loan foreclosure is initially
recorded at the lesser of mortgage loan balance or fair
value at the date of foreclosure. Losses, if any,
attributable to the excess of the recorded investment
including accrued interest over fair value are charged to
the allowance for loan losses on mortgage loans at the
time of foreclosure. A valuation allowance is also
established at the time of foreclosure for the estimated
costs to sell the property, as the Company is dependent
on the liquidation of the property for the recovery of
its investment in foreclosed real estate. Subsequent to
foreclosure, the property is carried at the lower of cost
or fair value less estimated costs to sell. The
property's operating income and expenses from the date of
foreclosure are reflected in the statement of operations.
Depreciation of the property commences one year from the
date of foreclosure. Income from guarantor settlements is
recognized when received.
Organization Costs
Certain costs related to the organization of the Company
were capitalized at cost and amortized on a straight-line
basis over 60 months. Organization costs became fully
amortized in fiscal 1993.
Income Taxes
The Company intends to operate at all times to qualify as
a real estate investment trust under the provisions of
the Internal Revenue Code. In general, each year
qualification is met, income is not subject to federal
income tax at the company level to the extent distributed
to shareholders.
Revenue Recognition
Loan origination fees received from the borrower, in
excess of loan origination costs paid, are amortized to
interest income using the effective interest method over
the life of the mortgage loan.
Continued
F-9
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES, continued:
Revenue Recognition, continued:
Interest income is accrued when earned. The Company
discontinues the accrual of interest income when
circumstances exist which cause the collection of
interest to be doubtful. The determination to discontinue
accruing interest is made after a review by the Company's
management of all relevant facts, including delinquency
of principal and/or interest, and financial stability of
the borrower. The Company classifies loans on which the
accrual of interest has been discontinued as nonearning.
Interest income on nonaccrual loans is recognized on a
cash basis if the future collectibility of the recorded
loan balance is expected. When the future collectibility
of the recorded loan balance is doubtful, collection of
interest will be applied as a reduction to outstanding
loan principal. All mortgage loans held by the Company
are classified as earning loans at December 31, 1995 and
1994.
3. MARKETABLE SECURITIES:
Marketable securities at December 31, 1995 and 1994 consisted of
the following:
<TABLE>
<CAPTION>
1995 1994
----------------------------- --------------------------
Interest Rate at
12/31/95 Cost Market Value Cost Market Value
----------------- ---- ------------ ---- ------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note 6.125% $ 3,507,383 $ 3,516,940
Federal National 6.36%-6.44% 5,956,601 5,948,714 $ 6,504,138 $ 6,218,604
Mortgage Association,
pass through
Federal Home Loan 7.92%-8.02% 3,815,059 3,861,079 4,635,859 4,564,444
----------- ----------- ----------- -----------
Mortgage Corporation,
pass through
$13,279,043 $13,326,733 $11,139,997 $10,783,048
=========== =========== =========== ===========
</TABLE>
The U.S. Treasury note has a scheduled maturity in July 1996. The
mortgage-backed securities mature according to payment characteristics of the
underlying loans. The ultimate maturity dates of the mortgage-backed
securities held by the Company at December 31, 1995 range from January 2017 to
August 2024.
Continued
F-10
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE:
Mortgage notes receivable as of dates indicated are summarized as
follows:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C>
First mortgage note 9.09% December 2000 Monthly payments of principal and
on parking garage in interest of $35,494 until maturity, at
Detroit, Michigan which time the remaining unpaid
principal balance of approximately
$4,010,000 is due. The note may be
prepaid in whole, but not in part, for
a fee ranging from 1 percent to 1.5
percent of the outstanding principal
balance at the time of prepayment.
First mortgage on 10.25% through March 31, April 2000 Monthly payments in varying
rehabilitation of 1995 adjusted to 9.26% on installments of principal and interest
historic office April 1, 1995** until maturity, at which time the
building located in remaining unpaid principal balance
Detroit, Michigan of approximately $1,858,000 is due.
The note may be prepaid in whole,
but not in part, for a set fee based
upon the rate by which the annual
yield on certain U.S. Treasury
securities exceeds the yield on the
note through April 1997, after which
time the fee ranges from 1 percent
to 3 percent of the outstanding
principal balance at the time of
prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C> <C> <C> <C>
First mortgage note None $4,376,000 $4,206,330 $4,238,157 $4,265,018
on parking garage in
Detroit, Michigan
First mortgage on None 1,900,000 1,812,889 1,836,190 1,703,506
rehabilitation of
historic office
building located in
Detroit, Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
** Adjustment based on the U.S. Treasury Securities weekly average yield
adjusted to a constant maturity of 5 years plus 2.25%.
</TABLE>
Continued F-11
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C>
First mortgage 9.875% February 1999 Monthly payments in varying
permanent loan on a installments of principal and interest
light industrial until maturity, at which time the
building located in remaining unpaid principal balance
Plymouth Township, of approximately $2,402,000 is due.
Michigan The note may be prepaid in whole,
but not in part, for a fee based upon
the rate by which the annual yield
on certain U.S. Treasury securities
exceeds the yield on the note at the
time of prepayment.
First mortgage on 10.50% December 2000 Monthly payments of interest only
day care center until January 1993 when payments
located in Plymouth, in varying installments of principal
Michigan and interest commence until
maturity, at which time the
remaining unpaid principal balance
of approximately $908,000 is due.
The note may be prepaid in whole,
but not in part, for a fee based upon
the rate by which the annual yield
on certain U.S. Treasury securities
exceeds the yield on the note at the
time of prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C> <C> <C> <C>
First mortgage None $2,525,000 $2,445,235 $2,458,787 $2,471,031
permanent loan on a
light industrial
building located in
Plymouth Township,
Michigan
First mortgage on None 960,000 940,653 945,613 950,070
day care center
located in Plymouth,
Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
</TABLE>
Continued F-12
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C>
First mortgage on 9.875% through October 31, October 2000 Monthly payments in varying
retail tire 1995 adjusted to 7.25% on installments of principal and interest
center located in November 1, 1995 based on until maturity, at which time the
Woodhaven, the U.S. Treasury average remaining unpaid principal balance
Michigan weekly yield adjusted to a of approximately $647,000 is due.
constant maturity of 5 years The note may be prepaid in whole,
plus 1.5% at that date but not in part, for a fee of 1 percent
of the outstanding principal balance
or based upon the rate by which the
annual yield on certain U.S.
Treasury securities exceeds the yield
on the note at the time of
prepayment.
First mortgage on 9.50% through February 28, February 2001 Monthly payments in varying
retail tire center 1996. The interest rate will installments of principal and interest
located in Sterling be adjusted on March 1, until maturity, at which time the
Heights, Michigan 1996 to the U.S. Treasury remaining unpaid principal balance
weekly average yield of approximately $693,000 is due.
adjusted to a constant The note may be prepaid in whole,
maturity of 5 years plus 1.5% but not in part, for a fee of 1 percent
to 2 percent of the outstanding
principal balance or based upon the
rate by which the annual yield on
certain U.S. Treasury securities
exceeds the yield on the note at the
time of prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C> <C> <C> <C>
First mortgage on None $ 695,000 $ 669,449 $ 673,579 $ 676,731
retail tire
center located in
Woodhaven,
Michigan
First mortgage on None 750,000 719,601 723,425 726,887
retail tire center
located in Sterling
Heights, Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
</TABLE>
Continued F-13
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C>
First mortgage on 10.25% April 2003 Monthly payments of interest only
office building through April 1995 and varying
located in Detroit, installments of principal and interest
Michigan from May 1995 until maturity, at
which time the remaining unpaid
principal balance of approximately
$1,695,000 is due. The note may be
prepaid in whole, but not in part, at
varying prepayment rates, based on
the date of prepayment.
First mortgage on 10.50% July 1997** Monthly payments of principal and
Industrial building interest of $11,933 until maturity, at
located in Van Buren which time the remaining unpaid
Township, Michigan principal balance of approximately
$1,185,230 is due. The note may be
prepaid in whole, but not in part, for
a fee based upon the rate by which
the annual yield on certain U.S.
Treasury securities exceeds the yield
on the note at the time of
prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C> <C> <C> <C>
First mortgage on None $1,800,000 $1,741,822 $1,743,332 $1,739,059
office building
located in Detroit,
Michigan
First mortgage on None 1,250,000 -- -- 1,212,924
Industrial building
located in Van Buren
Township, Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
** On November 9, 1994, the outstanding principal balance of this mortgage
note was prepaid. The Company also received a prepayment penalty of
approximately $114,000.
</TABLE>
Continued F-14
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C>
Renovation of office 1% Over Prime (Prime Rate July 1997 Monthly payments in varying
building located in at December 31, 1995 was installments of interest until
Detroit, Michigan 8.5%) maturity, at which time it is
anticipated that it will convert to a
permanent loan. The construction
note may be prepaid in whole, but
not in part, for a fee based upon the
rate by which the annual yield on
certain U.S. Treasury Securities
exceeds the yield on the rate at the
time of prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Industrial and Mixed-Use Facilities and Office Buildings:
<S> <C> <C> <C> <C> <C> <C>
Renovation of office None $1,365,000 $420,406 -- --
building located in (of which
Detroit, Michigan $921,000 is
undisbursed at
December 31,
1995)
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
</TABLE>
Continued F-15
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Shopping Centers:
<S> <C> <C> <C>
Shopping center 10.50% through December December 1999 Monthly payments in varying
located in Detroit, 31, 1994 adjusted to installments of principal and interest
Michigan 10.875% on January 1, until maturity, at which time the
1995** remaining unpaid principal balance
of approximately $941,000 is due.
The note may be prepaid in whole,
but not in part, for a fee ranging
from 1 percent to 5 percent of the
outstanding principal balance or
based upon the rate by which the
annual yield on certain U.S.
Treasury securities exceeds the yield
on the note at the time of
prepayment.
Shopping center 9.3752% January 2000 Monthly payments of principal and
located in Sterling interest of $18,298 until maturity, at
Heights, Michigan which time the remaining unpaid
principal balance of approximately
$2,028,000 is due. The note may be
prepaid in whole, but not in part, for
a fee based upon the rate by which
the annual yield on certain U.S.
Treasury securities at the time of
prepayment exceeds the yield on
the note through January 1997. After
such date, the note may be prepaid
without a fee.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Shopping Centers:
<S> <C> <C> <C> <C> <C> <C>
Shopping center None $1,080,500 $ 965,898 $ 971,030 $ 975,153
located in Detroit,
Michigan
Shopping center None 2,200,000 2,111,851 $2,127,504 2,141,578
located in Sterling
Heights, Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
** Adjustment based on the U.S. Treasury Securities weekly average yield
adjusted to constant maturity of 5 years plus 3%.
</TABLE>
Continued F-16
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Shopping Centers:
<S> <C> <C> <C>
Shopping center 9.17% June 1994 Monthly payments of interest only of
located in St. Clair $25,218 until maturity, at which
Shores, Michigan time the remaining unpaid principal
balance of $3,300,000 is due.
Rehabilitation of 11.25% October 2000 Monthly payments of principal and
shopping center interest of $16,471 until maturity, at
located in Detroit, which time the remaining unpaid
Michigan principal balance of approximately
$1,477,000 is due. The note may be
prepaid in whole, but not in part, for
a fee based upon the rate by which
the annual yield on certain U.S.
Treasury securities exceeds the yield
on the note at the time of
prepayment.
Rehabilitation of 11.25% October 2000 Monthly payments of principal and
shopping center interest of $21,961 until maturity, at
located in Detroit, which time the remaining unpaid
Michigan principal balance of approximately
$1,969,000 is due. The loan may be
prepaid in whole, but not in part,
and may require payment of a fee
based upon the rate by which the
annual yield on certain U.S.
Treasury securities exceeds the yield
on the note at the time of
prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Shopping Centers:
<S> <C> <C> <C> <C> <C> <C>
Shopping center None $3,300,000 -- -- $3,300,000
located in St. Clair
Shores, Michigan
Rehabilitation of None 1,650,000 $1,575,680 $1,589,953 1,602,673
shopping center
located in Detroit,
Michigan
Rehabilitation of None 2,200,000 2,100,907 2,119,938 2,136,897
shopping center
located in Detroit,
Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
</TABLE>
Continued F-17
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Shopping Centers:
<S> <C> <C> <C>
Shopping center 10.25% April 1997 Monthly payments in varying
located in Detroit, and installments of principal and interest
Michigan 9.75% until maturity, at which time the
remaining unpaid principal balance
of approximately $2,277,000 is due.
The note may be prepaid in whole,
but not in part, for a fee based upon
the rate by which the annual yield
on certain U.S. Treasury securities
exceeds the yield on the note at the
time of prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Shopping Centers:
<S> <C> <C> <C> <C> <C> <C>
Shopping center None $2,500,000 $2,329,018 $2,362,444 $2,392,384
located in Detroit,
Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
</TABLE>
Continued F-18
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Apartment Buildings:
<S> <C> <C> <C>
Renovation of 75- 8.0% August 2000 Monthly payments of interest only
unit building located and through April 1994 and varying
in Detroit, Michigan 9.5% installments of principal and interest
from May 1994 until maturity, at
which time the remaining unpaid
principal balance of approximately
$1,284,000 is due. The note may be
prepaid in whole, but not in part,
and may require payment of a fee
based upon the rate by which the
annual yield on certain U.S.
Treasury securities exceeds the yield
on the note at the time of
prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Apartment Buildings:
<S> <C> <C> <C> <C> <C> <C>
Renovation of 75- None $1,260,000** $1,361,789 $1,369,349 $1,369,463
unit building located
in Detroit, Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
** During 1993, the Company modified the terms of this mortgage note, pursuant
to which approximately $125,000 of interest was added to the principal
balance of the mortgage.
</TABLE>
Continued F-19
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Apartment Buildings:
<S> <C> <C> <C>
Renovation of 54- 9.25% September 2000 Monthly payments of principal and
unit building located interest of $5,800 until maturity, at
in Detroit, Michigan which time the remaining unpaid
principal balance of approximately
$557,000 is due. The note may be
prepaid in whole, but not in part,
and may require payment of a fee
based upon the rate by which the
annual yield on certain U.S.
Treasury securities exceeds the yield
on the note at the time of
prepayment.**
24-unit building 10.25% January 2001 Monthly payments in varying
located in Detroit, installments of principal and interest
Michigan until maturity, at which time the
remaining unpaid principal balance
of approximately $241,000 is due.
The note may be prepaid in whole,
but not in part, and may require
payment of a fee based upon the
rate by which the annual yield on
certain U.S. Treasury securities
exceeds the yield on the note at the
time of prepayment.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Apartment Buildings:
<S> <C> <C> <C> <C> <C> <C>
Renovation of 54- None $728,000 $614,211 $622,842 $703,403
unit building located
in Detroit, Michigan
24-unit building None 275,000 258,623 261,166 263,451
located in Detroit,
Michigan
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
** In December 1994, the Company modified the terms of this loan pursuant to
which $75,000 of principal was prepaid and the interest rate was reduced
from 11% to 9.25%.
</TABLE>
Continued F-20
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
<TABLE>
<CAPTION>
=============================================================================================================================
Final
Interest Maturity Periodic
Description Rate Date Payment Terms
- -----------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Apartment Buildings:
<S> <C> <C> <C>
Renovation of 167 10.25% and 12.25% April 1997 Monthly payments in varying
unit building located installments of principal and interest
in Detroit, Michigan until maturity, at which time the
remaining unpaid principal balance
of approximately $1,910,857 is due.
The note may be prepaid in whole,
but not in part, for a fee based upon
the rate by which the annual yield
on certain U.S. Treasury securities
exceeds the yield on the note at the
time of prepayment.
205-unit high-rise 10.00% August 2000 Monthly payments in varying
apartment building installments of principal and interest
located in Detroit, until maturity, at which time the
Michigan remaining unpaid principal balance
is due. The note may be prepaid in
whole or in part at anytime.
<CAPTION>
================================================================================================================================
Principal
Amount of
Carrying Amount of Loans Subject
Face Mortgages at December 31,* to
Prior Amount of ------------------------- Delinquent
Description Liens Mortgage 1995 1994 1993 Principal
and Interest
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Notes on Apartment Buildings:
<S> <C> <C> <C> <C> <C> <C>
Renovation of 167 None $ 2,500,000 $ 2,239,156 $ 2,350,670 $ 2,418,934
unit building located
in Detroit, Michigan
205-unit high-rise None 455,000 450,810 -- --
apartment building
located in Detroit,
Michigan
---------------- ---------------- ---------------- ---------------
33,769,500 26,964,328 26,393,979 31,049,162 --
Allowance for
loan losses (1,600,000) (1,000,000) (1,461,500)
---------------- ---------------- ---------------- ---------------
Mortgage notes
receivable, net of
allowance for loan
losses $ 33,769,500 $ 25,364,328 $ 25,393,979 $ 29,587,662 --
================ ================ ================ ===============
<FN>
- ---------
* The carrying amount is reduced for unamortized loan origination fees
received in excess of loan origination costs paid.
</TABLE>
Continued F-21
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, Continued:
Aggregate, contractual annual maturities of mortgage note receivable principal
are as follows:
<TABLE>
<S> <C>
1996 $ 440,034
1997 5,088,625
1998 283,573
1999 3,631,394
2000 15,361,258
2001 and after 2,403,406
-----------
27,208,290
Less unamortized net loan
origination fees 243,962
-----------
$26,964,328
===========
</TABLE>
Continued F-22
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, continued:
A reconciliation of the carrying value of mortgage notes receivable
for the years ended December 31, 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Mortgage notes receivable:
Balance, beginning of year $ 26,393,979 $ 31,049,162 $ 29,328,358
------------ ------------ ------------
Additions:
New mortgage loans 899,293 150,000 1,800,000
Amortization of net loan origination fees 50,095 104,008 60,946
Amortization of loan discount -- -- 22,886
Interest deferred until maturity
of mortgage loan -- -- 124,550
------------ ------------ ------------
Total additions 949,388 254,008 2,008,382
------------ ------------ ------------
Deductions:
Collections of principal (355,151) (4,876,191) (211,043)
Loan origination fees received (23,888) (33,000) (76,535)
------------ ------------ ------------
Total deductions (379,039) (4,909,191) (287,578)
------------ ------------ ------------
Balance, close of year 26,964,328 26,393,979 31,049,162
------------ ------------ ------------
Allowance for loan losses:
Balance, beginning of year (1,000,000) (1,461,500) (1,461,500)
------------ ------------ ------------
(Provisions to) recovery from operations (600,000) 461,000 --
Balance, close of year (1,600,000) (1,000,000) (1,461,500)
------------ ------------ ------------
Mortgage notes receivable, net of
allowance for loan losses $ 25,364,328 $ 25,393,979 $ 29,587,662
============ ============ ============
</TABLE>
During the year ended December 31, 1995, the Company earned approximately
$392,000 or 10.4% of its total income on one mortgage note with a carrying
value of approximately $4,206,000.
Two mortgage notes carried at an aggregate carrying value of approximately
$3,677,000; four mortgage notes carried at an aggregate carrying value of
approximately $3,201,000 and two mortgage notes carried at an aggregate
carrying value of approximately $2,162,228 at December 31, 1995, made with
entities affiliated through common ownership earned the Company $423,940,
$313,898 and $204,687, respectively, during the year ended December 31, 1995.
Continued
F-23
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, continued:
The Company evaluates its portfolio of mortgage loans on an
individual basis, comparing the amount at which the investment is
carried to its estimated net realizable value. In making its
evaluations, the Company has assumed that it will be able to
acquire property collateralizing mortgage loans by foreclosure, if
deemed appropriate, and hold and dispose of such assets and real
estate currently owned in the ordinary course of business to
maximize the return to the Company. The evaluations and related
assumptions are dependent upon current estimates of future
operations, proceeds, costs, events and general market and economic
conditions all of which are influenced by many unpredictable
factors. Accordingly, the ultimate realizations of the Company's
investments, including future income, may differ from amounts
presently estimated.
The Company had maintained an allowance for doubtful accounts of
$1,461,500 from December 31, 1992 through the third quarter of 1994
to reflect the expected recoverable cash flows from three troubled
loans. During 1994, the cash flows generated by one of the above
loans which had previously been in default, collateralized by a
shopping center, increased significantly. As this increase was
supported by an improvement in tenant base, the Company determined
at December 31, 1994 that this loan no longer required a loss
reserve. The loan loss reserve was reduced, accordingly, by
$461,500 during the fourth quarter of 1994 to $1,000,000. The other
loan with an affiliated borrower, which was also formerly in
default, had not exhibited the same magnitude of improvement in
cash flows and tenants during 1994. The loan loss reserve, however,
was further reduced by $250,000 in the second quarter of 1995,
based on the Company's determination that the continued assignment
of rents reduced the risk of loss associated with this loan.
During the third quarter of 1995, the Company determined that an
$850,000 increase in the allowance related to certain loans was
necessary as a result of the continued deterioration of the
underlying collateral and limited market rent potential on these
loans. In its analysis of the adequacy of the allowance for loan
losses, the Company used operating cash flow analyses and other
information obtained through an independent valuation of the
Company's mortgage portfolio performed in conjunction with the
proposed restructuring discussed in Note 11. The Company believes
that the allowance for loan losses of $1,600,000 at December 31,
1995 is adequate to properly reflect the portfolio of mortgage
loans at estimated net realizable value.
The Company adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114),
as amended by SFAS 118, on January 1, 1995. Under these new
standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be
unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement.
The measurement of impaired loans is based on the discounted cash
flows of the underlying collateral. The cumulative effect of
adopting the provisions of SFAS No. 114 was not significant. At
December 31, 1995, the total recorded investment in impaired loans,
as defined by SFAS 114, was $5,308,000. The allowance related to
these loans totaled $1,600,000 at December 31, 1995. The average
recorded investment in impaired loans was approximately $5,328,000
and interest income was $536,117 for the
Continued
F-24
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. MORTGAGE NOTES RECEIVABLE, continued:
year ended December 31, 1995. All impaired loans were classified as
earning loans during 1995, with interest income recognized on an
accrual basis.
5. REAL ESTATE OWNED:
At December 23, 1992, the Company obtained an apartment building
located in Detroit, Michigan, through a foreclosure sale. This
property was the collateral for a construction loan under which the
borrower defaulted during 1992. The carrying value of the property
was written down to its estimated fair value at the time of
foreclosure of $2,100,000, based upon a July 1992 independent
appraisal, net of a $140,000 valuation allowance for the estimated
costs to sell the property. At December 31, 1994, the carrying
value of the property was reduced to $900,000 to reflect an updated
property valuation based on the results of the Company's marketing
efforts to locate a buyer for the property. The carrying value of
the property was further written down to $555,000 during the
quarter ended June 30, 1995 as the result of an offer to purchase
the property.
On August 1, 1995, the sale of this property was consummated. In
accordance with the terms of the purchase agreement, the Company
received $100,000 of the purchase price at the August 1, 1995
settlement date. The remaining $455,000 of the purchase price will
be paid, pursuant to the terms of a mortgage note bearing interest
at 10% per annum, in monthly installments of principal and interest
of $4,889 commencing in September 1995 until maturity in August
2000, at which time the remaining unpaid principal of approximately
$375,000 is due. The mortgage note is guaranteed by the borrower
and may be prepaid in whole or in part at any time.
The property's operating income and expenses from the date of
foreclosure are reflected in the statement of operations. The net
loss from foreclosed property held for sale, for the years ended
December 31, 1995, 1994, and 1993 totaled $331,953, $1,295,416 and
$337,699 and consisted of the following:
Continued
F-25
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
5. REAL ESTATE OWNED, continued:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Rental income $ 432,292 $ 661,679 $ 553,668
---------- ---------- ----------
Expenses:
Operating expenses 380,011 840,950 834,503
Valuation provision 314,421 994,134 --
Depreciation expense 38,422 65,866 --
Management fees 23,779 37,538 40,123
Professional fees 7,612 18,607 16,741
---------- ---------- ----------
Total expenses 764,245 1,957,095 891,367
---------- ---------- ----------
Net loss from foreclosed
property held for sale $ 331,953 $1,295,416 $ 337,699
========== ========== ==========
</TABLE>
6. FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments held by the
Company at December 31, 1995 and 1994, and the valuation techniques
used to estimate the fair value, were as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,446,221 $ 2,446,221 $ 3,529,334 $ 3,529,334
Marketable securities 13,326,733 13,374,423 10,783,048 10,426,099
Mortgage notes receivable, net 25,364,328 25,490,028 25,393,979 25,203,520
Accrued interest and other 282,620 282,620 255,724 255,724
receivables
Accounts payable 125,532 125,532 184,905 184,905
</TABLE>
Cash and cash equivalents -- The carrying amount is a
reasonable estimate of fair
value.
Marketable securities -- The estimated fair value of
marketable securities is
estimated based on quoted
market prices.
Continued
F-26
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
6. FINANCIAL INSTRUMENTS, continued:
Mortgage notes receivable,
net -- The fair value of mortgage
notes receivable is estimated
by discounting future cash
flows using an estimated
discount rate which reflects
the current credit, interest
rate and prepayment risks
associated with similar types
of instruments.
Accrued interest and other
receivables -- The carrying amount is a
reasonable estimate of fair
value.
Accounts payable -- The carrying amount is a
reasonable estimate of fair
value.
7. FEDERAL INCOME TAX:
A real estate investment trust is not subject to federal income tax
on taxable income distributed to its shareholders during its fiscal
year and subsequent year, but prior to filing its federal tax
return. If, however, the real estate investment trust has retained
income within the limits allowed under the federal tax laws, it
must pay tax at corporate rates on its undistributed income.
Furthermore, if the real estate investment trust fails to
distribute, during the fiscal year, an amount equal to 85% of its
taxable income for that year, it is subject to a 4% excise tax on
the shortfall. The excise tax is not deductible for federal income
tax purposes. Income for tax and financial reporting purposes is
reconciled as follows:
Continued
F-27
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
7. FEDERAL INCOME TAX, continued:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income before income
tax on undistributed earnings $ 1,990,203 $ 2,587,550 $ 2,700,898
Increase (decrease) in taxable income resulting from:
Loan origination and appli-
cation fees, net 8,430 (88,845) (57,324)
Provision for valuation
allowances, net 914,421 532,634 --
Realized loss on sale of
foreclosed property (1,566,594) -- --
Bad debt expense -- (312,000) --
Dividends declared on
investment income (1,314,329) (2,764,623) (2,673,980)
Other, net (32,131) 45,284 30,406
----------- ----------- -----------
Taxable investment income -- -- --
=========== =========== ===========
</TABLE>
8. RELATED PARTY TRANSACTIONS:
The Company was involved in various transactions with affiliates as
follows:
o One of the Company's legal counselors is also a member of
the Company's Board of Directors. Fees for legal services
provided by the director's law firm amount to $306,394,
$153,296 and $57,599 for the years ended December 31,
1995, 1994 and 1993, respectively, of which $227,586 and
$70,076 of the fees earned in 1995 and 1994,
respectively, relate to the transaction discussed in Note
11. Accrued legal fees of $30,860 and $22,524 are
included in accounts payable in the accompanying balance
sheet at December 31, 1995 and 1994, respectively.
Continued
F-28
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
8. RELATED PARTY TRANSACTIONS, continued:
o Fees aggregating $23,920, $19,831, and $19,261 for the
years ended December 31, 1995, 1994 and 1993,
respectively, were earned by a shareholder of the Company
for providing various investment and other services to
the Company.
o Consulting fees under a contractual agreement aggregating
$44,520, $42,400 and $40,000 were earned by an officer of
the Company in 1995, 1994 and 1993 respectively.
o During 1995, one of the Company's board members became
the vice president of an entity which has a mortgage note
with the Company. The carrying amount of the mortgage
note receivable totaled $4,206,330 and $4,238,157 at
December 31, 1995 and 1994, respectively and earned the
Company $391,854, $394,843 and $408,150 during the years
ended December 31, 1995, 1994 and 1993, respectively.
9. DIVIDEND DECLARATION:
Under pertinent provisions of the Internal Revenue Code, a real
estate investment trust may consider a dividend declared in a
subsequent year to be a distribution of income of the immediately
prior year and thus reduce income subject to income tax. On March
13, 1996, the Board of Directors of the Company declared a cash
dividend of $.11 per share of common stock to its shareholders of
record on March 25, 1996, payable on March 29, 1996. Of this
dividend, $.01 will be paid from income earned by the Company in
1995. This dividend will be taxable to shareholders as ordinary
income.
10. COMMITMENTS:
At December 31, 1995, the Company had outstanding loan commitments
aggregating $921,000.
11. OTHER:
On September 8, 1995, the Company's Board of Directors gave its
approval for a proposed restructuring of the Company into a limited
liability company ("LLC") and the generation of additional capital
through the LLC. The Company expects to raise new capital of $25 to
$50 million through the private placement of securities by the LLC.
Distributions to current company shareholders under the proposed
LLC restructuring are expected to remain consistent with current
levels. At December 31, 1995, $626,000 of professional fees have
been incurred in connection with this transaction, of which
$313,000 have been deferred.
Continued
F-29
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
12. INTERIM FINANCIAL INFORMATION (unaudited):
<TABLE>
<CAPTION>
=======================================================================
Net Investment
Total Net Investment Income (Loss)
Quarters Ended Income Income (Loss) per Share
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal 1995
December 31 $ 913,133 $ 674,776 $ .15
September 30 973,527 (183,720) (.04)(1)
June 30 926,886 736,626 .16
March 31 950,513 762,521 .17
----------- ----------- --------
$ 3,764,059 $ 1,990,203 $ .44
=========== =========== ========
Fiscal 1994
December 31 $ 1,052,728 $ 250,564 $ .05(2)
September 30 937,150 814,839 .18
June 30 929,888 809,875 .18
March 31 938,262 712,272 .16
----------- ----------- --------
$ 3,858,028 $ 2,587,550 $ .57
=========== =========== ========
<FN>
- --------
1 The results of operations for the third quarter of fiscal year 1995
include a $850,000 increase in the allowance for loan losses and a $200,000
increase in general and administrative expenses for costs associated with the
Company's proposed restructuring into a limited liability company. See Notes 4
and 11 to the financial statements.
2 The results of operations for the fourth quarter of fiscal year 1994
include a $994,000 increase in the valuation provision for foreclosed property
held for sale offset by a $462,000 decrease in the allowance for loan losses
and recognition of $114,000 in income from loan prepayment penalties. See
Notes 4 and 5 to the financial statements.
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1995, 1994 and 1993
=======================================================================================================
Additions, Charged Balance
Charged to (Credited) to at
Balance at Costs and Other December
Description January 1 Expenses Accounts Deductions 31
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for
Loan Losses:
1995 $1,000,000 $600,000 $1,600,000
1994 1,461,500 $ (461,500)(1) 1,000,000
1993 1,461,500 1,461,500
Valuation
Allowance:
1995 1,134,134 314,421 (1,448,555)(2) --
1994 140,000 994,134 1,134,134
1993 140,000 140,000
<FN>
- ---------
1 Decrease in allowance for loan losses was charged against operating
expenses.
2 Foreclosed property sold in 1995.
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY CORPORATION
BALANCE SHEET
June 30, 1996 (unaudited) and December 31, 1995
===============================================================================================================
June 30, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................. $ 1,781,496 $ 2,446,221
Marketable securities................................................. 14,873,710 13,326,733
Mortgage notes receivable:
Notes, unaffiliated................................................. 22,873,170 22,757,998
Notes, affiliated................................................... 4,193,405 4,206,330
Allowance for loan losses........................................... (1,600,000) (1,600,000)
------------ ------------
25,466,575 25,364,328
Accrued interest and other receivables................................ 311,367 282,620
Other assets.......................................................... 367,522 340,999
------------ ------------
Total assets........................................... $ 42,800,670 $ 41,760,901
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable:
Shareholder....................................................... $ 16,500 $ 5,500
Trade............................................................. 103,594 120,032
Deferred income..................................................... 129,552 153,952
Deposits from borrowers for property taxes.......................... 186,338 146,385
Other............................................................... 1,627 1,705
------------ ------------
Total liabilities...................................... 437,611 427,574
------------- ------------
Commitments........................................................... -- --
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized; no shares issued
and outstanding................................................... -- --
Common Stock, $.01 par value; 25,000,000
shares authorized; 4,532,169 shares issued
and outstanding................................................... 45,322 45,322
Additional paid-in-capital.......................................... 43,355,529 43,355,529
Unrealized holding gains (losses) on marketable
securities available for sale..................................... (97,735) 47,690
Distributions in excess of net investment
income............................................................ (940,057) (2,115,214)
------------ ------------
Total shareholders' equity............................. 42,363,059 41,333,327
------------ ------------
Total liabilities and
shareholders' equity............................ $ 42,800,670 $ 41,760,901
============ ============
<FN>
==============================================================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY CORPORATION
STATEMENT OF OPERATIONS
for the three months and six months ended June 30, 1996 and 1995 (unaudited)
and the year ended December 31, 1995
=================================================================================================================================
Three months ended Six months ended Year ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995 Dec. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Income:
<S> <C> <C> <C> <C> <C>
Interest income:
From mortgage notes, unaffiliated....... $ 590,966 $ 577,973 $1,182,964 $1,157,684 $2,363,121
From mortgage notes, affiliated......... 97,001 97,784 194,217 194,703 391,854
Investment income......................... 216,321 239,023 482,992 438,691 866,168
Miscellaneous income...................... 11,723 12,106 51,800 86,321 142,916
--------- --------- ---------- ---------- ----------
Total income........................ 916,011 926,886 1,911,973 1,877,399 3,764,059
--------- --------- ---------- ---------- ----------
Operating expenses:
General and administrative................ 113,611 115,899 238,277 293,187 600,000
Change in allowance for
loan losses............................. -- (250,000) -- (250,000) 841,903
Net loss from foreclosed
property held for sale................... -- 324,361 -- 335,065 331,953
--------- --------- ---------- ---------- ----------
Total operating expenses............ 113,611 190,260 238,277 378,252 1,773,856
--------- --------- ---------- ---------- ----------
Net investment income............... $ 802,400 $ 736,626 $1,673,696 $1,499,147 $1,990,203
========= ========= ========== ========== ==========
Net investment income per share............. $ .18 $ .16 $ .37 $ .33 $ .44
========= ========= ========== ========== ==========
Weighted average shares of common stock
outstanding.............................. 4,532,169 4,532,169 4,532,169 4,532,169 4,532,169
========= ========= ========== ========== ==========
<FN>
==============================================================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN REALTY CORPORATION
STATEMENT OF CASH FLOWS
for the six months ended June 30, 1996 and 1995 (unaudited)
====================================================================================================================
Six months ended
June 30, 1996 June 30, 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net investment income................................................ $ 1,673,696 $ 1,499,147
------------ -------------
Adjustments to reconcile net investment income to
net cash provided by operating activities:
Change in allowance for loan losses................................ -- (250,000)
Valuation provision for foreclosed property........................ -- 312,066
Amortization of loan origination fees.............................. (25,177) (24,166)
Depreciation expense............................................... 1,477 34,231
Expiration of commitment and application fees...................... (29,400) --
Other.............................................................. 14,197 7,935
Increase in assets:
Accounts receivable.............................................. (28,747) (19,625)
Other assets..................................................... (28,000) (239,177)
Increase (decrease) in liabilities:
Accounts payable................................................. (5,438) (37,524)
Deferred income and other liabilities............................ 39,875 47,687
------------ -------------
Total adjustments....................................... (61,213) (168,573)
------------ -------------
Net cash provided by operating activities............... 1,612,483 1,330,574
------------ -------------
Cash flows from investing activities:
Commitment and loan extension fees received.......................... 5,000 44,400
Purchase of marketable securities.................................... (4,029,062) --
Collections of principal from marketable securities.................. 2,322,463 450,548
Loan repayments...................................................... 267,996 209,522
Loan disbursements................................................... (345,066) --
------------ -------------
Net cash (used in) provided by investing
activities............................................ (1,778,669) 704,470
------------ -------------
Cash flows from financing activities:
Dividends paid....................................................... (498,539) (906,434)
------------ -------------
Net (decrease) increase in cash and cash equivalents................... (664,725) 1,128,610
Cash and cash equivalents, beginning of period......................... 2,446,221 3,529,334
------------ -------------
Cash and cash equivalents, end of period............................... $ 1,781,496 $ 4,657,944
============ =============
<FN>
=============================================================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-34
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been
included. Operating results for the three months and six months ended
June 30, 1996 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1996. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1995.
The accompanying financial statements for the three months and six
months ended June 30, 1995 reflect certain reclassifications to be
consistent with the presentation adopted for the three months and six
months ended June 30, 1996.
2. Earnings per Share
The earnings per share for the three months and six months ended June
30, 1996 and 1995 and the year ended December 31, 1995 are based on
the weighted average number of shares of common stock outstanding
during the period.
3. Marketable Securities
Marketable securities available for sale are carried at market value
and unrealized gains and losses are included in a separate component
of shareholders' equity. Shareholders' equity at June 30, 1996
includes net unrealized holding losses on marketable securities of
$97,735. Marketable securities at June 30, 1996 and December 31, 1995
consist of Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation mortgage-backed securities and U.S. Treasury
Notes. Realized gains and losses on sales of securities are determined
based upon specific identification.
The net loss on the sales of marketable securities included in
investment income in the accompanying statements of operations
aggregated $8,478 and $14,197 for the three months and six months
ended June 30, 1996, and $3,714 and $7,935 for the three months and
six months ended June 30, 1995. At June 30, 1996 and 1995, all
marketable securities are considered available for sale.
F-35
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
4. Mortgage Notes Receivable
Mortgage notes receivable as of the dates indicated are summarized as
follows:
<TABLE>
<CAPTION>
===================================================================================================================
June 30, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
9.09% Mortgage note receivable, net of loan origination fees of
$35,382 at June 30, 1996 and $27,668 at December 31, $ 4,193,405 $ 4,206,330
1995, due monthly in installments of principal and interest of
$35,494 through December 2000
10.875% Mortgage note receivable, net of loan origination fees
of $5,830 at June 30, 1996 and $6,505 at December 31, 963,241 965,898
1995, due monthly in varying installments of principal and
interest through December 1999
9.3752% Mortgage note receivable, net of loan origination fees
of $7,542 at June 30, 1996 and $6,541 at December 31, 2,101,841 2,111,851
1995, due monthly in installments of principal and interest of
$18,298 through January 2000
9.26% Mortgage note receivable, net of loan origination fees of
$16,111 at June 30, 1996 and $17,951 at December 31, 1,798,817 1,812,889
1995, due monthly in varying installments of principal and
interest through April 2000
8.0% and 9.5% Mortgage note receivable, net of loan
origination fees of $5,454 at June 30, 1996 and $5,998 at 1,362,222 1,361,789
December 31, 1995, due monthly in varying installments of
principal and interest through August 2000
9.25% Mortgage note receivable, net of loan origination fees of
$8,040 at June 30, 1996 and $8,856 at December 31, 1995, 609,417 614,211
due monthly in installments of principal and interest of $5,800
through September 2000
7.25% Mortgage note receivable, net of loan origination fees of
$5,541 at June 30, 1996 and $6,103 at December 31, 1995, 665,683 669,449
due monthly in varying installments of principal and interest
through October 2000
10.5% Mortgage note receivable, net of loan origination fees of
$3,853 at June 30, 1996 and $4,194 at December 31, 1995, 938,110 940,653
due monthly in varying installments of principal and interest
through December 2000
11.25% Mortgage note receivable, net of loan origination fees
of $12,172 at June 30, 1996 and $13,272 at December 31, 2,090,884 2,100,907
1995, due monthly in installments of principal and interest of
$21,961 through October 2000
10.25% Mortgage note receivable, net of loan origination fees
of $3,390 at June 30, 1996 and $3,693 at December 31, 257,273 258,623
1995, due monthly in varying installments of principal and
interest through January 2001
</TABLE>
F-36
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
4. Mortgage Notes Receivable, continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
11.25% Mortgage note receivable, net of loan origination fees
of $9,129 at June 30, 1996 and $9,954 at December 31, $ 1,568,163 $ 1,575,680
1995, due monthly in installments of principal and interest of
$16,471 through October 2000
9.5% Mortgage note receivable through February 28, 1996
adjusted to 6.75% (based on the U.S. Treasury Securities 716,065 719,601
weekly average yield adjusted to a constant maturity of 5 years
plus 1.5%) on March 1, 1996 to maturity, net of loan origination
fees of $8,440 at June 30, 1996 and $9,232 at December 31, 1995, due
monthly in varying installments of
principal and interest through February 2001
9.875% Mortgage note receivable, net of loan origination fees
of $14,401 at June 30, 1996 and $15,636 at December 31, 2,438,279 2,445,235
1995, due monthly in varying installments of principal and
interest through January 1999
10.25% and 9.75% Mortgage notes receivable, net of loan
origination fees of $12,220 at June 30, 1996 and $19,911 at 2,311,204 2,329,018
December 31, 1995, due monthly in varying installments of
principal and interest through April 1997
10.25% and 12.25% Mortgage notes receivable, net of loan
origination fees of $7,354 at June 30, 1996 and $11,989 at 2,102,351 2,239,156
December 31, 1995, due monthly in varying installments of
principal and interest through April 1997
10.25% Mortgage note receivable, net of loan origination fees
of $50,030 at June 30, 1996 and $52,570 at December 31, 1,739,896 1,741,822
1995, due monthly in installments of interest only through April
1995 at which time varying installments of principal and
interest will be due monthly through April 2003
Bank prime rate plus 1% Mortgage note receivable, net of loan
origination fees of $23,888 at June 30, 1996 and 1995, due 765,471 420,406
monthly in installments of interest only until final closing, July
1997, at which time payments of principal and interest of
$12,355 will be due monthly through July 2007
10.00% Mortgage note receivable due monthly in installments
of principal and interest of $4,889 through August 2000 444,253 450,810
----------- ------------
27,066,575 26,964,328
Allowance for loan losses
(1,600,000) (1,600,000)
----------- ------------
Mortgage notes receivable, net of allowance for loan losses $25,466,575 $ 25,364,328
=========== ============
</TABLE>
=============================================================================
F-37
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
4. Mortgage Notes Receivable, continued
The Company's portfolio of mortgage notes receivable are reported at
their principal outstanding balance net of charge-offs and deferred
loan origination fees and costs on originated loans. Interest income is
generally recognized when income is earned using the interest method.
Loan origination fees and certain direct loan origination costs are
deferred and the net amounts are amortized as adjustments of the
loans' yields.
The Company adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), as
amended by SFAS 118, on January 1, 1995. Under the new standard, a
loan is considered impaired, based on current information and events,
if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired
loans is based on the fair value of the underlying collateral. The
cumulative effect of adopting the provisions of SFAS No. 114 was not
significant.
The adequacy of the allowance for loan losses (substantially all of
the allowance is related to the provision for impaired loans as
discussed above) is periodically evaluated by the Company in order to
maintain the allowance at a level that is sufficient to absorb
probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of known and inherent risks in the loan
portfolio, including adverse circumstances that may affect the ability
of the borrower to repay interest and/or principal and the estimated
value of collateral. In determining the allowance for possible losses,
the Company has considered many indicators of value, including market
evaluations of the underlying collateral, the cost of money, operating
cash flow from the property during the projected holding period and
expected capitalization rates applied to the stabilized net operating
income of the specified property.
The allowance for credit losses is established through charges to
earnings in the form of a provision for loan losses. Increases and
decreases in the allowance due to changes in the measurement of
impaired loans are included in the provision for credit losses. Loans
continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is
considered probable. When a loan or portion of a loan is determined to
be uncollectible, the portion deemed uncollectible is charged against
the allowance and subsequent recoveries, if any, are credited to the
allowance.
At June 30, 1996, the total recorded investment in impaired loans
was $5,289,500. The allowance related to these loans totalled
$1,600,000. The average recorded investment in impaired loans was
approximately $5,298,000 with interest income of $267,000 for the
six months ended June 30, 1996. All impaired loans were classified as
earning during 1996 with interest income recognized on an accrual
basis. The Company believes that the allowance for loan losses of
$1,600,000 at June 30, 1996 is at a level that is sufficient to
absorb probable credit losses in the mortgage loan portfolio.
F-38
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
5. Real Estate Owned
A sale of the property which was foreclosed by the Company in 1992 was
consummated on August 1, 1995. In accordance with the terms of the
purchase agreement, the Company received $100,000 of the purchase
price at the August 1, 1995 settlement date. The remaining $455,000 of
the purchase price will be paid, pursuant to the terms of the mortgage
note bearing interest at 10% per annum, in monthly installments of
principal and interest of $4,889 commencing in September 1995 until
maturity in August 2000, at which time the remaining unpaid principal
of approximately $375,000 is due. The mortgage note is guaranteed by
the borrower and may be prepaid in whole or in part at any time.
The property's 1995 operating income and expenses are reflected
in the statement of operations. The net loss from foreclosed property
held for sale totalled $335,065 for the six months ended June 30, 1995
and was largely attributable to a $312,066 increase in the valuation
provision.
6. Dividends
Under pertinent provisions of the Internal Revenue Code (the "Code"),
a real estate investment trust may consider a dividend declared in a
subsequent year to be a distribution of income of the immediately
prior year and thus reduce income subject to income tax. On March 13,
1996, the Board of Directors of the Company declared a cash dividend
of $.11 per share of common stock, to its shareholders of record on
March 25, 1996, payable on March 29, 1996. Of this dividend, $.01 was
payable from income earned by the Company in 1995 and $.10 was payable
from 1996 income. These dividends are taxable to shareholders as
ordinary income. For the quarter ending June 30, 1996, no cash
dividend was declared by the Board of Directors of the Company in
anticipation of the consummation of the restructuring of the Company
into a limited liability company in accordance with the transaction
discussed in Note 10.
7. Income Taxes
The Company currently intends to operate as a qualified real
estate investment trust under the Code (See Note 10). In general,
each year qualification is met, income is not subject to federal
income tax at the Company level to the extent distributed to
shareholders. The Company distributes at least 95% of its net taxable
investment income to its shareholders. Accordingly, no provision for
income taxes has been made for the three and six months ended
June 30, 1996.
8. Related Party Transactions
The Company was involved in various transactions with affiliates as
follows:
Consulting fees under a contractual agreement aggregating $23,373 and
$22,260 were earned by an officer of the Company during the six months
ended June 30, 1996 and 1995, respectively.
Fees aggregating $11,018 and $12,546 during the six months ended June
30, 1996 and 1995, respectively were earned by a shareholder of the
Company for providing various investment and other services to the
Company.
F-39
<PAGE>
METROPOLITAN REALTY CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
8. Related Party Transactions, continued
During 1995, one of the Company's board members became the vice
president of an entity which has a mortgage note with the Company. The
carrying amount of the mortgage note receivable totaled $4,193,405 and
$4,223,200 at June 30, 1996 and 1995, respectively and earned the
Company $194,217 and $194,703 during the six months ended June 30,
1996 and 1995, respectively.
During the six months ended June 30, 1996 and 1995, one of the
Company's directors was a member of a law firm which provides legal
services to the Company. Fees for legal services provided by the law
firm amounted to $49,932 and $159,120, for the six months ended June
30, 1996 and 1995, respectively. Of the fees earned in 1996 and 1995,
$3,500 and $118,618, respectively, relate to the transaction discussed
in Note 10.
9. Commitments
At June 30, 1996, the Company had outstanding loan commitments
aggregating $576,000.
10. Other
On September 8, 1995, the Company's Board of Directors gave its
approval for a proposed restructuring of the Company into a limited
liability company ("LLC") and the generation of additional capital
through the LLC. The Company expects to raise new capital of $25 to
$50 million through the private placement of securities by the LLC.
Distributions to current company shareholders under the proposed LLC
restructuring are expected to remain consistent with current levels.
At June 30, 1996, $688,000 of professional fees have been incurred in
connection with this transaction, of which $344,000 have been
deferred.
F-40
<PAGE>
[ Outside back cover, column 1 ]
No person is authorized in connection with any offering made hereby to
give any information or to make any representation not contained in this Proxy
Statement/Prospectus, and if given or made, such information or representation
must not be relied upon as having been authorized by the Company or by any
Underwriter. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any security other than the Class A
Membership Interests offered hereby, nor does it constitute an offer to sell
or a solicitation of an offer to buy any of the securities offered hereby to
any person in any jurisdiction in which it is unlawful to make such an offer
or solicitation to such person. Neither the delivery of this Proxy
Statement/Prospectus nor any sale made hereunder shall under any circumstances
create any implication that the information contained herein is correct as of
any date subsequent to the date hereof.
SUMMARY OF TABLE OF
CONTENTS
Summary.....................................................................1
Risk Factors...............................................................13
Introduction...............................................................18
The Companies..............................................................18
The Special Meeting........................................................20
Special Factors Concerning the Restructuring...............................22
The Offering...............................................................36
Pro Forma Financial Information............................................36
MRC, LLC Pro Forma Condensed Balance Sheet.................................37
Selected Financial Data of Metropolitan
Realty Corporation.................................................38
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................39
Management and Operations After the
Restructuring......................................................47
Investment Objectives and Policies After
the Restructuring..................................................55
Comparison of MRC Capital Stock and
MRC, LLC Class A Membership Interests...................................64
The Operating Agreement....................................................70
The Restructuring Agreement................................................75
Material Federal Income Tax Considerations.................................78
Considerations for Pension Fund Investors..................................89
Relationship with Independent Accountants..................................91
Experts....................................................................91
Legal Matters..............................................................91
Other Matters..............................................................91
Further Information........................................................92
Glossary...................................................................93
Appendix A -- Operating Agreement.........................................A-1
Appendix B -- Agreement and Plan of Dissolution
and Restructuring...................................................B-1
Financial Statements......................................................F-1
<PAGE>
[ Outside back cover, column 2 ]
---------
METROPOLITAN REALTY
CORPORATION
PROXY STATEMENT
---------
---------
METROPOLITAN REALTY
COMPANY, L.L.C.
PROSPECTUS
---------
September 24, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Article X of MRC, LLC's Operating Agreement provides that MRC, LLC
shall indemnify its member and managers to the fullest extent authorized or
permitted by the Delaware Limited Liability Company Act ("DLLCA"), as the same
exists or may hereafter be amended, and such right to indemnification shall
continue as to a person who has ceased to be a Member-Manager of MRC, LLC and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, except for proceedings to enforce rights to
indemnification, the MRC, LLC shall not be obligated to indemnify any Member
or Manager (or his or her heirs, executors or administrators) in connection
with a proceeding (or part thereof) initiated by such person unless such
proceeding (or part thereof) was authorized or consented to by the
Member-Managers of the MRC, LLC. The right to indemnification conferred in
this Article X shall include the right to be paid by MRC, LLC the expenses
incurred in defending or otherwise participating in any proceeding in advance
of its final disposition. In addition, MRC, LLC may, by action by the
Member-Managers, provide indemnification to employees and agents with the same
scope and effect as the foregoing indemnification of members and managers.
Item 21. Exhibits and Financial Statement Schedules.
(a) The following documents are being filed herewith unless
otherwise indicated:
Description
2 Agreement and Plan of Dissolution and Restructuring between
Metropolitan Realty Company, L.L.C. and Metropolitan Realty
Corporation (attached hereto as Appendix B).
*3.1 Certificate of Formation of Metropolitan Realty Company,
L.L.C..
3.2 Operating Agreement of Metropolitan Realty Company, L.L.C.
(attached hereto as Appendix A).
*3.3 Certificate of Amendment to Certificate of Formation of
Metropolitan Realty Company, L.L.C..
4 Operating Agreement of Metropolitan Realty Company, L.L.C.
(attached hereto as Appendix A).
5.1 Opinion of Bodman, Longley & Dahling LLP
**8.1 Opinion of Coopers & Lybrand L.L.P.
*8.2 Opinion of Coopers & Lybrand L.L.P.
*8.3 Opinion of Coopers & Lybrand L.L.P.
23.1 Consent of Bodman, Longley & Dahling LLP (included in Exhibit
5.1).
- --------
*Previously filed.
** Previously filed as Exhibit 5.2.
<PAGE>
*23.2 Consent of Coopers & Lybrand L.L.P.
*23.3 Consent of Cushman & Wakefield of Michigan, Inc.
*23.4 Consent of Coopers & Lybrand L.L.P.
*23.5 Consent of Coopers & Lybrand L.L.P.
*23.6 Consent of Coopers & Lybrand L.L.P.
*23.7 Consent of Coopers & Lybrand L.L.P.
*23.8 Consent of Coopers & Lybrand L.L.P.
23.9 Consent of Coopers & Lybrand L.L.P.
*24.1 Power of Attorney of Wayne S. Doran.
*24.2 Power of Attorney of Robert H. Naftaly.
*99.1 Appraisal of Cushman & Wakefield of Michigan, Inc.
Valuation Advisory Services
*99.2 Proxy Card of Metropolitan Realty Corporation
* Previously filed.
(b) Financial Statement Schedules:
All financial statement schedules are omitted because they are not
applicable, or the required information is included in the selected financial
data of Metropolitan Realty Corporation, predecessor of Metropolitan Realty
Company, L.L.C.
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
A. That, for purposes of determining any liability under the Act, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
B. (1) That, prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
II-2
<PAGE>
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
C. (1) To deliver or caused to be delivered with the prospectus,
to each person to whom the prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the prospectus
and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not
set forth in the prospectus, to deliver, or caused to be delivered to each
person to whom the prospectus is sent or given, the latest quarterly report
that is specifically incorporated by reference in the prospectus to provide
such interim financial information.
(2) To respond to requests for information that is incorporated
by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(3) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective.
D. That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Amendment No. 6 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Detroit, State of Michigan, on September 20,
1996.
METROPOLITAN REALTY COMPANY, L.L.C.
By: *
------------------------------------------
Name: Wayne S. Doran
Its: Member (Principal Executive Officer)
By: *
--------------------------------------------
Name: Robert H. Naftaly
Its: Member (Principal Financial Officer and
Principal Accounting Officer)
* \s\ F. Thomas Lewand
-------------------------------------------------
Name: F. Thomas Lewand, Attorney-in-Fact
II-4
