Filed Pursuant to Rule 424(b)(2)
Registration No. 333-56049
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED JUNE 30, 1998)
2,800,000 SHARES
[MUNIMAE MIDLAND LOGO]
MUNICIPAL MORTGAGE & EQUITY, LLC
COMMON SHARES
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MuniMae Midland is the trade name for Municipal Mortgage & Equity, LLC. MuniMae
Midland is selling all of the shares. The shares trade on the New York Stock
Exchange under the symbol "MMA." On February 5, 2003, the last sale price as
reported on the New York Stock Exchange was $23.60 per share.
INVESTING IN THE COMMON SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTIONS BEGINNING ON PAGE S-9 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 4
OF THE ACCOMPANYING PROSPECTUS.
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PRICE $23.60 PER SHARE
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PER SHARE TOTAL
--------- -----------
Public offering price............................ $23.60 $66,080,000
Underwriting discounts........................... $ 1.18 $ 3,304,000
Proceeds, before expenses, to MuniMae Midland.... $22.42 $62,776,000
The underwriters may also purchase up to an additional 420,000 shares from
MuniMae Midland at the public offering price, less the underwriting discount, to
cover overallotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The shares will be ready for delivery in New York, New York on or about February
11, 2003.
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RBC CAPITAL MARKETS MERRILL LYNCH & CO. UBS WARBURG
LEGG MASON WOOD WALKER WACHOVIA SECURITIES
INCORPORATED
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February 5, 2003
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Documents Incorporated by Reference......................... S-2
Prospectus Supplement Summary............................... S-3
The Company................................................. S-3
Distribution Policy......................................... S-7
Recent Developments......................................... S-7
Risk Factors................................................ S-9
Forward-Looking Information................................. S-24
Use of Proceeds............................................. S-24
Federal Income Tax Considerations........................... S-24
Underwriting................................................ S-34
Legal Matters............................................... S-36
Experts..................................................... S-36
PROSPECTUS
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 2
The Company................................................. 3
Risk Factors................................................ 4
Ratios of Earnings to Combined Fixed Charges and Preferred
Dividends................................................. 10
Use of Proceeds............................................. 10
Description of Common Shares................................ 11
Description of Preferred Shares............................. 11
Description of Warrants..................................... 14
Plan of Distribution........................................ 15
Experts..................................................... 16
Legal Matters............................................... 16
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You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference is accurate only as of
the date of the document in which the information appears. Our business,
financial condition, results of operations and prospects may have changed since
those dates.
-------------------------
Until May 2001 we operated the business of Municipal Mortgage & Equity, LLC
under the name "MuniMae." Since then, we have operated under the trade name
"MuniMae Midland," reflecting our 1999 acquisition of Midland Financial
Holdings, Inc. Our legal name remains Municipal Mortgage & Equity, LLC even
though we refer to Municipal Mortgage & Equity, LLC together with all of its
subsidiaries as "MuniMae Midland." In this prospectus supplement, "we," "us,"
"our" and "ours" each refer to MuniMae Midland. Municipal Mortgage & Equity, LLC
is a limited liability company that is treated as a partnership for federal
income tax purposes. Not all of its subsidiaries are treated as partnerships. We
refer to "MuniMae" when we discuss only the parent of all of the MuniMae Midland
entities -- Municipal Mortgage & Equity, LLC -- and not the subsidiaries. Our
tax-exempt mortgage revenue bond portfolio is held by MuniMae TEI Holdings, LLC
through first-tier and remote tier subsidiaries. MuniMae TEI Holdings, LLC is a
first-tier wholly owned subsidiary of MuniMae. In this prospectus supplement,
MuniMae TEI Holdings, LLC and its first-tier and remote tier subsidiaries are
referred to as the "TEI Group."
DOCUMENTS INCORPORATED BY REFERENCE
In addition to the documents incorporated by reference or deemed
incorporated by reference in the accompanying prospectus, our Annual Report on
Form 10-K for the year ended December 31, 2001, our Quarterly Reports for the
quarters ended March 31, June 30 and September 30, 2002 and our Current Reports
on Form 8-K filed January 31, 2002 and February 11, 2002, which have been filed
with the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, are hereby incorporated into this prospectus supplement and
specifically made a part of this prospectus supplement.
S-2
PROSPECTUS SUPPLEMENT SUMMARY
This prospectus supplement summary is not complete and may not contain all
of the information that is important to you. To understand this offering of
common shares, you should read the entire prospectus supplement, the
accompanying prospectus and the documents incorporated by reference carefully,
especially the risk factors and federal income tax considerations.
THE COMPANY
We invest in, and earn origination, asset management and other fees from,
multifamily housing and other real estate financings. At September 30, 2002, we
owned or managed a portfolio of debt and equity investments secured directly or
indirectly by 868 properties that contained a total of 92,159 units and were
located in 47 states and the U.S. Virgin Islands. Our operations consist of two
business segments:
- An investing segment consisting of subsidiaries that hold investments
producing primarily tax-exempt interest income. A significant portion of
our investments are tax-exempt mortgage revenue bonds or interests in
tax-exempt mortgage revenue bonds issued by state and local governments
or their agencies or authorities to finance affordable multifamily
housing developments. Multifamily housing developments, as well as the
rents paid by the tenants, typically secure these investments.
- An operating segment that provides servicing, loan origination and tax
credit and other equity syndication services. These operations and the
equity investments made by this segment generate taxable income.
MuniMae is organized as a limited liability company. This structure allows
it to combine the limited liability, governance and management characteristics
of a corporation with the pass-through income features of a partnership. As a
result, the tax-exempt income MuniMae derives from certain investments remains
tax-exempt when MuniMae passes the income through to shareholders. We conduct
most of the business of our operating segment through corporate subsidiaries,
which do not have the pass-through and other tax advantages of limited liability
companies. Approximately 100% of our net income for the year ended December 31,
2001 was tax-exempt. While we produce taxable income each year, in 2001 we had
deductions sufficient to offset all of our taxable income. Approximately 92% of
our net income for the three years ended December 31, 2001 was tax-exempt.
The key elements of our strategy are:
- Selective Investments. We acquire new assets, primarily secured by
multifamily housing developments, that have characteristics similar to
our other investments and possess attractive returns. For the nine months
ended September 30, 2002, we participated in transactions with respect to
tax-exempt bonds and bond related investments having a face value of
$95.2 million, all of which we expect to generate tax-exempt income.
These purchases included portions of and whole tax-exempt bonds, senior
floating-rate securities from the securitization of bonds and subordinate
securities that entitle us to the cash flow from a bond remaining after
payments are made to holders of senior securities. We also invested $65.5
million (including transaction costs) to acquire 35% equity interests in
18 partnerships, each of which owns a multifamily housing development. We
also obtained equity interests in four other partnerships, each of whose
assets consist solely of a type of interest rate swap known as a total
return swap. The equity investments produce taxable income.
S-3
- Intensive Asset Management. We seek to maximize current and future cash
flow through active management of our investments. To achieve this goal,
we utilize strategic asset management plans to maximize collections of
debt service payments while maintaining the long term economic viability
of the properties securing our investments. On a portfolio-wide basis, we
conduct ongoing site visits and inspections, managing agent assessments,
budget reviews, market analyses and monthly and annual operating
statement reviews, and also monitor the capital plans for each property.
We have the opportunity to realize greater returns on some of our
investments if the underlying property performs well. Participating
tax-exempt mortgage revenue bonds, on which the amount of the interest
payments made to us is based on property performance, represented
approximately 17.8% of the fair value of the tax-exempt bonds and bond
related investments we held at September 30, 2002.
- Balanced Funding Strategy and Diverse Sources of Capital. We utilize a
combination of equity financing, debt financing and securitizations of
our assets to finance the acquisition of our investments and manage
interest rate risks. This allows us to manage our cost of capital and
cash flows from our investment portfolio while funding acquisitions. In
order to reduce our dependency on any one counterparty, in case, for
example, that party ceases to offer securitization programs or is no
longer able to perform its obligations under its existing
securitizations, we have diversified our securitization programs and
counterparties significantly over the past two years. Our capital
providers include commercial banks, pension funds, government-sponsored
entities, investment banks and other institutional investors.
- Expanded Product Lines. Beginning with the acquisition of Midland
Financial Holdings, Inc. in October 1999, we have diversified our product
line to include investments that generate taxable income, tax credit and
other equity syndication services and investment advisory services. We
have used our expanded product lines to create a full service, one-stop
resource for tax-exempt and taxable financing to the multifamily housing
markets. In addition we have increased our investment in new product
types in order to capitalize on opportunistic situations and to identify
potential new investment programs. One example of a new investment
program is the series of investments we make with CAPREIT, which is
described under the caption "Recent Developments -- New Investments with
CAPREIT."
We use our combination of real estate and tax-exempt investment expertise
to select and manage our investments and to develop financing opportunities. Our
senior management team, led by Mark K. Joseph, Chairman and Chief Executive
Officer, has an average of nine years of experience with us and our affiliates,
and an average of 19 years of experience in the real estate industry.
Our executive offices are located at 218 North Charles Street, Suite 500,
Baltimore, Maryland 21201 and our telephone number is (443) 263-2900. Our
website is www.munimaemidland.com. We do not incorporate by reference the
contents of our website into this prospectus supplement.
BUSINESS SEGMENTS AND SOURCES OF INCOME
Investing Segment
Our investing segment consists of subsidiaries that hold investments
producing primarily tax-exempt interest income. The following table sets forth
summary data with respect to the tax-exempt bonds and bond related investments
held by our investing segment as of September 30, 2002. With respect to
participating bonds, pro forma annual interest represents year-to-date aggregate
interest income as of September 30, 2002, annualized, except for three bonds for
which, had we annualized interest received at September 30, 2002, the resulting
income would have exceeded the maximum amount we are permitted to receive on the
bond in any calendar year; for those bonds we assumed the maximum
S-4
permitted interest rate of 16%. With respect to non-participating bonds, pro
forma annual interest is the product of the bond coupon rate and the unpaid
principal balance as of September 30, 2002. With respect to residual bond
related investments, pro forma annual interest is derived by first calculating
the product of (w) the senior certificates outstanding as of September 30, 2002
and (x) the average Bond Market Association index rate for the nine months ended
September 30, 2002, plus transaction fees and an interest rate spread to cover
certain costs, and then subtracting that amount from the interest payment on the
bond, which is the product of (y) the bond coupon rate and (z) the unpaid
principal balance of the securitized underlying bond.
% OF WEIGHTED PRO FORMA % OF FACE AMOUNT INTEREST RATE
FACE FAIR TOTAL AVERAGE ANNUAL TOTAL RANGE (000S) RANGE(5)
AMOUNT VALUE FAIR INTEREST INTEREST ANNUAL ---------------- --------------
(000S) (000S) VALUE RATE (000S)(4) INTEREST LOW HIGH LOW HIGH
-------- -------- ------- -------- --------- -------- ------ ------- ---- -----
INVESTMENTS IN
MORTGAGE REVENUE
BONDS:
Participating bonds... $ 82,928(1) $ 84,377 10.82%(2) 8.48% $ 7,035 11.27% $5,215 $19,790 7.44% 9.65%
Non-participating
bonds............... 654,809(1) 621,423 79.68%(3) 7.29% 47,721 76.41% 25 54,743 5.83% 9.50%
Participating
subordinate bonds... 60,379 56,193 7.21%(2) 9.95% 6,005 9.62% 1,489 12,415 0.00%(6) 16.00%
Non-participating
subordinate bonds... 19,041 17,900 2.30%(3) 8.87% 1,689 2.70% 653 5,420 5.00% 12.50%
-------- -------- ------- ------- ------- ------ -------
Total/average......... $817,157 $779,893 100.00% 7.64% $62,450 100.00% 7,382 92,368 5.54% 10.07%
======== ======== ======= ======= ======= ====== =======
PRO FORMA
FACE FAIR ANNUAL
AMOUNT VALUE INTEREST
(000S) (000S) (000S)
-------- -------- ---------
INVESTMENT IN BOND
RELATED
INVESTMENTS:........ $ 1,606 $ 11,380 $11,140
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(1) Aggregate fair value of these bonds includes the fair values of 15 bonds
that we have securitized, resulting in $219.9 million of corresponding short
term debt and 17 bonds that we have securitized, resulting in $119.3 million
of corresponding long term debt on our balance sheet. These bonds continue
to be included as assets on our balance sheet because the accounting for
these transactions is partially dependent on certain call provisions that
enable us to retain effective control over these bonds.
(2) We derive weighted average interest rate of participating bonds by
annualizing September 30, 2002 year-to-date aggregate interest paid on all
participating bonds and dividing by the aggregate face amount of all
participating bonds as of September 30, 2002. For three bonds, we assumed
the maximum interest rate on those bonds of 16% because annualizing the
interest received at September 30, 2002 would have produced a result in
excess of the maximum amount the obligors are required to pay on those
bonds. Because the interest on these bonds is based partly on property
performance, annualizing this interest may not reflect the annual interest
we will actually receive.
(3) We derive weighted average interest rate of non-participating bonds by
summing the product of the face amount multiplied by the interest rate of
each non-participating bond and dividing the total by the aggregate face
amount of all non-participating bonds.
(4) Interest income from our residual interests may vary substantially as
interest rates rise and fall. See "Risk Factors -- We may suffer adverse
consequences from changing interest rates and the effectiveness of our
hedging strategies."
(5) With respect to participating bonds, we derive low and high interest rates
by annualizing aggregate interest paid at September 30, 2002 and dividing by
the face amount as of September 30, 2002. With respect to non-participating
bonds, we use the low and high base interest rates stated in the
S-5
bonds. For three bonds, we assumed the maximum permitted interest rate on those
bonds of 16%, even though annualizing the interest received at September 30,
2002 would have produced a higher result, because that result would have been in
excess of the maximum amount the obligors are required to pay on those
bonds.
(6) Our Riverset bond pays us interest only to the extent of cash flow. The
minimum pay rate is zero. Interest accrues at the stated base rate if it is
not paid and is due at maturity.
Operating Segment
Our operating segment provides servicing, loan origination and tax credit
and other equity syndication services. It also makes equity investments, such as
our investments with CAPREIT. These operations and investments generate taxable
income. For the nine months ended September 30, 2002, our operating segment,
which we conduct through Midland, generated $14.5 million in fees, comprising
$4.6 million of loan origination fees, $5.1 million of loan servicing fees, and
$4.8 million of brokerage fees we earned from tax credit equity syndication fund
origination fees. Loan origination fees do not include $2.1 million of
origination fees that we received in connection with loan origination activity
that we defer and amortize into income over the life of the investment.
THE OFFERING
Common shares offered......... 2,800,000
Common shares outstanding
after the offering............ 28,415,147
Use of proceeds............... We estimate that our net proceeds from this
offering without exercise of the overallotment
option will be approximately $62.8 million. We
intend to use the net proceeds to fund future
investment activity, to reduce outstanding
notes payable and for general corporate
purposes. See "Use of Proceeds."
Risk Factors.................. See "Risk Factors" and other information
included in this prospectus supplement, the
accompanying prospectus and the documents
incorporated by reference for a discussion of
factors you should carefully consider before
deciding to invest in the common shares.
New York Stock Exchange
symbol........................ "MMA"
The number of shares outstanding after the offering excludes 2,872,033
shares reserved for issuance under our share option plans, of which options to
purchase 1,345,970 shares at an average exercise price of $19.65 were
outstanding. This number assumes that the underwriters' overallotment option is
not exercised. If the overallotment option is exercised in full, we will issue
and sell an additional 420,000 shares yielding estimated additional net proceeds
of approximately $9.4 million.
S-6
DISTRIBUTION POLICY
The holders of the common shares are entitled to distributions as declared
by our board of directors. Our current policy is to distribute to the holders of
common shares at least 80% of our cash flow from operations (exclusive of
capital-related items and reserves), but only after payment of distributions to
the holders of preferred shares issued by one of our subsidiaries.
RECENT DEVELOPMENTS
INVESTMENTS IN TAX-EXEMPT REVENUE BONDS AND MORTGAGE REVENUE BONDS
Since September 30, 2002, we have participated in approximately $55.0
million in face value of tax-exempt bonds. Although historically we have funded
the entire face amount of the bonds at the time they are originated, we have
agreed with certain borrowers that we will advance only a portion of the funding
and make the remainder available to the borrowers as they are able to employ the
funds in the project. This reduces the amount of our capital at risk in the
event the project is not completed and reduces the interest cost to the borrower
until all of the funds are drawn. The following table sets forth summary data
regarding these transactions.
FACE WEIGHTED
AMOUNT OF AVERAGE AMOUNT
UNDERLYING PERMANENT DATE OF FUNDED AT
(000'S) INTEREST INITIAL JAN. 31, 2003
INVESTMENT BOND RATE(1) FUNDING (000'S)
---------- ---------- --------- ---------- -------------
City Views at Rosa Burney Park................. $ 6,300 6.689% 12/11/2002 $1,258
Jefferson at Towne Lake........................ 25,150 7.852 12/17/2002 6,515
Sanger Trails.................................. 9,750 6.917 12/23/2002 225
Olathe Senior Residences....................... 8,150 6.813 12/24/2002 51
Osborne Place Manors........................... 5,680 6.866 12/27/2002 51
------- ------
Total........................................ $55,030 $8,100
======= ======
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(1) Each of these investments comprises two bonds, each of which carries a
different interest rate.
REDEMPTION OF BOND
The issuer of our tax-exempt mortgage revenue bond known as Villa Hialeah
redeemed the bond on December 23, 2002. The proceeds that we received upon this
redemption included a return of principal and interest of approximately $10.2
million and an additional $0.3 million early redemption fee.
SALE OF BOND
From time to time we have sold investments when attractive prices were
available. On October 9, 2002, we sold our tax-exempt mortgage revenue bond
known as Park Center, resulting in net proceeds of approximately $10.8 million,
of which approximately $1.4 million represented capital gain.
MIDLAND
In the agreement pursuant to which we acquired Midland Financial Holdings,
Inc. in 1999, we agreed to make additional contingent purchase price payments in
three annual installments. In December 2002, we issued 135,116 common shares,
having a value of approximately $3.3 million, in payment of the final
installment.
S-7
NEW INVESTMENTS WITH CAPREIT
During December 2002, we made equity investments totaling approximately
$6.0 million in two properties identified for purchase by CAPREIT, Inc. These
investments are in addition to $65.5 million (including transaction costs) we
invested earlier in 2002 in 18 partnerships that each own a multifamily housing
development in which CAPREIT and its affiliates also invested. Pursuant to our
investment agreement with CAPREIT, we may, but are not required to, invest up to
$25 million per year for four years in new equity investments with CAPREIT.
DECLARATION OF CURRENT DISTRIBUTION
On January 17, 2003, our board of directors raised our regular quarterly
distribution from $.4400 to $.4425 per common share payable on February 7, 2003
to shareholders of record on January 27, 2003. This represents an annualized
distribution of $1.77 per common share and an indicated annualized yield of
7.50% based on the last sale price of our common shares reported on the New York
Stock Exchange on February 5, 2003. Investors in this offering will not
participate in the February 7, 2003 distribution, but will be entitled to
participate in any future distributions to holders of common shares if they
continue to hold those shares. Approximately 100% of our net income, and thus
our quarterly distributions, for the year ended December 31, 2001 was
tax-exempt. While we produce taxable income each year, in 2001 we had deductions
sufficient to offset all of our taxable income. Approximately 92% of our net
income for the three years ended December 31, 2001 was tax-exempt.
S-8
RISK FACTORS
Before you invest in our common shares, you should be aware that the
occurrence of any of the events described in this risk factors section and
elsewhere in this prospectus supplement and the accompanying prospectus could
have a material adverse effect on our business, financial condition and results
of operations. You should carefully consider these risk factors, together with
all of the other information included in this prospectus supplement and the
accompanying prospectus, before you decide to purchase the common shares.
THE PROPERTIES SECURING OUR INVESTMENTS MAY NOT GENERATE SUFFICIENT INCOME TO
MAKE THE PAYMENTS DUE TO US.
One of the major risks of owning investments secured by multifamily
residential properties is the possibility that the owner of the property
securing an investment does not make the payments due to us. The following is a
list of some of the things that might cause us to receive less income from our
investments than we expect:
- Adverse economic conditions, either local, regional or national, may
limit the amount of rent that can be charged for rental units at the
properties. Adverse economic conditions may also result in a reduction in
timely rent payments or a reduction in occupancy levels.
- Occupancy and rent levels may decrease due to the construction of
additional housing units or the establishment of rent stabilization or
rent control laws or similar agreements.
- Declines in the level of mortgage interest rates and other changes in the
mortgage finance market, such as the increasing availability of
zero-downpayment mortgages, may encourage tenants in multifamily rental
properties to purchase housing, which may reduce the demand for rental
housing.
- City, state and federal housing programs that subsidize many of the
properties impose rent limitations and may limit the ability of the
operators of the properties to increase rents. This may discourage
operators from maintaining the properties in proper condition during
periods of rapid inflation or declining market value of the properties.
In addition, the programs may impose income restrictions on tenants,
which may reduce the number of eligible tenants in the properties and
result in a reduction in occupancy rates. Even if a property is not
subject to legal restrictions on the amount of rent that may be charged
to low and moderate income tenants, rental market conditions and other
factors may result in reduced rents.
- Tenants who are eligible for subsidies or similar programs may not find
the differences in rents between the subsidized or supported properties
and other multifamily rental properties in the same area to be a
sufficient economic incentive to reside at a subsidized or supported
property, which may have fewer amenities or otherwise be less attractive
as a residence.
- Expenses at the property level, including but not limited to capital
needs, real estate taxes and insurance, may increase.
All of these conditions and events may increase the possibility that a
property owner may be unable to meet its obligations with respect to mortgage
bonds supporting our investments. This could affect our cash available for
distribution to holders of our common shares.
OUR INCOME WOULD BE ADVERSELY AFFECTED BY DECLINING PROPERTY VALUES AND PROPERTY
PERFORMANCE.
Our business would be adversely affected by periods of economic slowdown or
recession that result in declining property values or property performance,
particularly declines in the value or performance
S-9
of multifamily properties. Any material decline in property values weakens the
value of the properties as collateral for our investments, may require us to
post additional assets as collateral (which limits our ability to generate
income from those assets) and increases the possibility of a loss in the event
of a default. Additionally, some of our income comes from contingent interest on
participating tax-exempt mortgage revenue bonds and equity investments in
partnerships that own multifamily housing developments. Accordingly, a decline
in the performance of the related multifamily housing developments would likely
have a negative effect on our cash available for distribution to holders of our
common shares.
SUBSTANTIALLY ALL OF OUR INVESTMENTS ARE ILLIQUID.
There is no regular trading market for substantially all of our
investments, making them illiquid. This lack of liquidity would be worse during
turbulent market conditions or if any of our tax-exempt bonds become taxable or
go into default. In the event that we require additional cash during a turbulent
market, we may have to sell our investments on unfavorable terms. In addition,
the illiquidity associated with our investments makes them hard to value and may
cause significant changes in the fair value of our investments, which would be
reflected in our book value and other income.
WE MAY SUFFER ADVERSE CONSEQUENCES FROM CHANGING INTEREST RATES NOTWITHSTANDING
OUR HEDGING STRATEGIES.
Changes in interest rates. A decrease in market interest rates may result
in a bond issuer redeeming or a bond borrower prepaying or refinancing the bond
prior to its stated maturity. We may not be able to reinvest the proceeds of any
redeemed investment at an attractive rate of return. This may adversely affect
our ability to generate sufficient income to pay distributions on our common
shares.
An increase in market interest rates may lead our securitization
counterparties or prospective purchasers of our existing investments to demand a
higher annual yield than they currently receive. This could increase our cost of
capital, reduce the market value of our investments and may result in a
reduction, possibly to zero, of interest distributions we receive from our
residual trust interests. These occurrences would adversely affect the amount of
cash available for distribution to the holders of our common shares.
In addition, an increase in market interest rates could lead to a decrease
in the value of some of our investments. This could cause some counterparties to
demand additional collateral to preserve our existing short term securitization
facilities. To the extent that additional collateral could not be provided to
satisfy these demands, these securitization facilities could be terminated,
which could adversely affect cash available for distribution to holders of the
common shares and our financial condition.
Hedging Strategies. Developing an effective interest rate risk management
strategy is complex, and no strategy can completely insulate us from all
potential risks associated with interest rate changes. There is a significant
risk that we could be required to liquidate investments to satisfy margin calls
if interest rates rise or fall dramatically. In addition, hedging involves
transaction costs. If we hedge against interest rate risks, we may substantially
reduce our net income or adversely affect our financial condition. Furthermore,
there can be no assurance that our interest rate hedging activities will protect
us fully against all of the risks involved.
At September 30, 2002, we had $417.0 million of floating interest rate
exposure related to our securitizations. To reduce our exposure to rising
interest rates, we often enter into interest rate hedges. At September 30, 2002,
most of our floating rate exposure was hedged by interest rate swaps. Net
payments received by us from our interest rate hedges, if any, will be taxable
income, even though the investments we are hedging typically pay tax-exempt
interest. We enter into hedges for limited time
S-10
periods that are typically substantially shorter than the term of our interest
rate exposure. At September 30, 2002, the weighted average maturities of our
floating rate securitizations and interest rate hedges were approximately 7.9
and 3.5 years, respectively. There can be no assurance that we will be able to
enter into new hedges at favorable prices, or at all, when the existing
arrangements expire, a risk that is increased by our use of a strategy that
requires us to enter into new arrangements often.
OUR INCOME DEPENDS ON THE PERFORMANCE OF COUNTERPARTIES TO OUR CONTRACTUAL
OBLIGATIONS.
All of our income is derived from contractual obligations to make payments
to us. Some of our structured transactions, such as the securitization
transactions, are extremely complex. See "-- Other parties have priority on the
interest and principal of some of our investments, including where we have
issued guarantees." We also engage in limited amounts of buying and selling of
hedging products and mortgage instruments, including, but not limited to, buying
and selling total return swaps and financial futures contracts and options on
financial futures contracts and trading forward contracts in order to hedge bond
purchase commitments. These instruments are complex and can produce volatile
results, including margin calls. Hedging and participating in structured
transactions, particularly of a complex nature, exposes us to the credit risks
of our counterparties who may in certain circumstances not pay or perform under
their contracts. Accordingly, we cannot assure you that our investment or
hedging strategies will have the desired results.
WE HAVE SIGNIFICANT OFF-BALANCE-SHEET FINANCING.
We have in the past obtained, and may in the future obtain, a significant
amount of our funding from securitizing tax-exempt bonds. When we securitize a
bond and purchase only subordinate certificates, our rights are subordinate to
the payment in full of the value of outstanding senior certificates. In
addition, we are the guarantor on $16.2 million of demand notes relating to
loans we made and then sold. See "-- Other parties have priority on the interest
and principal of some of our investments, including where we have issued
guarantees." Under our policies in effect prior to September 30, 2001, and
consistent with generally accepted accounting principles, we did not include
these obligations and the related assets on our balance sheet. Although
generally accepted accounting principles allow us to keep similar financing
generated by future securitization transactions off our balance sheet, due to
potential accounting issues associated with off-balance-sheet transactions, we
decided to change our policies for most transactions entered into after
September 30, 2001. Under this policy we intend to treat all future
securitization transactions in which we own interests in the bonds prior to
their securitization as borrowings and include the senior certificate
obligations and the related assets on our balance sheet. We do not expect to
change our accounting treatment for the senior certificates and demand notes
that were treated as off-balance-sheet obligations as of September 30, 2001. The
amount of those obligations as of September 30, 2002 was $147.3 million. In
addition, we continue to create off-balance-sheet debt when we acquire
subordinate securities from securitizations in which we did not own an interest
in the bonds prior to their securitization. The amount of those obligations as
of September 30, 2002 was $66.0 million. We may change these policies at any
time in the future.
Investors may become concerned about investing in us or any company that
has significant off-balance-sheet financings. If investors or other parties
determine that our off-balance-sheet financing adversely affects their
willingness to own an interest in or engage in transactions with us, our
business and the value of our common shares would be negatively affected.
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OTHER PARTIES HAVE PRIORITY ON THE INTEREST AND PRINCIPAL OF SOME OF OUR
INVESTMENTS, INCLUDING WHERE WE HAVE ISSUED GUARANTEES.
Investments owned by MuniMae TE Bond Subsidiary, LLC. We own 100% of the
common shares of one of our subsidiaries, TE Bond Subsidiary, LLC; however, TE
Bond Subsidiary has also issued $168.0 million of preferred shares. The holders
of the preferred shares have the first right to income and principal of the
investments held by the subsidiary, up to the liquidation preference of the
preferred shares of $168.0 million plus unpaid distributions upon any
liquidation. The investments in TE Bond Subsidiary represented $678.0 million of
fair value or 45.3% of our gross assets as of September 30, 2002 and generated
$45.2 million or 47.5% of our gross income for the nine months ended September
30, 2002. As of September 30, 2002, 85.7% of the fair value of our tax-exempt
bonds and other bond related investments was held by TE Bond Subsidiary. Holders
of the subsidiary's preferred shares are entitled to an aggregate of $12.0
million in distributions per annum.
Investments we have securitized or pledged as collateral. We securitize
some of our investments that generate tax-exempt income to provide funds for
other investments at what we believe is a low cost relative to the cost of other
forms of financing. In a typical short term securitization, we cause tax-exempt
bonds to be deposited into a trust. The trust sells short term floating rate
interests in the trust, which have first priority on the cash flow from the
deposited tax-exempt bonds, to third party investors. We purchase from the trust
the right to receive the interest remaining after the trust makes payments to
the holders of the senior floating rate interests, which is called a residual
interest. In the event the trust cannot meet its obligations, all or a portion
of the deposited tax-exempt bonds may be sold to satisfy the obligations to the
holders of the senior interests. Therefore, cash flow from these tax-exempt
bonds may not be available to pay any amounts on our residual interests. In the
event of the liquidation of the tax-exempt bonds, no payment will be made to us
except to the extent that the sale price received for the tax-exempt bonds
exceeds the amounts due on the senior obligations of the trust.
Typically the payment of the interest and principal on the senior floating
rate interests is guaranteed by a third party credit enhancement provider. We
also typically pledge tax-exempt bonds, but may pledge other types of assets, to
secure the credit enhancement provider's guarantee of payment to the holders of
the senior floating rate certificates. In the event that the trust has
insufficient income to repay the short term senior floating rate certificates
and the third party is required to repay the senior floating rate certificates,
our pledged assets may be sold to reimburse the third party for its advance of
funds and we may lose the cash flow from the tax-exempt bonds and our ownership
interest in them. Our ability to remedy defaults inside the trust is limited. At
September 30, 2002, $479.3 million or 60.6% of the fair value of our tax-exempt
bonds and bond related investments (in addition to the tax-exempt bonds that are
the subject of the securitization) was pledged to secure repayment by a third
party of $417.0 million in principal amount of short term senior floating rate
certificates. These assets that were pledged as collateral produced $39.4
million or 53.6% of our pro forma annual interest income from bonds and other
bond related investments.
In addition to short term securitizations, we also utilize longer term
fixed-rate securitizations. The interests sold from the longer term
securitization trusts bear interest at a fixed rate or at a fixed rate for
several years and then are subject to a remarketing. Similar to short term
securitizations, we pledge other tax-exempt bonds that we own to secure our
repayment obligation. At September 30, 2002, approximately $65.8 million or 8.3%
of the fair value of our tax-exempt bonds and bond related investments (in
addition to the tax-exempt bonds that are the subject of the securitization) was
pledged to secure repayment of the $119.3 million in principal amount of senior
trust certificates issued by the securitization facilities. The assets that were
pledged as collateral produced $10.3 million or 13.9% of our pro forma annual
interest income from bonds and bond related investments.
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Subordinated Investments. A portion of our investments are subordinated
securities or interests in bonds that are junior in right of payment to other
bonds, notes or instruments. At September 30, 2002, these investments
represented $74.1 million or 9.4% of the fair value of our tax-exempt bonds and
bond related investments and produced $7.7 million or 10.5% of our pro forma
annual interest income from tax-exempt bonds and other bond related investments.
Among the risks of these investments are that borrowers may not be able to make
payments on both the senior and the junior interests and that the value of the
underlying asset may be less than the amounts owed to both the senior and the
junior interest holders. As a consequence, we, as a holder of the junior
security, could receive less than the full and timely repayment of our
investment. Moreover, the holders of the senior interests may control the
ability to enforce remedies. Without the consent of the senior holders, we will
have limited ability to take actions that might protect our interests. If the
cash flow with respect to a particular investment is not sufficient to make full
payments on the junior interests, our ability to make distributions to our
shareholders could be adversely affected.
We have obligations under guarantee and loss sharing agreements. As part
of our regular business, we sometimes guarantee obligations of third parties and
agree to share losses, if any, with investors and other counterparties. These
commitments include guarantees of payment on bank credit lines, tax indemnities
to holders of preferred shares issued by one of our subsidiaries, guarantees of
performance on certain financing and swap agreements and guarantees of payment
and loss sharing agreements with Fannie Mae and other financial partners. We
assume these obligations to facilitate the completion of some investments we
make and transactions we structure, and to increase the yield we can offer
investors and realize ourselves or decrease the rate charged to us by investors
or lenders. If we were required to fulfill our obligations on one or more of
these commitments, our ability to make distributions to our shareholders would
be adversely affected.
WE HAVE LIMITED RECOURSE UPON A TAX-EXEMPT MORTGAGE REVENUE BOND DEFAULT OR UPON
THE BANKRUPTCY OF A BORROWER UNDER A MORTGAGE BOND.
Although state or local governments or their agencies or authorities issue
the tax-exempt mortgage revenue bonds that we own (or which underlie many of our
investments), the tax-exempt mortgage revenue bonds are not general obligations
of any state or local government. No government is liable under the tax-exempt
mortgage revenue bonds, nor is the taxing power of any government pledged to the
payment of principal or interest under the tax-exempt mortgage revenue bonds. An
assignment of the related mortgage loan secures each tax-exempt mortgage revenue
bond we own. The loan is secured by a mortgage on the underlying property and an
assignment of rents. The owners of the underlying properties are only liable for
the payment of principal and interest under the mortgage loans to the extent of
the cash flow and sale proceeds from the properties. Accordingly, the revenue
derived from the operation of the properties and amounts derived from the sale,
refinancing or other disposition of the properties is the sole source of funds
for payment of principal and interest to us under the tax-exempt mortgage
revenue bonds.
Our revenue may also be adversely affected by the bankruptcy of a borrower.
A borrower under bankruptcy protection may be able to restructure its debt
payment and stop making mortgage payments.
WE HOLD INVESTMENTS THAT HAVE FAILED IN THE PAST TO MEET THEIR DEBT SERVICE
OBLIGATIONS AND MAY FAIL TO MEET THEIR OBLIGATIONS AGAIN IN THE FUTURE.
As of September 30, 2002, tax-exempt bonds that accounted for approximately
18.6% of our pro forma annual interest income from tax-exempt bonds and other
bond related investments failed for some period of time to meet their full debt
service obligations and five of those bonds continued to be in default at
September 30, 2002. In lieu of foreclosure, the general partner interest in the
original
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borrowing partnership or the deeds to the properties securing all but two of
these tax-exempt bonds were transferred to affiliates of the general partner of
our predecessor entity. All the bonds that are in default were acquired by our
predecessor except for two bonds, which represent approximately 3.9% of our pro
forma annual interest income from tax-exempt bonds and other bond related
investments. In addition, one bond that accounts for approximately 2.5% of our
pro forma annual interest income from tax-exempt bonds and other bond related
investments has defaulted since September 30, 2002 and continues to be in
default. Additionally, some of our tax-exempt bonds have been refunded on terms
that defer, and in certain circumstances reduce, the debt service obligations on
such tax-exempt bonds. We generally have no ability to limit or initiate these
refundings. We cannot assure you that defaults and refundings will not occur in
the future and that when they do occur, that they will not result in reduced
cash flow from our investments.
THE VALUE OF THE COMMON SHARES AND MUNIMAE'S ABILITY TO MAKE DISTRIBUTIONS
DEPEND ON THE APPLICATION OF TAX LAWS.
Impact of Proposed Tax Legislation. On January 7, 2003, the Bush
Administration proposed changes to the tax laws that would, if enacted as
proposed, exclude certain corporate dividends from an individual's taxable
income. The proposal would reduce the importance of a primary advantage of
investing in municipal bonds -- that interest received on these bonds is
tax-exempt while dividend income from investments in corporate equity is taxed
as ordinary income. It is likely that this could increase the cost of municipal
financings, as interest rates offered by municipal borrowers would rise to
compensate investors for the loss of the tax advantage. This could lead to a
decrease in municipal borrowing activities, which would reduce our opportunities
to originate, structure and invest in municipal financings. Even if this
proposal is not enacted, while it is under consideration, borrowers and
investors may postpone transactions until the issue is resolved. The proposed
changes and any temporary reduction in transaction volume could adversely affect
our operations and could negatively affect our net income.
The changes proposed would exclude corporate dividends from taxable income
only to the extent that the corporation paying the dividends has paid tax on its
income. While we produce taxable income each year, in 2001 we had deductions
sufficient to offset all of our taxable income in that year. Approximately 92%
of MuniMae's net income for the three years ended December 31, 2001 was tax-
exempt. While the tax-exempt portion of our distributions is, and under the
proposal would remain, excludable from taxable income, the proposal could cause
the after-tax returns available from other investments to increase, and cause
shares in other companies to become more attractive relative to our shares.
These changes could also reduce the value of our existing investments, since
tax-exempt municipal bond income would not enjoy the same tax advantage as
provided under current law.
The proposed exclusion from taxable income would apply only to dividends
paid out of income that was taxed at the corporate level. Through Midland, we
arrange for corporations to make investments in exchange for tax credits that
are available under various federal programs and which reduce the taxable net
income of the holder. In connection with this business we receive fees for
selling the tax credits, make loans to and earn interest on those loans from
developers and provide and receive fees for managing assets. If the proposal is
enacted in its current form, income that has not been taxed at the corporate
level could be less valuable to shareholders than taxed income, the value of tax
credits to corporate investors could decrease and the tax credit syndication
industry could be harmed and possibly cease to operate. Even if this proposal is
not enacted, while it is under consideration, corporations may be disinclined to
purchase tax credits that they may later choose not to use or may find to be of
limited value. Moreover, delays in the syndication of tax credits could
negatively affect our net income and our
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ability to borrow from third parties to finance this product line. There can be
no assurance regarding the form in which this proposal ultimately will be
enacted or whether it will in fact be enacted.
Publicly Traded Partnership Status. MuniMae operates as a partnership for
federal income tax purposes. This permits MuniMae to pass through most of its
tax items -- including taxable income, tax-exempt income, deductions, credits
and other tax items -- to shareholders. However, the listing of common shares on
the New York Stock Exchange causes MuniMae to be treated as a "publicly traded
partnership" for federal income tax purposes. As a publicly traded partnership,
MuniMae will be taxed as a corporation for any taxable year in which less than
90% of its gross income consists of "qualifying income." Qualifying income
includes interest, dividends, real property rents, gains from the sale or other
disposition of real property or other capital assets held for the production of
interest or dividends, and certain other items. Clifford Chance US LLP, our
counsel, has advised us that, although the issue is not free from doubt,
tax-exempt interest income constitutes qualifying income for this purpose.
In addition, in the opinion of Clifford Chance US LLP, although the issue
is not free from doubt, each of MuniMae and its predecessor has been and is
properly treated as a partnership for federal income tax purposes. In this
regard, we have represented to Clifford Chance US LLP that, in all relevant
prior years of MuniMae and its predecessor's existence, at least 90% of its
gross income was qualifying income, and have covenanted to conduct MuniMae's
operations in a manner such that at least 90% of its gross income, including
tax-exempt income, will constitute qualifying income. Clifford Chance US LLP's
opinion is based on, and subject to, our foregoing representation and the
discussion below entitled "Federal Income Tax Considerations -- General."
If, for any reason, less than 90% of MuniMae's gross income constitutes
qualifying income, MuniMae's income, deductions, credits and other tax items
would not pass through to shareholders, and shareholders would be treated as
stockholders in a corporation for federal income tax purposes. In addition,
distributions by MuniMae to its shareholders would constitute ordinary dividend
income, taxable to the shareholders to the extent of MuniMae's earnings and
profits, which would include tax-exempt net income, as well as any taxable net
income it may have, reduced by any federal income taxes paid. MuniMae would not
be able to deduct the payment of these dividends. Also, MuniMae would be
required to pay federal income tax at regular corporate rates on its net income,
with the exception of tax-exempt income. See "Federal Income Tax
Considerations -- General -- Publicly Traded Partnership Rules" and
"-- Treatment of Corporate Dividends."
Tax-Exemption of Mortgage Revenue Bonds. On the date of initial issuance
of each of the tax-exempt mortgage revenue bonds in which MuniMae invests, bond
counsel, or special tax counsel, rendered its opinion to the effect that, based
on the federal income tax law in effect on the date of issuance, interest on
such tax-exempt mortgage revenue bonds was excludable from gross income for
federal income tax purposes, except with respect to any tax-exempt mortgage
revenue bond, other than a tax-exempt mortgage revenue bond the proceeds of
which are loaned to a charitable organization qualifying as a certain type of
tax-exempt organization under the federal income tax law, during any period in
which such tax-exempt mortgage revenue bond is held by a "substantial user" of
the property or by a "related person" to such substantial user as such terms are
described in the relevant provisions of the federal income tax law. These
opinions are typically conditioned on the compliance with state and local usury
laws. For purposes of our discussion, we treat federal income tax law as a body
of authorities consisting of the Internal Revenue Code of 1986, as amended,
Treasury Regulations issued under the Code, administrative interpretations of
the Code and judicial interpretations of the Code.
Federal income tax law establishes certain requirements which must be met
by the issuer of bonds and certain other persons subsequent to the issuance of
such bonds for interest to remain excluded from gross income for federal income
tax purposes. Among these continuing requirements are restrictions on
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the investment and use of the bond proceeds and, for bonds the proceeds of which
are loaned to a certain type of tax-exempt charitable organization, the
continued tax-exempt status of such charitable organization borrower. In
addition, the continuing requirements include income restrictions and compliance
with an arbitrage compliance certificate, regulatory agreement or similar
document. Failure to comply with the continuing requirements of the federal
income tax law may cause interest on such bonds to be includable in gross income
for purposes of the federal income tax law retroactive to the date of issuance,
regardless of when such non-compliance occurs. Each issuer of the bonds, as well
as each conduit borrower of the tax-exempt mortgage revenue bonds, has
covenanted in an arbitrage compliance certificate, regulatory agreement or
similar document, that it would comply with certain procedures and guidelines
designed to ensure satisfaction of the continuing requirements of the federal
income tax law. Failure to comply with these continuing requirements may cause
the interest on such bonds to be includable in gross income for federal income
tax purposes, retroactive to the date of issuance, regardless of when such
non-compliance occurs.
In connection with the above, Clifford Chance US LLP has not passed upon,
and does not assume any responsibility for, but rather has assumed the
continuing correctness of, the opinions of bond counsel, or special tax counsel,
relating to the tax-exemption of interest on the bonds. Clifford Chance US LLP
has not independently verified whether any events or circumstances have occurred
since the original issuance of the bonds that would adversely affect such
opinion of bond counsel or special tax counsel. However, as of the date of this
prospectus supplement, neither we, our affiliates nor Clifford Chance US LLP,
has knowledge of any events that may adversely affect the tax-exempt status of
the bonds, including any notice that the Internal Revenue Service considers
interest on any of the bonds to be includable in gross income.
MuniMae's predecessor owned 22 tax-exempt mortgage revenue bonds. The
borrowers on 11 of these tax-exempt mortgage revenue bonds had failed to make
timely debt service payments resulting in defaults on such tax-exempt mortgage
revenue bonds, and the tax-exempt mortgage revenue bonds were refunded in 1995.
The borrowers on six of the remaining tax-exempt mortgage revenue bonds, which
were not refunded, have defaulted on their monetary obligations. Three of the 22
tax-exempt mortgage revenue bonds continued to be in default as of September 30,
2002. In addition, the borrowers on two of the tax-exempt mortgage revenue bonds
that MuniMae and certain of its subsidiaries have acquired, subsequently have
defaulted on their monetary obligations and continued to be in default as of
September 30, 2002. Additionally, the borrower on one of the tax-exempt mortgage
revenue bonds has defaulted since September 30, 2002 and continues to be in
default. MuniMae completed foreclosure proceedings on one of the defaulted bonds
and may initiate foreclosure proceedings on other mortgage properties at some
time in the future. We believe that MuniMae and certain of its subsidiaries have
exercised and continue to exercise prudent business practices to enforce their
creditor's rights under the applicable bond documents, including initiating
foreclosure proceedings on the mortgaged properties when advisable.
A risk exists that the Internal Revenue Service may treat actions of
MuniMae or certain of its subsidiaries to exercise, or not to exercise, their
rights under one or more of the mortgages of the defaulted tax-exempt mortgage
revenue bonds as constituting a material modification of such tax-exempt
mortgage revenue bond and, therefore, conclude that these tax-exempt mortgage
revenue bonds were reissued for federal income tax purposes. If the Internal
Revenue Service asserts this position and is successful in maintaining it in a
court, interest on these tax-exempt mortgage revenue bonds probably would be
taxable for federal income tax purposes.
In connection with the above, we have been advised by counsel that
MuniMae's actions, or failures to act, taken in connection with the default of
these tax-exempt mortgage revenue bonds would not,
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under the federal income tax law in effect at the time of the defaults, result
in a reissuance of such mortgage bonds. We have assumed the continuing
correctness of the legal advice we received on this issue. Clifford Chance US
LLP has not passed upon, and does not assume responsibility for, but rather has
assumed the correctness of, counsel's advice to us on this issue. Unlike a
ruling from the Internal Revenue Service, however, the advice of counsel has no
binding effect or official status of any kind, and no assurance can be given
that the conclusions reached will not be contested by the Internal Revenue
Service or, if contested, will be sustained by a court. We will use commercially
reasonable efforts to contest any adverse determination by the Internal Revenue
Service on this issue. We will incur additional expenses if we contest any
adverse determination.
Treatment of Tax-Exempt Mortgage Revenue Bonds as Equity. Interest payable
on certain of the participating tax-exempt mortgage revenue bonds that we hold
for investment depends upon the cash flow from, and proceeds upon sale of, the
underlying properties. If the Internal Revenue Service determined that these
participating tax-exempt mortgage revenue bonds involved an equity investment in
the respective underlying properties because of this feature, all or part of the
interest on those bonds would not qualify as tax-exempt interest for federal
income tax purposes. However, to our knowledge, the Internal Revenue Service has
not challenged the tax-exempt status of these participating tax-exempt mortgage
revenue bonds.
Prior to the acquisition of the participating tax-exempt mortgage revenue
bonds, MuniMae's predecessor received opinions of counsel to the effect that,
based upon certain assumptions described in the opinions, more likely than not,
each of these tax-exempt mortgage revenue bonds would be treated, for federal
income tax purposes, as representing indebtedness and that no portion of the
tax-exempt mortgage revenue bond or any payments receivable thereunder would be
considered (i) an equity interest in the conduit borrower, (ii) an equity
interest in a venture between MuniMae and the conduit borrower, or (iii) an
ownership interest in the underlying properties. We have received similar
opinions with respect to the participating subordinate tax-exempt mortgage
revenue bonds and one additional tax-exempt mortgage revenue bond that we
acquired afterward.
The original opinions issued with respect to certain of these tax-exempt
mortgage revenue bonds indicated that the tax-exempt mortgage revenue bonds
were, more likely than not, indebtedness, but included a qualification that no
opinion was expressed with respect to the characterization of the tax-exempt
mortgage revenue bonds as indebtedness or equity under circumstances of a
default. With respect to three of these tax-exempt mortgage revenue bonds that
have defaulted, but were not refunded, we have not received any updated opinions
of counsel with respect to the issue of whether the underlying tax-exempt
mortgage revenue bonds should be treated as equity. With respect to two of these
participating tax-exempt mortgage revenue bonds that have defaulted, but were
not refunded, we have received an updated opinion of counsel that the bonds will
be treated as debt. Unlike a ruling from the Internal Revenue Service, however,
an opinion of counsel has no binding effect or official status of any kind, and
no assurances can be given that the conclusions reached in such opinion will not
be contested by the Internal Revenue Service or, if contested, will be sustained
by a court. We will use commercially reasonable efforts to contest any adverse
determination by the Internal Revenue Service on this issue. We will incur
additional expenses if we contest any adverse determination.
A number of opinions rendered at the time of the issuance of some of our
investments, which were originally acquired by MuniMae's predecessor, were
rendered by a predecessor of Piper Rudnick LLP, counsel for the underwriters in
this offering. Piper Rudnick LLP's predecessor was then acting as counsel for
MuniMae's predecessor. Except as described in the preceding sentence, none of
the opinions described in the preceding paragraph, were rendered by Clifford
Chance US LLP or Piper Rudnick LLP, and neither has passed on or assumes any
responsibility for the opinions of other counsel on this issue.
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Moreover, neither Clifford Chance US LLP nor Piper Rudnick LLP has made any
independent determination as to whether any events or circumstances have
occurred or intervened since the original issuance of the "indebtedness"
opinions that would adversely affect such opinions, including the defaults
described above.
Investment in New Assets. MuniMae has been making additional investments
in tax-exempt mortgage revenue bonds and related assets and entering into
hedging transactions, such as interest rate swaps. These investments may produce
income that is subject to federal income tax, and that may not be qualifying
income for purposes of the publicly traded partnership rules. In addition,
MuniMae's investments may include investments in tax-exempt mortgage revenue
bonds that need to be restructured and remarketed. MuniMae could recognize
taxable income, gain or loss, upon any such restructuring and remarketing of the
tax-exempt bonds even though such restructuring does not result in any cash
proceeds to MuniMae. In addition, various conditions would have to be met to
insure that the restructuring and remarketing of tax-exempt bonds would not
cause the loss of the tax-exempt status of interest on such bonds.
Taxable Income. MuniMae currently invests significantly in tax-exempt
investments. However, MuniMae invests in some assets, such as Midland, and
engages in certain operations that generate income that is not exempt from
federal income tax, including dividends from Midland and capital gains from the
sale of its assets. Further, as described above, the Internal Revenue Service
may seek to recharacterize a portion of MuniMae's tax-exempt income as taxable
income. A shareholder's distributive share of such income will be taxable to the
shareholder, regardless of whether an amount of cash equal to such distributive
share is actually distributed. Further, although MuniMae believes it to be
unlikely, shareholders may owe taxes relating to their investments in MuniMae
that exceed distributions made by MuniMae. See "Federal Income Tax
Considerations."
Limitations on Business Activities. As stated above, MuniMae is not
taxable as a corporation under the publicly traded partnership rules, provided
it continues to satisfy the 90% qualifying income exception. In determining
whether interest is treated as qualifying income under these rules, interest
income derived from the active conduct of a lending, banking or similar business
is not treated as qualifying income. In this regard, we have represented and
covenanted that MuniMae is acting as an investor with respect to its investments
and that it has not and will not engage in the active conduct of a lending,
banking or similar business. If, for any reason, more than 10% of MuniMae's
gross income constitutes non-qualifying income, such as interest derived from
the active conduct of a lending, banking or similar financial business, MuniMae
will be taxable as a corporation rather than as a partnership for federal income
tax purposes, with the attendant negative consequences to MuniMae and
shareholders described above. See "-- Publicly Traded Partnership Status."
Substantial User Limitation. Interest on a tax-exempt mortgage revenue
bond, other than a tax-exempt mortgage revenue bond the proceeds of which are
loaned to a tax-exempt charitable organization, will not be excluded from gross
income during any period in which MuniMae or, if the bond is held by an
affiliate of MuniMae, the affiliate is a "substantial user" of the corresponding
property or a "related person" of a "substantial user." A "substantial user" of
a property generally includes the conduit borrower and any person or entity who
uses the property on other than a de minimis basis. MuniMae or its affiliate, as
applicable, will be a related person of a substantial user for this purpose if,
among other things, it directly, indirectly or by attribution owns more than a
specified percentage of the stock or capital or profits interest in the
substantial user. The attribution rules under federal income tax law are complex
and the preceding sentence is not intended to be a complete summary of their
application.
We have received opinions and/or advice with respect to certain of the
tax-exempt mortgage revenue bonds we hold for investment to the effect that
MuniMae is not a substantial user or a related
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person of such substantial user. There exist certain levels of direct or
indirect common ownership between us and certain of the borrowers of the
tax-exempt mortgage revenue bonds which were considered when we received such
opinions, and/or advice, that MuniMae or, if the bond is held by an affiliate of
MuniMae, the affiliate is not a related person of a substantial user of the
facilities financed by such tax-exempt mortgage revenue bonds. Clifford Chance
US LLP has not passed upon, nor assumed any responsibility for, but rather,
except as provided in the next paragraph, has assumed the correctness of those
opinions and/or advice. Based upon discussions with us, as of the date of this
prospectus supplement, Clifford Chance US LLP does not have knowledge of any
facts or circumstances that would adversely affect the conclusions underlying
those opinions and/or advice.
As of the date of this prospectus supplement, one of MuniMae's officers
owns, directly or indirectly, more than 50% of the profits and/or capital
interests in partnerships that are the borrowers on 10 tax-exempt mortgage
revenue bonds MuniMae or its affiliates own through a combination of whole bond
and custodial receipt arrangements. In the opinion of Clifford Chance US LLP,
MuniMae or, if the bond is held by an affiliate of MuniMae, the affiliate will
not be treated as a related person of any substantial user of any of the
facilities financed with the proceeds of a tax-exempt mortgage revenue bond
relating to such partnership by virtue of any equity investment in MuniMae by
any of MuniMae's officers upon the consummation of the offering. Clifford Chance
US LLP based its opinion on certain representations that we made in connection
with this offering. Further, in issuing the foregoing opinion, Clifford Chance
US LLP has assumed that our representations are true and correct and has not
made any independent determination as to the equity ownership of MuniMae, its
affiliates or the partnerships. The foregoing opinion also assumes that (i) the
tax-exempt mortgage revenue bonds will be treated as indebtedness for federal
income tax purposes, (ii) interest on such tax-exempt mortgage revenue bonds is
excludable from gross income for federal income tax purposes except during any
period in which it is held by a substantial user of the property or related
person thereto, and (iii) neither MuniMae nor any of its affiliates are treated
as a substantial user of the property for any reason. Unlike a ruling from the
Internal Revenue Service, however, the opinion of Clifford Chance US LLP has no
binding effect or official status of any kind, and no assurance can be given
that the conclusion reached will not be contested by the Internal Revenue
Service or, if contested, will be sustained by a court. We intend to use
commercially reasonable efforts to contest any adverse determination by the
Internal Revenue Service on the substantial user issue. Any such contest will
result in us incurring additional expenses. The issue of whether MuniMae or its
affiliates will be treated as a related person is a highly factual inquiry which
ultimately depends upon the direct and indirect ownership of MuniMae and its
affiliates. Because common shares are publicly traded, there can be no assurance
that MuniMae or its affiliates will not be treated as a related person to a
substantial user at a future time.
Allocation of MuniMae's Taxable and Tax-Exempt Income. MuniMae will use
various accounting and reporting conventions to determine each shareholder's
allocable share of income, including any market discount taxable as ordinary
income, gain, loss and deductions. MuniMae's allocation provisions will be
respected for federal income tax purposes only if they are considered to have
"substantial economic effect" allocations or are in accordance with the
partners' "interest in the partnership". There is no assurance that the Internal
Revenue Service will agree with MuniMae's various accounting methods,
conventions and allocation provisions, particularly its allocation, pursuant to
an election made by MuniMae, to shareholders of adjustments attributable to the
differences between the shareholders' purchase price of common shares and their
shares of MuniMae's tax basis in its assets. Because, as a publicly traded
partnership, MuniMae may be unable to comply with the literal requirements of
the applicable tax law provisions, and because certain of its allocations may
not have "substantial economic effect," Clifford Chance US LLP is unable to
express an opinion on these issues. However, we do not expect that any
reasonable adjustments which may be required by the Internal Revenue Service
would
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substantially increase the income allocable to shareholders. See "Federal Income
Tax Considerations -- Certain Federal Income Tax Considerations Relating to
MuniMae and Its Shareholders -- Allocation of Income and Loss."
Revocation of the Basis Adjustment Election. MuniMae previously made an
election, under the relevant provisions of the federal income tax law, to adjust
the bases of its partnership properties on the transfer of its common shares, by
the difference between the transferee shareholder's basis in the shares and the
transferee shareholder's allocable share of MuniMae's basis in its properties.
MuniMae has requested that the Internal Revenue Service revoke the basis
adjustment election for its taxable years beginning with the taxable year ending
December 31, 2003. As of the date of this prospectus supplement, MuniMae has not
yet received the Internal Revenue Service's approval of the revocation. If
approval is received, MuniMae will no longer be making the adjustments discussed
above each time there is a transfer of MuniMae shares. The absence of such
adjustments may tend to accelerate a shareholder's recognition of gain
attributable to dispositions by MuniMae of its properties. See "Federal Income
Tax Considerations -- Certain Federal Income Tax Considerations Relating to
MuniMae and its Shareholders -- Basis Adjustment Election" for additional
information.
New Tax Shelter Regulations. The Treasury Department recently issued
Temporary Regulations expanding the disclosure of reportable transactions and
the list-maintenance requirements for potentially abusive tax shelters for
transactions entered into on or after January 1, 2003. Because of the broad
scope of the Temporary Regulations, it is possible that some of the transactions
we enter into on or after January 1, 2003, such as interest rate swaps and other
derivative transactions subject to confidentiality agreements or sale of
tax-exempt mortgage revenue bonds at a loss, may be subject to the disclosure
and list-maintenance requirements. Subsequent to the issuance of the Temporary
Regulations, the Treasury Department announced that the effective date of the
new list-maintenance requirements would be delayed until the publication of
final Regulations. As of the date of this prospectus supplement, the Treasury
Department has not issued the final Regulations, and we are not certain what
revisions will be made or how the final Regulations will affect the operations
of MuniMae.
TAX-EXEMPT NET INCOME COULD DECREASE IF THE FOCUS OF OUR BUSINESS CHANGES.
If the operating segment of our business, which generates taxable income,
represents a larger percentage of our business in the future or if we invest in
a larger percentage of taxable investments, the percentage of our net income
that is tax-exempt could decrease significantly. Additionally, MuniMae receives
interest income on intercompany loans MuniMae makes to Midland, a corporate
subsidiary, and MuniMae also receives dividend income from Midland. Unlike
tax-exempt distributions from a subsidiary organized as a limited liability
company that can act as a pass through entity, taxable interest income and
dividend income from a corporation is not tax-exempt. The percentage of our net
income that is tax-exempt could decrease significantly if, and to the extent, we
receive interest or dividends from Midland. See "The value of the common shares
and MuniMae's ability to make distributions depend on the application of tax
laws -- Treatment of Corporate Dividends."
ENVIRONMENTAL PROBLEMS AT THE PROPERTIES SECURING OUR INVESTMENTS WOULD REDUCE
THE INTEREST PAYMENTS TO US AS WELL AS THE VALUE OF THE COLLATERAL SECURING THE
INVESTMENT AND THE INVESTMENT ITSELF.
Our bond and bond related investments are generally secured by real estate.
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is generally liable for the costs of removal or
remediation of hazardous or toxic substances released on, above, under or in
such property. These laws often impose liability without regard to whether the
owner knew of, or was responsible for, the presence of these substances. The
costs of removal or remediation could be
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substantial and could negatively impact the availability of cash flow at the
property level for payments on our investments. Independent environmental
consultants have conducted Phase I environmental site assessments (which involve
inspection without soil sampling or groundwater analysis) with respect to all
but five of the properties as of the date of this prospectus supplement. Our
bond and bond related investments secured by these five properties represent
7.0% of our pro forma annual interest income from tax-exempt bonds and other
bond related investments. We cannot assure you that the environmental
assessments or our inspections have revealed all environmental liabilities and
problems relating to the properties or that nothing has occurred since the
completion of such assessments. Additionally, we cannot assure you that the
properties on which no environmental assessment was conducted do not contain
regulated toxic or hazardous substances. We intend that all investments acquired
in the future will have Phase I environmental site assessments.
A PORTION OF OUR INCOME IS SUBJECT TO THE RISKS OF INVESTING IN ASSISTED LIVING
FACILITIES AND/OR CONGREGATE CARE FACILITIES.
As of the date of this prospectus supplement, five of the properties
underlying our investments are assisted living or other elder care facilities.
We may acquire additional investments secured, directly or indirectly, by
assisted living and/or congregate care facilities. In addition to the risks
associated with investing in tax-exempt mortgage revenue bonds, investments that
are secured by assisted living or other congregate care facilities are subject
to risks related to the operation and regulation of the facility since under
many state laws these facilities may be subject to regulation as healthcare
providers. Assisted living and elder care facilities are subject to additional
regulatory oversight, licensing requirements, restrictions on evicting tenants
and zoning. In addition, the Internal Revenue Code and related regulations
establish restrictions on the operation of the facility to maintain its
tax-exempt status. Finally, the residents of assisted living or other congregate
care facilities are generally elderly, disabled or other similar individuals.
Many of these residents may have limited financial means or may participate in
federal or state assistance programs. To that extent, operators of the facility
may have difficulty increasing rates or revenues or may have difficulty
collecting payments in excess of the federal or state assistance that the
residents receive, which could depress the value of the facility and could
adversely impact the facility's ability to service its mortgage obligations.
A PORTION OF OUR INCOME IS SUBJECT TO THE RISKS OF INVESTING IN STUDENT HOUSING
FACILITIES.
Two of the properties underlying our tax-exempt mortgage revenue bonds were
student housing facilities as of September 30, 2002. We have acquired one
additional tax-exempt mortgage revenue bond secured by student housing
facilities since September 30, 2002. In addition to the risks associated with
investing in tax-exempt mortgage revenue bonds, investments that are secured by
student housing facilities are subject to risks associated with a primarily
student population and the facility's relationship with nearby educational
institutions. Moreover, recent Internal Revenue Service audit activity of bonds
financing certain student housing facilities could adversely affect the value of
our investments in the market.
A PORTION OF OUR INCOME IS SUBJECT TO THE RISKS OF INVESTING IN OTHER REAL
ESTATE INVESTMENTS.
We have acquired two and may acquire other investments related to large
scale real estate developments, including single-family housing developments.
The risks associated with these investments may be different from those
associated with investing in tax-exempt multifamily bonds, since many of these
investments are secured only by specific payments pledged by the local
government or local improvement district that issues the bonds. Some of these
investments are secured by assessment payments imposed on the residents of the
development. Other investments are secured by special taxes
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or tax increments imposed on the development. Periods of economic decline may
affect the ability of residents of the development to pay assessments or taxes.
Additionally, a decline in the property value of the development would reduce
any taxes that secure the bonds. Further, many of these developments, and
related local infrastructures, have not been constructed when the bonds are
issued, so that an economic decline could affect the construction schedule and
subsequent sale of the development to residents, in which case the value of
assessments or taxes paid or the value of the tax increment would be adversely
affected. Since these financings are generally not secured by a mortgage, a
decline in assessments or taxes increases the possibility of a loss in the event
of a default.
WE ARE NOT REQUIRED TO BE REGISTERED UNDER THE INVESTMENT COMPANY ACT AND WOULD
NOT BE ABLE TO CONDUCT OUR BUSINESS AS WE CURRENTLY CONDUCT IT IF WE BECAME
REQUIRED TO BE REGISTERED.
We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act of 1940. We are exempt from
registration because, directly and through majority owned subsidiaries, we are
primarily engaged in the business of purchasing or otherwise acquiring mortgages
and other liens on and interests in real estate. In order to qualify for this
exemption, according to current interpretation of the staff of the Securities
and Exchange Commission, we must maintain at least 55% of our assets directly in
mortgages and other liens on and interests in real estate, with the balance of
our assets in real estate-type interests. Unless an investment represents all of
the certificates issued with respect to a pool of mortgages, the investment may
be treated as separate from the underlying mortgage loans and, thus, may not be
considered as a qualifying interest for purposes of the 55% requirement.
Additionally, we must own "whole" bonds in order for our mortgage bonds to be
considered qualifying interests for purposes of the 55% requirement. Based on
advice of counsel, we believe that we currently meet the 55% test. However, our
residual interests and some of our tax-exempt bonds are not qualifying
interests. The requirement that we maintain 55% of our assets in qualifying
interests may inhibit our ability to acquire assets or to securitize additional
interests in the future. If we fail to qualify for exemption from registration
as an investment company, we would be unable to conduct our business as we
currently conduct it and it could result in penalties and additional operating
costs. Additionally, each of our subsidiaries must qualify individually for an
exemption from registration. Even if we maintain our current exemption, if one
or more of our subsidiaries becomes subject to registration, we would be unable
to conduct our business as we currently do.
RISKS ASSOCIATED WITH REDEMPTION OF OUR SECURITIES.
After our formation in 1996, we issued four kinds of securities. Our
operating agreement required us to redeem all of these securities, other than
our common shares, upon the occurrence of certain events relating to a pool of
bonds originally acquired by our predecessor. As some of these events occurred,
we redeemed portions of the securities. In January 2002, an affiliate of Merrill
Lynch acquired custodial receipts representing interests in five of the bonds
that had been owned by our predecessor. After Merrill Lynch acquired the
custodial receipts, we redeemed the remaining outstanding securities, other than
our common shares. There can be no assurance that the former holders of these
securities will not challenge the values we assigned to, or the redemption of,
their shares.
PENSION FUNDS MAY WITHDRAW THE FUNDS THEY INVEST IN OUR GROUP TRUST OR OUR REAL
ESTATE INVESTMENT TRUST.
A significant portion of the construction lending we originate through our
Midland subsidiary is facilitated by our access to the funds in a trust we
advise, named Midland Affordable Housing Group Trust. The trust is funded by a
group of pension fund investors who are under no obligation to continue their
investment in the trust. At September 30, 2002, three pension funds were
investors of
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$160.0 million in the trust. These same pension funds, along with one other,
have contributed $70.0 million to a real estate investment trust, named Midland
REIT, that we advise. These pension funds also pledged an additional $30 million
to the REIT. We would not be able to continue originating construction loans and
the REIT would not be able to continue operating if our existing pension fund
investors chose to liquidate their investments or cease funding the REIT and
their investments could not be replaced with investments from other eligible
investors. Both the trust and the REIT have lines of credit, which allow them to
borrow against the respective assets in which they invest. The inability of the
trust or the REIT to either pay financing costs related to their borrowings or
repay the borrowings when due could result in a significant reduction in our
ability to use them as sources of equity or debt financing.
CERTAIN OFFICERS AND DIRECTORS AND ENTITIES THEY CONTROL MAY HAVE CONFLICTS OF
INTEREST WITH US.
An affiliate of our Chairman provides property management functions for
some of the properties securing our investments. This affiliate receives
property management fees under management contracts. Our management believes
that these contracts provide for fees that are at or below market rates. These
management contracts will continue to be renewed only if they are providing
property management services at a price competitive with the prices that would
be charged by independent third parties for comparable goods and services in the
same geographic location and, in the case of any management contract with any
company managed or controlled by any member of our board of directors, the
contract is approved by a majority of our independent directors. Nonetheless,
conflicts may exist in determining whether to renew or terminate these
management contracts and in setting the fees payable under these contracts
because any change in the fees could affect the amounts available to make
payments under the related tax-exempt mortgage revenue bonds.
Mark K. Joseph, Chairman of our board of directors and Chief Executive
Officer controls, and Michael L. Falcone, our President, Chief Operating Officer
and a director owns, interests in entities that own some of the properties that
secure our investments. As a result, these entities could have interests that do
not coincide with, or even are adverse to, our interests. These entities could
choose to act in accordance with their own interests, which could adversely
affect us. Among the actions these entities could take might be selling a
mortgaged property, thereby causing a redemption event for our investment at a
time and under circumstances that could be disadvantageous to us.
Additionally, Mark K. Joseph, Michael L. Falcone and Gary A. Mentesana, our
Senior Vice President and Chief Capital Officer, serve on the board of directors
of MuniMae TE Bond Subsidiary. As directors of this subsidiary, they have
fiduciary responsibilities to holders of the subsidiary's preferred shares,
owned by third parties, and the subsidiary's common shares owned by us. There
may be instances where the interests of the subsidiary and its shareholders may
not coincide with, or may even be adverse to, the interests of the holders of
our common shares.
WE MAY BE UNABLE TO SECURITIZE ADDITIONAL ASSETS AND THEREFORE MAY NOT BE ABLE
TO MAKE ADDITIONAL INVESTMENTS.
Our ability to achieve our investment objectives depends largely on our
ability to successfully securitize our tax-exempt bonds, continue to operate our
existing securitization programs and manage our exposure to interest rate risks.
Some of our tax-exempt bonds may have credit or other characteristics which make
them unsuitable for securitization at a given time. Any failure to maintain
existing or consummate new securitization and interest rate swap transactions
could reduce our net interest income and have a material adverse effect on our
operations.
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FORWARD-LOOKING INFORMATION
This prospectus supplement and the accompanying prospectus contain
forward-looking statements. These forward-looking statements are not historical
facts, but rather are based on our current expectations, estimates and
projections about our industry, beliefs and assumptions. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. These
risks and uncertainties are described in "Risk Factors" and elsewhere in this
prospectus supplement and the accompanying prospectus. We caution you not to
place undue reliance on these forward-looking statements, which reflect our
management's view only as of the respective dates of this prospectus supplement
and the accompanying prospectus.
USE OF PROCEEDS
We estimate the net proceeds we will receive from this sale of common
shares, after payment of expenses related to the offering and underwriting
discounts and commissions, will be approximately $62.8 million. We intend to use
the net proceeds of this offering to fund future investment activity, to reduce
outstanding notes payable and for general corporate purposes. The notes that we
intend to repay with the proceeds from this offering bear interest at the prime
rate and mature on demand. If the overallotment option is exercised in full, we
estimate that the additional net proceeds we will receive, after payment of
expenses related to the offering and the underwriting discounts and commissions,
will be approximately $9.4 million. We intend to use the additional net proceeds
to fund future investment activity, to reduce outstanding notes payable and for
general corporate purposes.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the federal income tax
consequences that are material to a typical common shareholder of MuniMae who is
a United States citizen or resident and is based on the federal income tax law,
consisting of the Internal Revenue Code of 1986, as amended, Treasury
Regulations issued under the Code, administrative interpretations of the Code
and judicial interpretations of the Code. No attempt has been made to comment on
all federal income tax matters affecting MuniMae or MuniMae's common
shareholders. The discussion does not purport to deal with federal income or
other tax consequences applicable to an investment by certain categories of
common shareholders, including, without limitation, tax-exempt organizations,
dealers in securities, banks, insurance companies, Subchapter S corporations,
real estate investment trusts, and persons who are not citizens or residents of
the United States and is not tax advice. In the opinion of Clifford Chance US
LLP, our counsel for this offering, the following discussion reflects the
federal income tax considerations that are material to a typical common
shareholder. No ruling on the federal, state or local tax considerations
relevant to the issuance of the common shares, the debt characterization of the
tax-exempt mortgage revenue bonds, the tax-exempt character of interest on the
tax-exempt mortgage revenue bonds or other investments, or the classification of
MuniMae as a partnership has been, or will be, requested from the Internal
Revenue Service or from any other tax authority. Moreover, no assurance can be
given that the conclusions reached by Clifford Chance US LLP will be accepted by
the Internal Revenue Service or, if challenged by the Internal Revenue Service,
sustained in court. This summary is
S-24
based on current legal authority and there is no assurance that legislative or
administrative changes or court decisions may not occur that would significantly
modify the statements and opinions expressed herein.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS ABOUT THEIR FEDERAL,
STATE, LOCAL AND FOREIGN INCOME TAX CONSEQUENCES PRIOR TO PURCHASING THE COMMON
SHARES.
GENERAL
Partnership Status of MuniMae and the TEI Group. Based upon and subject to
our representations and discussions set forth below, MuniMae will be classified
as a partnership for federal income tax purposes. Under the Treasury Regulations
that are effective as of January 1, 1997, in the case of a "business entity"
that was in existence prior to January 1, 1997, the claimed classification of
the entity will be respected for all periods prior to January 1, 1997 if (i) the
entity had a reasonable basis for its claimed classification; (ii) the entity
and all members of the entity recognized the federal income tax consequences of
any change in the entity's classification within six months prior to January 1,
1997; and (iii) neither the entity nor any member was notified in writing on or
before May 8, 1996 that the classification of the entity was under examination
(in which case the entity's classification will be determined in the
examination). Based on our representations that the Internal Revenue Service did
not examine the classification of MuniMae or its predecessor as a partnership on
or before May 8, 1996, and based upon its review of MuniMae's certificate of
formation and operating agreement and the limited partnership agreement of
MuniMae's predecessor, Clifford Chance US LLP has advised us that in its opinion
MuniMae and its predecessor satisfy the foregoing requirements. For all periods
beginning on or after January 1, 1997, MuniMae has been and will be classified
as a partnership, unless it makes an election with the Internal Revenue Service
to be classified as other than a partnership. As of the date of this prospectus
supplement, MuniMae has not made, and has no plans to make, such an election.
However, taxation of MuniMae as a partnership further depends upon its
satisfying the "qualifying income" exception for publicly traded partnerships
described below.
Based upon its review of the organic documents of each member of the TEI
Group and certain representations made by us, Clifford Chance US LLP has advised
us that in its opinion each member of the TEI Group has been and will be
classified as a partnership or disregarded as an entity separate from its owner
if it has a single owner for United States federal income tax purposes, unless
it makes an election with the Internal Revenue Service to be classified as an
association. As of the date of this prospectus supplement, no member of the TEI
Group has made, and no such member has plans to make, such an election.
Publicly Traded Partnership Rules. MuniMae is a "publicly traded
partnership" because its common shares are traded on the New York Stock
Exchange. A publicly traded partnership is generally taxable as a corporation
unless 90% or more of its gross income is "qualifying income." Qualifying income
includes interest, dividends, real property rents, and gains from the sale or
disposition of real property or capital assets held for the production of
interest or dividends, and certain other items. Clifford Chance US LLP has
advised us that, although the issue is not free from doubt, tax-exempt interest
constitutes qualifying income for this purpose. In this regard, we have
represented to Clifford Chance US LLP that, in all relevant prior years of
MuniMae's, and its predecessor's, existence at least 90% of its gross income was
qualifying income and we have covenanted to conduct MuniMae's operations in a
manner such that it will continue to satisfy the qualifying income exception.
See "Risk Factors -- The value of the common shares and MuniMae's ability to
make distributions depend on the application of tax laws -- Publicly Traded
Partnership Status." In addition, under the relevant provisions of the federal
income tax law, income from notional principal contracts, such as interest rate
swaps, caps
S-25
and floors, should be included in qualifying income if the property, income or
cash flow that measures the amounts to which MuniMae is entitled under such
contracts would give rise to qualifying income if held or received directly by
MuniMae.
On the other hand, interest, including tax-exempt interest, will not be
treated as qualifying income if such interest is derived in the active conduct
of a lending, banking or similar business. MuniMae has represented and
covenanted that it acts as an investor with respect to its investments, and has
not and will not engage in the active conduct of a lending, banking or similar
financial business. If, for any reason, more than 10% of MuniMae's gross income
is attributable to non-qualifying income, including interest income derived from
the conduct of a lending, banking or similar financial business, MuniMae will be
taxable as a corporation rather than as a partnership for federal income tax
purposes. See "Risk Factors -- The value of the common shares and MuniMae's
ability to make distributions depend on the application of tax
laws -- Limitations on Business Activities." Based upon, and subject to, the
foregoing representations and covenants and based upon its review of MuniMae's
investments and operational activities as reported by MuniMae, Clifford Chance
US LLP has advised us that, although the issue is not free from doubt, each of
MuniMae and its predecessor has been and is properly treated a partnership for
federal income tax purposes.
If MuniMae becomes taxable as a corporation in any taxable year in the
future for federal income tax purposes, its income, losses and deductions and
other tax items will be reported only on its tax return rather than being passed
through to its shareholders. In addition, MuniMae will be required to pay
federal income tax at corporate rates on any portion of its net income that does
not constitute tax-exempt income. In this regard, a portion of its tax-exempt
income may be included in determining its alternative minimum tax liability. The
imposition of any tax at the corporate level will reduce the amount of cash
available to be distributed to its shareholders. In addition, distributions from
MuniMae to its shareholders will be ordinary dividend income taxable to the
shareholders as portfolio income to the extent the distributions do not exceed
MuniMae's earnings and profits, including tax-exempt net income, as well as any
taxable net income (reduced by any federal income tax thereon) that it may have.
MuniMae will not be able to deduct the payment of those dividends.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS RELATING TO MUNIMAE AND ITS
SHAREHOLDERS
Taxation of MuniMae and Its Shareholders. A partnership is not subject to
federal income tax. Assuming that MuniMae is treated as a partnership for
federal income tax purposes, it will not be subject to federal income tax.
Instead, each shareholder is required to include on the shareholder's income tax
return the shareholder's distributive share of MuniMae's income, gain, loss,
deduction and other tax items, regardless of whether any money is, in fact,
distributed to such shareholder. Thus, a shareholder may, for example, be
required to report income, without the current receipt of cash, if MuniMae does
not make cash distributions while generating taxable income from its operations.
Consequently, a shareholder's tax liability with respect to his or her share of
MuniMae's taxable income may exceed the cash actually distributed in a given
taxable year.
Although MuniMae does not pay federal income tax on its income, it must
file a federal information tax return on an Internal Revenue Service Form 1065
with respect to its income, gain, loss, deduction and other tax items arising
from its operations. In addition, MuniMae must provide each shareholder with
information as to such shareholder's distributive share of its income, gain,
loss, deduction and other tax items on a Schedule K-1 to the Internal Revenue
Service Form 1065 after the close of each of its fiscal years. In preparing such
information, MuniMae will utilize various accounting and reporting conventions,
some of which are discussed in this prospectus supplement, to determine each
shareholder's allocable share of its income, gain, loss, deduction and other tax
items.
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MuniMae's allocation provisions will be recognized for federal income tax
purposes only if they meet certain requirements under the federal income tax
law. There is no assurance that the use of such conventions will result in
allocations that conform to such requirements. In addition, there is no
assurance that the Internal Revenue Service will not challenge the use of such
allocations and conventions. Any such challenge could result in substantial
expenses to MuniMae and its shareholders, as a result of contesting such
challenge, as well as an increase in tax liability to shareholders as a result
of adjustments to their allocable share of MuniMae's income, gain, loss,
deduction and other tax items. See "-- Tax Returns, Audits, Interest and
Penalties."
Tax-Exempt Income. MuniMae expects that a significant portion of its
revenues will consist of tax-exempt income. There are risks that certain amounts
of income that MuniMae will report as tax-exempt may not qualify for such
treatment. See "Risk Factors -- The value of the common shares and MuniMae's
ability to make distributions depend on the application of tax laws."
Allocation of Income and Loss. Article 4 of MuniMae's operating agreement
provides rules for allocating its taxable and tax-exempt income, gain, loss,
deductions (including non-deductible expenses) and other tax items. MuniMae's
allocation provisions will be respected for federal income tax purposes only if
they are considered to have "substantial economic effect" or are in accordance
with the partners' "interest in the partnership." If any allocation of a tax
item fails to satisfy either of these requirements, the item will be allocated
among the shareholders based on the IRS's determination of their respective
interests in MuniMae, taking into account on the basis of all of the relevant
facts and circumstances. Such a determination could result in the income, gains,
losses, deductions, or other tax items allocated under the operating agreement
being reallocated among the shareholders differently from the original
allocation. Such a reallocation, however, would not alter the distribution of
cash flow under MuniMae's operating agreement.
MuniMae's operating agreement permits shareholders' capital accounts to be
increased or decreased to reflect the revaluations of assets, at fair market
value, on MuniMae's books in connection with a contribution from, or
distribution to, any shareholder of money or other property. In addition,
shareholders' capital accounts are restated to reflect the issuance of
additional common shares at the time of such issuance of additional common
shares, including the common shares issued pursuant to this offering. In
addition, the relevant provisions of the federal income tax law and MuniMae's
operating agreement require that MuniMae allocate tax items so as to take into
account any variations between MuniMae's tax basis in MuniMae's assets and the
fair market value of MuniMae's assets created by such a reevaluation. These
rules are complex and there is no assurance that MuniMae will be able to comply
with them fully.
Pursuant to an election made by MuniMae, when common shares are sold or
exchanged by a shareholder, MuniMae is required to account for the variation
between the basis of the transferee shareholder in the shareholder's common
shares and the transferee shareholder's share of MuniMae's tax basis in
MuniMae's assets, less the transferee's share of MuniMae's debt, allocable to
the shareholder's common shares. The Internal Revenue Service has not issued
guidance as to how a partnership with publicly traded shares can comply with
these rules. There is no assurance that the Internal Revenue Service will agree
with MuniMae's methods of allocating income, gain, loss, deduction and other tax
items, including tax-exempt interest and nondeductible expenses. There is also
no assurance that the Internal Revenue Service will agree with MuniMae's
determination and allocation of adjustments attributable to the differences
between the shareholders' purchase price of common shares and their shares of
MuniMae's tax basis in MuniMae's assets and the allocation of MuniMae's
expenses. Because, as a publicly traded partnership, MuniMae may be unable to
comply with the literal requirements of the federal income tax law and, because
certain of MuniMae's operating agreement's allocations may not
S-27
have substantial economic effect, counsel is unable to express an opinion on
these issues. However, MuniMae does not expect that any reasonable adjustments
which may be required by the Internal Revenue Service would substantially
increase the share of MuniMae's taxable income allocable to shareholders.
MuniMae has asked the Internal Revenue Service for permission to revoke its
basis adjustment election beginning with the 2003 fiscal year. See "-- Basis
Adjustment Election" below.
Shareholder's Basis in Common Shares. A shareholder's adjusted basis in
common shares is relevant in determining the gain or loss on the sale or other
disposition of common shares and the tax consequences of a distribution from
MuniMae. See "-- Treatment of Cash Distributions to Shareholders." In addition,
a shareholder is entitled to deduct on the shareholder's income tax return,
subject to the limitations discussed below, the shareholder's distributive share
of MuniMae's net loss, if any, to the extent of such shareholder's adjusted
basis in the shareholder's common shares.
A shareholder's initial basis in newly issued common shares will be the
shareholder's purchase price for the common shares, which will subsequently be
increased by the shareholder's share of items of MuniMae's income, including
tax-exempt interest, and gain, and reduced, but not below zero, by (a) the
shareholder's share of items of MuniMae's loss and deduction, including any
nondeductible expenses and (b) any cash distributions received by such
shareholder from MuniMae.
Treatment of Cash Distributions to Shareholders. Cash distributions made
to shareholders will generally be treated as a non-taxable return of capital and
will not generally increase or decrease such shareholders' share of taxable
income or loss from MuniMae. A return of capital generally does not result in
any recognition of gain or loss for federal income tax purposes but reduces a
shareholder's adjusted basis in the shareholder's common shares. Distributions
of cash in excess of a shareholder's adjusted basis in the shareholder's common
shares immediately prior thereto will result in the recognition of gain to the
extent of such excess.
Sale of Common Shares. Gain or loss will be recognized by a shareholder
upon the sale of the common shares acquired in an amount equal to the difference
between the amount realized on the sale and the tax basis of the shareholder
allocable to the common shares. Except to the extent attributable to MuniMae's
unrealized receivables or inventory, which are not expected to be material, such
gain or loss will be a capital gain or loss if the common shares are held as
capital assets and will be a long term capital gain or loss if the shareholder's
holding period in the common shares is more than one year. In general, an
individual's capital gains are taxed at a rate of 20%, and 10% for individuals
in the 15% tax bracket. Long term capital gains are taxed at a long term rate of
18%, and 8% for individuals in the 15% tax bracket, if the shareholder acquires
the common shares on or after January 1, 2002 and holds them for more than five
years.
The Internal Revenue Service takes the position that a partner has a single
aggregate basis in all of the partner's partnership interests and that, to
determine gain or loss upon a sale of a part of such partnership interests, the
portion of the partner's basis allocated to the interests being sold (if the
partner's share of all partnership liabilities does not exceed the adjusted
basis of such partner's entire interest) equals the partner's share of
partnership liabilities discharged on the sale plus the partner's aggregate tax
basis, excluding basis attributable to partnership liabilities, multiplied by
the ratio of the fair market value of the interests sold to the fair market
value of all of the partner's partnership interests. This position may produce
unexpected results if applied to a shareholder who purchased common shares at
more than one price.
Limitation on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest" expense is generally limited to the amount of
such taxpayer's "net investment income." Investment interest expense includes
(i) interest on indebtedness incurred or continued to purchase or carry property
held for investment and that is not part of a passive activity, (ii) a
partnership's interest
S-28
expense attributed to portfolio income under the rules governing passive
activities, and (iii) the portion of interest expense incurred or continued to
purchase or carry an interest in a passive activity, such as a shareholder's
interest in MuniMae, to the extent attributed to portfolio income under the
passive loss rules. Net investment income includes gross income from property
held for investment, gain attributable to the disposition of property held for
investment, and amounts treated as gross portfolio income pursuant to the
passive loss rules less deductible expenses, other than interest, directly
connected with the production of investment income.
A shareholder would treat as investment interest the shareholder's
allocable portion of MuniMae's total interest expense for federal income tax
purposes, if any, or of any margin account or other interest expense incurred to
purchase or carry a common share, that is attributable to MuniMae's gross
portfolio income less deductible expenses directly connected with such portfolio
income. MuniMae currently does not expect to incur any significant amount of
indebtedness as part of its investment strategy. However, there can be no
assurance that MuniMae will not change or otherwise modify its strategy and
incur significant amounts of indebtedness in the future. The portion of a
shareholder's allocable share of MuniMae's interest expense, or of any margin
account or other interest expense incurred to purchase or carry a common share,
that is attributable to MuniMae's passive income is subject to the passive loss
limitations described under "-- Limitations on Deductibility of Losses" below.
Limitations on Deductibility of Losses. It is not anticipated that MuniMae
will generate any tax losses. A corporate shareholder generally will be entitled
to deduct its distributive share of any of MuniMae's losses to the extent of the
shareholder's tax basis of its common shares at the end of the year in which
such losses occur. However, shareholders who are individuals, trusts, estates,
personal service companies and certain closely held C corporations may be
subject to limitations on deducting losses of MuniMae.
Deductibility of Interest Connected with Tax-Exempt Income. Federal income
tax law generally disallows any deduction for interest paid by a taxpayer on
indebtedness incurred or continued for the purpose of purchasing or carrying a
tax-exempt obligation. A purpose to carry tax-exempt obligations will be
inferred whenever a taxpayer owns tax-exempt obligations and has outstanding
indebtedness which is neither directly connected with personal expenditures nor
incurred in connection with the active conduct of a trade or business. The
Internal Revenue Service may take the position that a shareholder's allocable
portion of any interest that MuniMae paid on its borrowings and/or any interest
paid by the shareholder on indebtedness incurred to purchase an interest in
MuniMae should be viewed in whole or in part as incurred to enable such
shareholder to continue carrying such tax-exempt obligations and, therefore,
that the deduction of any such interest by such shareholder should be disallowed
in whole or in part. MuniMae does not expect to incur any significant amount of
indebtedness to purchase or carry tax-exempt investments. However, a risk exists
that the Internal Revenue Service may take the position that short term or
longer term interests in the securitizations trusts are debt. MuniMae has
received opinions of counsel to the effect that such interests are not debt for
federal income tax purposes. However, if the Internal Revenue Service takes the
position that the short term or longer term interests are debt and is successful
in maintaining this position in a court, interest paid to the holders of such
interests will not be deductible to MuniMae, as the holder of the residual
interest.
Alternative Minimum Tax. Unless grandfathered under the applicable
provisions of the federal income tax law, interest on the tax-exempt mortgage
revenue bonds generally is an item of tax preference for purposes of the
alternative minimum tax. To the extent interest on any of the tax-exempt
mortgage revenue bonds MuniMae owns is such an item of tax preference, a portion
of the interest income allocable to common shareholders also will be a tax
preference item.
S-29
Other Federal Income Tax Considerations. Federal income tax law provides
certain provisions that could result in other tax consequences as a result of an
ownership of common shares or the inclusion in certain computations including,
without limitation, those related to the corporate alternative minimum tax of
interest that is excluded from gross income.
Ownership of tax-exempt obligations may result in collateral tax
consequences to certain taxpayers, including, without limitation, financial
institutions, property and casualty insurance companies, certain foreign
corporations doing business in the United States, certain S corporations with
excess passive income, individual recipients of social security or railroad
retirement benefits and individuals otherwise eligible for the earned income
credit. Prospective purchasers of common shares should consult a tax adviser as
to the applicability of any such collateral consequences.
MuniMae's Expenses. MuniMae has incurred or will incur various expenses in
connection with its ongoing administration and operation. Payments for services
generally are deductible if the payments are ordinary and necessary expenses,
are reasonable in amount and are for services performed during the taxable year
in which paid or accrued. Expenses which are allocable to tax-exempt interest
income, however, are non-deductible to individual shareholders. We have adopted
accounting policies for allocating expenses between our operating segment and
our investment segment. There is no assurance that such policies will not be
successfully challenged by the Internal Revenue Service.
To the extent MuniMae's expenses are not disallowed as described in the
previous paragraph, payments for services related to the acquisition of an asset
having a useful life in excess of one year, such as brokerage fees, generally
must be capitalized into the cost basis of the acquired property. The Internal
Revenue Service may not agree with MuniMae's determinations as to the
deductibility of fees and expenses and may require that certain expenses be
capitalized and amortized or depreciated over a period of years. If all or a
portion of such deductions are disallowed on the basis that some of the
foregoing expenses are non-deductible syndication fees or otherwise, MuniMae's
taxable income will be increased, or its losses will be reduced.
An individual's miscellaneous itemized deductions, including the investor's
investment expenses, are deductible only to the extent they exceed 2% of his
adjusted gross income. In addition, otherwise allowable itemized deductions will
be reduced, but not by more than 80% of the amount thereof, by an amount equal
to 3% of the individual's adjusted gross income over a statutorily defined
threshold. However, MuniMae can elect to be treated as an "electing large
partnership" under the relevant provisions of the federal income tax law, and,
if it does, the limitation on miscellaneous itemized deductions will apply at
MuniMae's level. In such case, instead of the 2% floor, 70% of MuniMae's total
miscellaneous itemized deductions will be disallowed.
Offering Expenses. Expenses of issuing and marketing MuniMae's common
shares, generally called syndication expenses, are not allowable deductions to
MuniMae or its shareholders. Syndication expenses are defined as expenditures
connected with the issuing and marketing of interests in partnerships. Fees
payable to dealer managers and soliciting dealers, registration fees, printing
costs, selling and promotional material costs and legal fees for securities and
tax advice pertaining to registration of the common shares with the Securities
Exchange Commission are syndication expenses and, therefore, do not qualify for
amortization.
Basis Adjustment Election. MuniMae has elected, under the relevant
provisions of the federal income tax law, to adjust the basis of its partnership
property on the transfer of its common shares, by the difference between the
transferee shareholder's basis in the shareholder's shares and the transferee
shareholder's allocable share of the basis of all of its property. The increase
or decrease affects the basis of MuniMae's property only with respect to the
transferee shareholder's shares. The procedure for allocating the basis
adjustment is complex, and there is no assurance that the Internal Revenue
Service would not challenge the
S-30
allocations of the basis step-up among MuniMae's assets. MuniMae has requested
that the Internal Revenue Service revoke the basis adjustment election for its
taxable years beginning with the taxable year ending December 31, 2003. As of
the date of this prospectus supplement, MuniMae has not received the Internal
Revenue Service's approval of the revocation. If approval is received, MuniMae
will no longer be making the adjustments discussed above each time there is a
transfer of MuniMae shares. Therefore, it is likely that, among other things, a
transferee shareholder's basis in the shares and the transferee's allocable
share of MuniMae's basis in its properties will differ, resulting in potential
timing mismatches with respect to allocations attributable to such properties,
which mismatches would only be eliminated when the shareholder disposes of its
common shares. Such mismatches may tend to accelerate a shareholder's
recognition of gain attributable to dispositions by MuniMae of its properties
when compared with the timing of gain recognition that would occur if the
election were still in place.
Backup Withholding. Distributions to shareholders whose common shares are
held on their behalf by a "broker" may constitute "reportable payments" under
the federal income tax rules regarding "backup withholding." Backup withholding,
however, would apply only if the shareholder (i) failed to furnish his or her
Social Security number or other taxpayer identification number of the person
subject to the backup withholding requirement (e.g., the "broker"), (ii)
furnished an incorrect Social Security number or taxpayer identification number
or (iii) the Internal Revenue Service otherwise notifies MuniMae that the
shareholder is subject to backup withholding. If "backup withholding" were
applicable to a shareholder, MuniMae would be required to withhold a portion of
each distribution to such shareholder and to pay such amount to the Internal
Revenue Service on behalf of such shareholder. Foreign shareholders are subject
to other requirements. Backup withholding tax is not an additional tax. Any
amounts withheld from a payment under the backup withholding rules are allowed
as a refund or a credit against the shareholder's federal income tax liability,
provided that the required information is furnished to the Internal Revenue
Service.
Issuance of Additional Common Shares. MuniMae is likely to issue new
common shares to additional investors to acquire additional investments. On any
issuance of additional common shares, the capital accounts of existing
shareholders will be adjusted to reflect a revaluation of MuniMae's property,
based on their then fair value, net of liabilities, to which they are then
subject.
Tax Returns, Audits, Interest and Penalties. MuniMae will supply a
Schedule K-l to Internal Revenue Service Form 1065 to each shareholder of record
as of the last day of each month of each calendar year. MuniMae is not obligated
to provide tax information to persons who are not shareholders of record.
Any shareholder who sells or exchanges a common share will be required to
notify MuniMae of such transaction in writing within 30 days of the transaction
or, if earlier, by January 15 of the calendar year after the year in which the
transaction occurs. The notification is required to include (i) the names and
addresses of the transferor and the transferee; (ii) the taxpayer identification
number of the transferor and, if known, of the transferee; and (iii) the date of
the sale or exchange. A shareholder will not be required to notify MuniMae of a
sale or exchange of a common share if an information return is required to be
filed by a broker with respect to such sale or exchange. Any transferor who
fails to notify MuniMae of a sale or exchange may be subject to a $50 penalty
levied by the Internal Revenue Service for each such failure. MuniMae will treat
any transferor shareholder who provides all of the information requested of the
transferor on the depositary receipt as having satisfied this notification
requirement.
In addition, MuniMae must file an information return notifying the Internal
Revenue Service of any sale or exchange of a common share in which any portion
of the consideration received by the transferor is attributable to certain
properties owned by MuniMae that would result in ordinary income to MuniMae upon
sale and report the name and address of the transferee and the transferor who
were
S-31
parties to such transaction, along with all other information required by
applicable provisions of the federal income tax law, including the fair market
value of the selling shareholder's allocable share of unrealized receivables,
and/or depreciation recapture, if any. MuniMae will not be required to file such
return until it has been notified of the sale or exchange. If MuniMae does not
know the identity of the beneficial owner of the common share, the record holder
of such common share may be treated as the transferor or transferee, as the case
may be. If MuniMae fails to file such a return, MuniMae may be subject to a
penalty of $50 levied by the Internal Revenue Service for each such failure up
to an annual maximum of $250,000, with no limit in the case of intentional
disregard of the filing requirement. MuniMae is also required to provide this
information to the transferor and the transferee. If MuniMae fails to furnish
any such information, MuniMae may be subject to a penalty of $50 levied by the
Internal Revenue Service for each such failure up to an annual maximum of
$250,000. However, MuniMae will not be required to file a return upon the sale
or exchange of a common share with respect to which an information return is
required to be filed by a broker.
To the extent MuniMae's tax returns are examined by the Internal Revenue
Service, the tax treatment of MuniMae's income, gain, loss or deductions or
credits will be determined at MuniMae's level in a unified proceeding, rather
than separate proceedings for each holder of common shares. MuniMae may elect to
be treated as an electing large partnership under the federal income tax law. If
MuniMae makes such election, only MuniMae, and not its shareholders, will
receive notice of Internal Revenue Service adjustments to MuniMae's tax return.
Only MuniMae will have the right to appeal the adjustments. Under the electing
large partnership provisions, MuniMae may elect to either (i) combine the
adjustments with similar items for the current tax year and pass through the
adjustment to shareholders for such year or (ii) pay a tax on any adjustment at
the highest individual or corporate rate, plus interest and penalties.
In general terms, if MuniMae does not elect to be treated as an electing
large partnership, MuniMae will still be subject to a unified partnership
proceeding, but shareholders owning at least a 1% profits interest in MuniMae
whose names and addresses have been furnished to the Internal Revenue Service
will receive a notice of the commencement of an audit of MuniMae as well as a
notice of the final partnership administrative adjustment. Also, if MuniMae does
not elect electing large partnership status, the tax matters partner, which is
also the Special Shareholder under MuniMae's operating agreement, would not be
able to settle on behalf of, and bind, shareholders with less than a 1% profits
interest under certain circumstances.
State, Local and Foreign Income Taxes. In addition to the federal income
tax consequences described above, shareholders should consider potential state,
local and foreign tax consequences of an investment in MuniMae and are urged to
consult their individual tax advisors in this regard. The rules of some states
and localities for computing and/or reporting taxable income may differ from the
federal rules. Interest income that is tax-exempt for federal purposes may be
taxable by some states and localities.
Under the tax laws of certain states, MuniMae may be subject to state
income or franchise tax or other taxes that may be applicable to it. Such taxes
will decrease the amount of income available to shareholders. Shareholders are
advised to consult with their tax advisors concerning the tax treatment of
MuniMae, and its effect on the shareholders, under the tax laws of the states
applicable to MuniMae and the shareholders.
Both the substantive features and the filing requirements of state income
taxation of shareholders will vary according to factors which include, but are
not limited to, the following: (i) the status of the shareholder; (ii) whether
the state imposes personal or corporate income taxation or instead imposes a
form of franchise, unincorporated business or occupational taxation; (iii)
whether the state will allow
S-32
credits or exemptions for income taxes to which a shareholder is subject in the
shareholder's state or other jurisdiction of residence; (iv) the level of
personal exemptions or credits allowed by the state and whether those exemptions
or credits are required to be prorated based on the ratio of income from sources
in the taxing state to total income; and (v) whether the applicable tax rate
structure is applied on the basis of income from sources in the taxing
jurisdiction or on the basis of total income of a nonresident taxpayer. MuniMae
may be required to withhold state taxes from distributions to shareholders in
some instances.
THE SUMMARY OF TAX CONSEQUENCES SET FORTH ABOVE IS FOR GENERAL INFORMATION
ONLY AND DOES NOT ADDRESS THE CIRCUMSTANCE OF ANY PARTICULAR SHAREHOLDER.
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON SHARES
INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
S-33
UNDERWRITING
We intend to offer the shares through the underwriters named below. RBC
Dain Rauscher Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS
Warburg LLC, Legg Mason Wood Walker, Incorporated and Wachovia Securities, Inc.
are acting as representatives of the underwriters. Subject to the terms and
conditions described in a purchase agreement among us and the underwriters, we
have agreed to sell to the underwriters, and the underwriters severally have
agreed to purchase from us, the number of shares listed opposite their names
below.
NUMBER OF
UNDERWRITER SHARES
----------- ---------
RBC Dain Rauscher Inc....................................... 1,040,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 520,000
UBS Warburg LLC............................................. 520,000
Legg Mason Wood Walker, Incorporated........................ 260,000
Wachovia Securities, Inc. .................................. 260,000
A.G. Edwards & Sons, Inc. .................................. 100,000
McDonald Investments Inc., a KeyCorp Company................ 100,000
---------
Total..................................................... 2,800,000
=========
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
non-defaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters and their controlling persons
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officers' certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares to the public at the public offering price on the cover page
of this prospectus supplement and to dealers at that price less a concession not
in excess of $0.71 per share. The underwriters may allow, and the dealers may
reallow, a discount not in excess of $0.235 per share to other dealers. After
the offering, the public offering price, concession, discount and other selling
terms may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before our expenses. The information assumes either no exercise or
full exercise by the underwriters of their over-allotment option to purchase
additional shares.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price........................... $23.60 $66,080,000 $75,992,000
Underwriting discount........................... $ 1.18 $ 3,304,000 $ 3,799,600
Proceeds, before expenses, to us................ $22.42 $62,776,000 $72,192,400
S-34
The expenses of the offering, not including the underwriting discount, are
estimated at $450,000.
OVERALLOTMENT OPTION
We have granted an option to the underwriters to purchase up to 420,000
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise this option for 30 days from the date of this
prospectus supplement solely to cover any overallotments. If the underwriters
exercise this option, each will be obligated, subject to conditions contained in
the underwriting agreement, to purchase a number of additional shares
proportionate to that underwriter's initial amount reflected in the above table.
NO SALES OF SIMILAR SECURITIES
We have agreed, with exceptions, not to sell or transfer any common shares
for 90 days after the date of this prospectus supplement without first obtaining
the written consent of RBC Dain Rauscher Inc. All of our executive officers and
directors have agreed, with exceptions, not to sell or transfer any common
shares for 45 days after the date of this prospectus supplement without first
obtaining the written consent of RBC Dain Rauscher Inc. Specifically, we and
these other individuals have agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any common shares,
- sell any option or contract to purchase any common shares,
- purchase any option or contract to sell any common shares,
- grant any option, right or warrant for the sale of any common shares,
- lend or otherwise dispose of or transfer any common shares,
- request or demand that we file a registration statement related to the
common shares, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common shares whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common shares and to securities
convertible into or exchangeable or exercisable for common shares. It also
applies to common shares owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
NEW YORK STOCK EXCHANGE LISTING
The shares are listed on the New York Stock Exchange under the symbol
"MMA."
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the shares is completed, Securities and Exchange
Commission rules may limit underwriters and selling group members from bidding
for and purchasing our common shares. However, the representatives may engage in
transactions that stabilize the price of our common shares, such as bids or
purchases to peg, fix or maintain that price.
If the underwriters create a short position in our common shares in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus supplement, the representatives may reduce that
short position by purchasing shares in the open market. The
S-35
representatives may also elect to reduce any short position by exercising all or
part of the overallotment option described above. Purchases of our common shares
to stabilize its price or to reduce a short position may cause the price of our
common shares to be higher than it might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common shares. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
OTHER RELATIONSHIPS
We have entered into various securitization, sale, guarantee, residual
interest and interest rate swap transactions with Merrill Lynch on terms
generally available in the marketplace. We have also entered into interest rate
swap transactions with an affiliate of Wachovia Securities, Inc. on terms
generally available in the marketplace.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings with us.
They have received and will in the future receive customary fees and commission
for these transactions.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Clifford Chance US LLP,
New York, New York, and Gallagher, Evelius & Jones, LLP, Baltimore, Maryland,
and for the underwriters by Piper Rudnick LLP, Baltimore, Maryland.
EXPERTS
The financial statements incorporated in this prospectus supplement by
reference to our Annual Report on Form 10-K for the year ended December 31,
2001, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on authority as an
expert in auditing and accounting.
S-36
PROSPECTUS
----------------
$349,304,375
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
COMMON SHARES, PREFERRED SHARES AND WARRANTS
------------------------------
Municipal Mortgage and Equity, L.L.C. (the "Company") may from time to time
offer, together or separately, in one or more series: (i) growth shares of
limited liability company interest ("Common Shares"); (ii) preferred shares of
limited liability company interest ("Preferred Shares"); and (iii) warrants or
other rights to purchase Common Shares, Preferred Shares, or any combination
thereof, as may be designated by the Company at the time of the offering
("Warrants"), with an aggregate public offering price of up to $349,304,375, in
amounts, at prices and on terms to be determined at the time of offering. The
Common Shares, Preferred Shares and Warrants (collectively, the "Securities")
may be offered, separately or together, in separate series and in amounts, at
prices and on terms to be set forth in one or more supplements to this
Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable, in the case of Common Shares, the number of
shares and the terms of the offering and sale; (ii) in the case of Preferred
Shares, the number of shares, the specific title, the aggregate amount, any
distribution (including the method of calculating payment of distributions),
seniority, liquidation, redemption, voting and other rights, any terms for any
conversion or exchange into other Securities, the initial public offering price
and any other terms; and (iii) in the case of Warrants, the designation and
number, the exercise price and any other terms in connection with the offering,
sale and exercise of the Warrants. The Common Shares are listed on the New York
Stock Exchange, Inc. ("NYSE") under the symbol "MMA."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a national securities exchange of, the
Securities covered by such Prospectus Supplement, not contained in this
Prospectus.
The Securities may be offered directly to one or more purchasers, through agents
designated from time to time by the Company or to or through underwriters or
dealers. If any agents or underwriters are involved in the sale of any of the
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in an accompanying Prospectus
Supplement. The net proceeds to the Company from such sale will also be set
forth in an accompanying Prospectus Supplement. No Securities may be sold by the
Company without delivery of a Prospectus Supplement describing the method and
terms of the offering of such series of Securities. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE SECURITIES.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus is June 30, 1998.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (of which this Prospectus is a part) on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities in respect of which this Prospectus is being
delivered. This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission, and in the exhibits thereto.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Securities, reference is hereby made to the
Registration Statement and such exhibits and schedules, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices listed below.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, as well as such reports, proxy
statements and other information filed with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material also can be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates.
The Company files its reports, proxy statements and other information with the
Commission electronically. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at http://www.sec.gov.
The Common Shares are listed on the NYSE, and reports, proxy statements and
other information concerning the Company can be inspected and copied at the
offices of the New York Stock Exchange at 20 Broad Street, New York, New York
10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company under the Exchange
Act with the Commission and are incorporated by reference in this Prospectus:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1997, as amended by the Company's Form 10-K/A filed on May 29,
1998.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, as amended by the Company's Form 10-Q/A filed on May 29,
1998.
3. The Company's Current Report on Form 8-K filed January 23, 1998.
4. The Company's Current Report on Form 8-K filed January 29, 1998.
5. The Company's Prospectus/Consent Solicitation Statement included in its
Registration Statement on Form S-4 (File No. 33-99088), as declared
effective by the Commission on May 29, 1996, as it relates to the
description of the Company's Common Shares contained under the caption
"Description of Shares" and incorporated by reference into Item 1 of
2
Form 8-A filed with the Commission on July 25, 1996, pursuant to 12(b)
of the Exchange Act, including all amendments and reports updating such
description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of filing hereof and prior to the date
on which the Company ceases offering and selling Securities pursuant to this
Prospectus shall be deemed to be incorporated by reference in this Prospectus
and to be a part hereof from the dates of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed modified or superseded for the purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus and the accompanying Prospectus
Supplement are delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated by reference herein by
reference, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference into the Registration Statement to which
this Prospectus relates or into such other documents. Requests for documents
should be directed to Municipal Mortgage and Equity, L.L.C., 218 North Charles
Street, Suite 500, Baltimore, Maryland 21201, Attention: Derek Cole, (410)
962-8044.
THE COMPANY
The Company is a self-advised and self-managed Delaware limited liability
company which, together with its predecessor, has since 1986 been in the
business of originating, investing in and servicing tax-exempt instruments
backed by multifamily housing developments. The Company's investments
principally represent interests in mortgage bonds which have been issued by
state and local governments or their agencies or authorities to finance
multifamily housing developments and other bond related investments (the
"Mortgage Bonds"). The Company owns a portfolio of investments (the
"Investments") secured directly or indirectly by properties (the "Properties")
located in a variety of states. Certain of the Investments are participating
Mortgage Bonds where the amount of the interest payments made to the Company is
based, in part, on property performance, providing the Company the opportunity
to realize greater returns if and to the extent property performance improves.
As a limited liability company, the Company combines the limited liability,
governance and management characteristics of a corporation with outside
directors together with the pass-through income features of a partnership. As a
result, the tax-exempt income derived from the investments may be passed through
to shareholders. Approximately 85% of the Company's interest income in 1997 was
tax-exempt.
The principal executive offices of the Company are located at 218 North
Charles Street, Suite 500, Baltimore, Maryland 21201, and its telephone number
at that location is (410) 962-8044.
3
RISK FACTORS
RISKS OF INVESTING IN MORTGAGE BONDS SECURED BY MULTIFAMILY APARTMENT PROPERTIES
One of the major risks of investing in Mortgage Bonds secured by
multifamily residential properties is the possibility that the property securing
a Mortgage Bond (a "Mortgaged Property") will not generate income sufficient to
meet its operating expenses, including debt service on the related Mortgage
Bonds, or that the net proceeds of a sale of such Mortgaged Property will not be
sufficient to repay the related Mortgage Bonds. In that event, delays in
payments on the Mortgage Bonds and/or losses of principal on the Mortgage Bonds
may occur. The factors affecting the operations of each Mortgaged Property and
its potential for appreciation in value include general and local economic or
market conditions, changes in neighborhood characteristics, changes in real
estate taxes, insurance premiums, cost of utilities, changes in the amount of
operating, administrative and maintenance costs relating to the Mortgaged
Property, rental values, rent strikes, collection difficulties, governmental
rules and fiscal policies, vandalism, uninsured losses and competition from
existing and future housing complexes in the vicinity of the Mortgaged
Properties. A significant portion of the Mortgaged Properties have failed in the
past to meet required debt service under the Mortgage Bonds, and a number of the
Mortgage Bonds have been refunded on terms which defer, and in certain
circumstances reduce, the amounts payable thereunder. There can be no assurance
that such defaults and refundings will not occur in the future.
INVESTMENTS IN JUNIOR MORTGAGES
When the Company invests in mortgages (or related bonds) which are junior
to senior mortgages on a particular property, the Company is subject to the
risks of such investment, which include the risks that borrowers may not be able
to make debt service payments on both the senior and the junior mortgages, that
the value of the mortgaged property may be less than the amounts owed under both
mortgages and that debt service collected on the junior mortgages may be lower
than the Company's cost of funds. If any of the above occurred, the Company's
ability to make expected distributions to the Company's shareholders could be
adversely affected.
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by declining property values or
performance, particularly declines in the value or performance of multifamily
properties. Any material decline in property values increases the loan-to-value
ratios of Mortgage Bonds previously issued, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of default. With
respect to a significant portion of the Investments, a decline in performance of
the related underlying multifamily properties will directly affect the Company's
interest income. Significant declines in the late 1980s and early 1990s in the
value of the underlying Properties and in cash flow on the Properties led to
defaults on most of the bonds held by the Company's predecessor and to
restructuring, refinancing or extension of many of such investments. There can
be no assurance that similar problems may not occur in the future. See "-- Risks
of Investing in Mortgage Bonds Secured by Multifamily Apartment Properties."
Each Mortgage Bond owned by the Company is secured by an assignment to the
Company of the related mortgage loan, which in turn is secured by a mortgage on
the underlying property and assignment of rents. Although such Mortgage Bonds
are issued by state or local governments or their agencies or authorities, the
Mortgage Bonds are not general obligations of any state or local government, no
government is liable under the Mortgage Bonds, nor is the taxing power of any
government pledged to the payment of principal or interest under the Mortgage
Bonds. In addition, the underlying mortgage loans are nonrecourse, which means
that the owners of the underlying Properties, which are also the borrowers under
the mortgage loans, are not liable for the payment of principal and interest
under the loans except to the extent of cash flow from, and value of, the
Properties. Accordingly, the sole source
4
of funds for payment of principal and interest under the Mortgage Bonds is the
revenue derived from operation of the Properties and amounts derived from the
sale, refinancing or other disposition of such Properties.
RISKS OF SECURITIZATIONS
The Company seeks to enhance its overall return on its Investments and to
purchase additional investments through the securitization of part of its
portfolio of Mortgage Bonds. In a typical securitization, Mortgage Bonds are
sold and deposited into a trust. Short term floating rate interests in the
trust, which have first priority on the cash flow from the Mortgage Bonds, are
sold to third party investors and these interests are paid before the Company's
residual interest described herein. The Company retains the residual cash flow
from the trust and receives the proceeds from the sale of the floating rate
interests less certain transaction costs. The Company will recognize taxable
capital gains (or losses) upon the deposit of Mortgage Bonds in a trust. In the
event the trust cannot meet its obligations, all or a portion of the deposited
Mortgage Bonds may be distributed to the floating rate interest holders or sold
to satisfy such obligations. Therefore, cash flow from these Mortgage Bonds may
not be available to pay any amounts on the residual interest held by the Company
and in the event of the liquidation of the Mortgage Bonds, no payment will be
made to the Company except to the extent that the market value of the Mortgage
Bonds exceeds the amounts due on the other obligations of the trust. Additional
Mortgage Bonds may be pledged to secure repayment of the floating rate
certificates. Upon any default in repayment of such certificates, the pledged
Mortgage Bonds may be subject to foreclosure and sale and the Company may lose
the cash flow therefrom, and/or its ownership interest therein. The Company may
have a limited ability to remedy defaults inside the trust and prevent the loss
of its investment in the residual interest. As a result of these
securitizations, the Company generally owns higher yielding but riskier portions
of bond related investments such as Residual Interest Tax Exempt Securities
receipts ("RITES(R)"). Furthermore, the RITES(R) may be subject to call in
certain circumstances which are beyond the control of the Company. Where the
Mortgage Bonds bear fixed rates of interest, securitization may also create
interest rate risks, as described below. See "-- Interest Rate Risks; Hedging
Risks" below.
The Company relies, in part, on securitizations to fund acquisitions of its
investments. Accordingly, the ability of the Company to achieve its investment
objectives depends on its ability to successfully securitize its Mortgage Bonds
and manage its interest rate exposure. Certain of the Company's Mortgage Bonds
may have credit or other characteristics which make them unsuitable for
securitization at this time. Any failure to consummate securitization and
interest rate swap transactions could reduce the Company's net interest income
and have a material adverse effect on the Company's operations.
INTEREST RATE RISKS; HEDGING RISKS
An increase in market interest rates may lead prospective purchasers of the
Company's existing assets or holders of the Company's debt or equity securities
to demand a higher annual yield than they would have otherwise and could
increase the cost to the Company of borrowing funds for investment in additional
assets, any of which could adversely affect the amount of funds available for
distribution to the holders of Securities. Any increase in market interest rates
also may reduce the market value of the Company's assets and the market value of
the Securities.
The results of the Company's operations depend on, among other things, the
level of net interest income derived from the difference between the return on
the securitized Mortgage Bonds and the short term floating rate payments owed to
the floating rate certificate holders. While the interest rate on the
securitized Mortgage Bonds is fixed, the third party holders of the floating
rate certificates in the securitization are paid interest at a floating rate
that is reset periodically. The Company, as holder of the
5
residual trust interest, receives the balance of interest on the Mortgage Bonds
not used to pay the third party trust certificates. Rising short term interest
rates would therefore reduce the net interest income available to the Company,
and possibly result in a loss.
To reduce the Company's exposure to rising interest rates, the Company
enters into interest rate swaps, which are contracts exchanging an obligation to
pay a floating rate approximating the rate on the floating rate trust
certificates for an obligation to pay a fixed rate. Net swap payments received
by the Company, if any, will be taxable income, even though the investment being
hedged pays tax-exempt interest. The interest rate swaps are for limited time
periods which generally match the anticipated prepayment date of the underlying
Mortgage Bond. However, there is no certainty that prepayment will occur at the
end of the swap period, and the swap period is typically shorter than the term
of the underlying bond. There can be no assurance that the Company will be able
to acquire interest rate swaps at favorable prices, or at all, when the existing
arrangements expire, in which case the Company would be fully exposed to the
interest rate risks described above.
To the extent that, from time to time, the Company repurchases the short
term floating rate interests issued in connection with a securitization
transaction, the Company may elect to keep in place any related swap to the
extent that such swap is expected to be used in the future as a hedge with
respect to another transaction. To the extent that a swap is not terminated at
such time as the Company repurchases short term floating rate interests, the
Company may be exposed to interest rate risks under such swap, particularly in a
declining interest rate environment.
Developing an effective interest rate risk management strategy is complex
and no management strategy can completely insulate the Company from all
potential risks associated with interest rate changes. In addition, hedging
involves transaction costs. In the event the Company hedges against interest
rate risks, the Company may substantially reduce its net income or adversely
affect its financial condition. Furthermore, there can be no assurance that the
Company's interest rate hedging activities will be effective.
In the event that the Company purchases interest rate swaps or other
instruments, the Company must rely for payment under these agreements on the
creditworthiness of the counterparties which to date has been Merrill Lynch
Capital Services, Inc. ("MLCS"). In addition, certain of the owners of the
Properties have entered into interest rate swaps with Credit Suisse Financial
Products under which the Property owner pays the counterparty a variable rate up
to the cap in exchange for the counterparty's obligation to pay a fixed rate. To
the extent that short term interest rates increase, the cash flow on such
Property which may be distributed to the holder of the participating Mortgage
Bond may decrease. There can be no assurance any third party will honor its
payment obligations under the agreements. If the provider of such swap or other
instrument becomes financially unsound or insolvent, the Company may be forced
to unwind such swap or other instrument with such provider and may take a loss
thereon. Further, the Company could suffer the adverse consequences against
which the hedging transaction was intended to protect. No assurance can be given
that the Company can avoid risks of third party insolvency.
The Company may also engage in limited amounts of buying and selling of
other mortgage hedging securities or other hedging products, including, but not
limited to, buying and selling financial futures contracts and options on
financial futures contracts and trading forward contracts in order to hedge
commitments. These types of hedging devices and mortgage instruments are complex
and can produce volatile results. Accordingly, there can be no assurance that
the Company's hedging strategy will have the desired beneficial impact on the
Company's cash flow and on the resulting distribution yield of the Securities.
6
CONFLICTS OF INTEREST
Affiliates of certain directors and officers of the Company are responsible
for a full range of property management functions for certain Mortgaged
Properties for which they receive property management fees pursuant to
management contracts. The Company's management believes that these contracts
provide for fees which are at or below market rates for property management
fees. These management contracts will continue to be renewed only if (i) such
affiliates are providing such property management services at a price
competitive with the prices which would be charged for such goods and services
by independent parties for comparable goods and services in the same geographic
location, and (ii) in the case of any management contract with any affiliate of
any member of the Company's Board of Directors, such management contract is
approved by the independent directors of the Company. Nonetheless, conflicts may
exist in determining whether to renew or terminate these management contracts,
and in setting the fees payable under such contracts, since any change in such
fees could affect the amounts payable under the related Mortgage Bonds.
Certain entities which control certain Mortgaged Properties are controlled
by Mark K. Joseph, the Chairman of the Board and Chief Executive Officer of the
Company. As a result, such entities could have interests which do not fully
coincide with, or even are adverse to, the interests of the Company. Such
entities could choose to act in accordance with their own interests, which could
adversely affect the Company. Among the actions such entities could desire to
take might be selling a Mortgaged Property, and thereby causing a redemption
event, at a time and under circumstances which would not be advantageous to the
Company.
Management and certain affiliates own Term Common Shares, which participate
in the cash flow of the Company. The Term Common Shares, which will be redeemed
when the preferred equity of the Company issued in 1996 is fully redeemed, are
expected to have little or no residual value, but while outstanding receive an
aggregate of 2% of the net cash flow of the Company. While these shares remain
outstanding, the holders may have conflicts of interest in determining whether
redemption of the preferred equity issued in 1996 and Term Common Shares is in
the best interest of the Company, in particular due to the limited residual
value of the Term Common Shares. Holders of Term Common Shares also receive a
greater return as cash flow increases in total, regardless of whether per share
cash flow increases or there is a distribution to shareholders. See "Description
of Preferred Shares."
DEPENDENCE ON KEY EMPLOYEES
The Company is wholly dependent for the selection, structuring and
monitoring of its Mortgage Bonds and other Investments on the diligence and
skill of its executive officers, many of whom would be difficult to replace.
REGISTRATION UNDER THE INVESTMENT COMPANY ACT
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Investment Company Act
exempts entities that are "primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretation of the staff of the
Securities and Exchange Commission, in order to qualify for this exemption, the
Company must maintain at least 55% of its assets directly in Qualifying
Interests and the balance in real estate-type interests. For example, unless
certain mortgage securities represent all of the certificates issued with
respect to an underlying pool of mortgages, such mortgage securities may be
treated as securities separate from the underlying mortgage loans and, thus, may
not be considered Qualifying Interests for purposes of the 55% requirement.
7
Similar interpretations mandate that the Company own "whole" bonds in order for
its Mortgage Bonds to be Qualifying Interests. Based on advice of counsel, the
Company believes it meets the 55% test. However, the Company's RITES(R)
interests and certain of its Mortgage Bonds are not Qualifying Interests. The
requirement that the Company maintain 55% of its assets in Qualifying Interests
may inhibit the Company's ability to acquire certain kinds of assets or to
securitize additional interests in the future. If the Company fails to qualify
for exemption from registration as an investment company, its ability to
maintain its financing strategies would be substantially reduced, and it would
be unable to conduct its business as described herein. Such a failure to qualify
could have a material adverse effect on the Company.
LIMITED OPERATING HISTORY DOES NOT PREDICT FUTURE PERFORMANCE
The Company embarked on its acquisition growth strategy in 1996 and,
accordingly, has not yet developed an extensive financial history or experienced
a wide variety of interest rate fluctuations or market conditions. Consequently,
the Company's financial results to date may not be indicative of future results.
Furthermore, there can be no assurance that the Company will receive returns on
its investments sufficient to compensate for interest rate and credit risks
inherent in the Company's investment strategy.
FAILURE TO MANAGE EXPANSION MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's expansion as a result of its investment of the net proceeds
of an offering may cause a significant strain on the Company's financial,
management and other resources. To manage the Company's growth effectively, the
Company must continue to improve and expand its existing resources and
management information systems. If the Company is unable to manage growth
effectively, the Company's financial conditions and results of operations may be
adversely affected.
INVESTMENTS IN MORTGAGE BONDS AND RITES(R) MAY BE ILLIQUID
The Company's Investments lack a regular trading market and may be
illiquid. In addition, during turbulent market conditions, the liquidity of all
of the Company's Investments may be adversely impacted. There is no limit to the
percentage of the Company's assets that may be invested in illiquid Mortgage
Bonds and RITES(R). In the event the Company required additional cash, the
Company may be required to liquidate its Investments on unfavorable terms which
could substantially reduce the value of the Securities.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances released on, above, under
or in such property. Such laws often impose such liability without regard to
whether the owner knew of, or was responsible for, the presence of such
hazardous or toxic substances. The costs of such removal or remediation could be
substantial and could negatively impact the availability of property cash flow
for payments on the Investments. Phase I environmental site assessments (which
involve inspection without soil sampling or groundwater analysis) have been
conducted by independent environmental consultants ("Phase I Assessments") with
respect to most, but not all, of the Properties. The assessments that have been
completed have not revealed any environmental conditions as of the time such
studies were completed which the Company believes would have a material adverse
effect on its business, assets or results of operations. No assurance can be
given that these Phase I Assessments or the Company's inspections have revealed
all environmental liabilities and problems relating to the Properties or that
nothing has occurred since the completion of such Phase I Assessments.
Management is not aware of any material environmental problems with respect to
the Properties. No assurance can be
8
given that the Properties on which no environmental assessment was conducted do
not contain regulated toxic or hazardous substances.
BOARD OF DIRECTORS' ABILITY UNILATERALLY TO EFFECT CHANGES IN INVESTMENT,
FINANCING AND CERTAIN OTHER POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, debt, capitalization and distributions, will be
determined by the Company's Board of Directors. Although the Board of Directors
of the Company has no present intention to change the Company's business plan,
the Board of Directors may amend or revise these and certain other policies from
time to time without a vote of the Company's shareholders. Accordingly, the
Company's shareholders will have no control over changes in the policies of the
Company (except for certain policies directly affecting holders of the Company's
preferred shares), and changes in the Company's policies may not fully serve the
interests of all of the Company's shareholders.
PROVISIONS THAT MAY DISCOURAGE CHANGES OF CONTROL
The Company's organizational documents contain provisions that may be
deemed to have an anti-takeover effect, including the staggered terms of the
Company's directors, business combination and fair price provisions and control
share acquisition provisions. The Company has adopted a shareholder rights plan.
Further, the employment agreements of certain of the officers provide them with
substantial payments should their employment terminate as a result of a change
of control. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Company's Board of Directors
and management and in the policies formulated by the Board of Directors and to
discourage an unsolicited takeover of the Company if the Board of Directors
determines that such takeover is not in the best interests of the persons to
which the Board of Directors feels it owes a fiduciary duty, including the
Company's shareholders. These provisions may, however, have the effect of
delaying, deferring or preventing a takeover attempt that a shareholder might
consider to be in the shareholder's best interest, including offers that might
result in a premium over market price for the Common Shares. These provisions
may reduce interest in the Company as a potential acquisition target or reduce
he likelihood of a change in the management or voting control of the Company
without the consent of the then incumbent Board of Directors. In addition, in
the event that certain business combination or share acquisition transactions
occur, and the Company's special shareholder does not approve of such
transaction, such special shareholder has the right to withdraw as a shareholder
of the Company; and in the event of such withdrawal, (i) the Company would be
obligated to pay the withdrawing special shareholder $1,000,000, and (ii) a new
special shareholder might have to be found in order to ensure that the Company
is not deemed to be taxable as a corporation, any of which may have an adverse
effect on the Company or the Common Shares.
ISSUANCE OF ADDITIONAL SECURITIES
The Company may issue additional securities, including additional preferred
interests in the Company, in the public or private market to obtain funds for
the acquisition of additional assets or may exchange such securities for
additional assets. The ability of the Company to sell or exchange such
securities will depend on conditions then prevailing in the relevant capital
markets and the Company's results of operations, financial condition and
business prospects. The issuance of such additional securities will not be
subject to the approval of the holders of Securities, could affect the timing
and amount of distributions to the holders of Securities, and may affect the
trading price of the Securities. The holders of Securities will not have any
preemptive rights in connection with the issuance of any additional securities
of the Company.
9
FORWARD-LOOKING STATEMENTS
This Prospectus, the accompanying Prospectus Supplement and the other
reports incorporated by reference contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from results or plans
expressed or implied by such forward-looking statements. Such factors include,
among other things, adverse changes in the real estate markets, risk of default
under the Mortgage Bonds, financial condition and bankruptcy of tenants,
interest rate fluctuations, tax treatment of the Company and its Investments,
environmental/safety requirements, adequacy of insurance coverage, and general
and local economic and business conditions. Although the Company believes that
the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included or incorporated by reference in
this Prospectus or the accompanying Prospectus Supplement will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements, the inclusion of such information, including the
information presented herein and under "The Company," should not be regarded as
a representation by the Company or any other person that the objectives and
plans of the Company will be achieved.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED DIVIDENDS
The following are ratios of consolidated earnings to combined fixed charges
and preferred dividends for the Company for each of the years ended December 31,
1997, 1996, 1995, 1994 and 1993 and for the three months ended March 31, 1998
and 1997.
THREE
MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- -----------
1997 1996 1995 1994 1993 1998 1997
---- ---- ----- ----- ----- ---- ----
Ratio................................... 8.9 10.7 507.7 592.1 323.8 9.4 7.6
For purposes of computing this ratio, earnings represent earnings from
continuing operations. Combined fixed charges include management's estimate of
the interest portion of operating lease rentals based on one third of such
rentals. For the periods in which Preferred Shares were outstanding, preferred
dividend requirements represent the share of net income that is allocable to
Preferred Shares, Preferred CD Shares and Term Growth Shares.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net cash proceeds from the sale of Securities in
respect of which this Prospectus is being delivered for general corporate
purposes, including new investments and working capital. Pending such uses, the
Company may invest such net proceeds in short term liquid investments. Any
specific allocation of the net proceeds of an offering of Securities to a
specific purpose will be determined at the time of such offering and will be
described in the related Prospectus Supplement.
10
DESCRIPTION OF COMMON SHARES
The following brief description of the Common Shares does not purport to be
complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Amended and Restated Certificate of Formation and
Operating Agreement (the "Operating Agreement") and By-laws, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
The Operating Agreement does not limit the number of Common Shares which
the Company's Board of Directors may cause the Company to issue. The Company had
14,359,407 Common Shares outstanding at March 31, 1998. The Company will pay
distributions to holders of the Common Shares on a pro rata basis when declared
by its Board of Directors out of funds legally available therefor. Distributions
to the holders of Common Shares are subject to preferences on distributions on
the Company's then Outstanding Preferred Shares (as defined below), and any
other preferred securities which may be issued by the Company in the future.
Holders of Common Shares have no preemptive, conversion, sinking fund or
cumulative voting rights. The shares of Common Shares are not redeemable, except
pursuant to certain anti-takeover provisions adopted by the Company.
The Operating Agreement and By-laws of the Company set forth the
relationship of the shareholders to the Company and to one another and the
manner in which the Company will conduct its operations, much like the articles
and bylaws of a Delaware corporation or the partnership agreement of a Delaware
general or limited partnership. While, as a limited liability company, the
Company is not subject to the Delaware General Corporation Law (the "DGCL"), the
Delaware Limited Liability Company Act permits a limited liability company
agreement to provide, and the Operating Agreement and By-laws of the Company do
provide, that the management of a limited liability company shall be conducted
by a board of directors and officers designated by such board and that the
holders of shares in such limited liability company (as is the case with the
holders of the Common Shares) be afforded substantially all of the rights that
are afforded holders of the common shares issued by a corporation organized
under the DGCL. In all material respects, the fiduciary duties of the directors
and officers of the Company and any duties of shareholders of the Company and
their affiliates are the same as those applicable under the DGCL.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016, telephone
number (908) 272-8511.
DESCRIPTION OF PREFERRED SHARES
Under the Company's Operating Agreement, the Company's Board of Directors
(without any further vote or action by the Company's shareholders) is authorized
to provide for the issuance, in one or more series, of an unlimited amount of
Preferred Shares. The Board of Directors is authorized to fix the number of
shares, the relative powers, preferences and rights, and the qualifications,
limitations or restrictions applicable to each series thereof by resolution
authorizing the issuance of such series.
OUTSTANDING PREFERRED SHARES
In connection with the merger of its predecessor with the Company in 1996,
the Company issued the original preferred shares (the "Original Preferred
Shares") and Preferred CD Shares (collectively,
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the "Outstanding Preferred Shares"). The Company is required to distribute to
the holders of the Outstanding Preferred Shares cash flow attributable to such
shares (defined in the Operating Agreement to be the cash flow derived from a
specific pool of 22 Mortgage Bonds (the "Original Bonds")). In addition, the
Company is required to distribute 2% of the Company's net cash flow to the
holders of the 2,000 shares of Term Common Shares.
As of March 31, 1998, there were 22,940 Original Preferred Shares and
11,860 Preferred CD Shares outstanding. The Company does not intend to issue any
shares of the series of Outstanding Preferred Shares. The terms of the
Outstanding Preferred Shares require that no other Preferred Shares be senior in
rank or priority of payment to the Outstanding Preferred Shares with respect to
the cash flow from the Original Bonds.
The description below sets forth certain general terms and provisions of
the Company's Preferred Shares to which a Prospectus Supplement may relate. The
specific terms of any series of Preferred Shares in respect of which this
Prospectus is being delivered (the "Offered Preferred Shares") will be described
in the Prospectus Supplement relating to such Offered Preferred Shares. The
following summary of certain provisions governing the Company's preferred shares
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Operating Agreement and the resolutions of the
Board of Directors relating to each particular series of Offered Preferred
Shares in connection with such Offered Preferred Shares.
If so indicated in the applicable Prospectus Supplement, the terms of any
series of Offered Preferred Shares may differ from the terms set forth below,
except those terms required by the Operating Agreement.
GENERAL
The Offered Preferred Shares, when issued in accordance with the terms of
the Operating Agreement and of the applicable resolutions of the Board of
Directors and as described in the applicable Prospectus Supplement, will be
fully paid and non-assessable.
To the extent not fixed in the Operating Agreement, the relative rights,
preferences, powers, qualifications, limitations or restrictions of the Offered
Preferred Shares of any series will be fixed pursuant to resolutions of the
Board of Directors relating to such series. The Prospectus Supplement relating
to the Offered Preferred Shares of each such series shall specify the terms
thereof, including:
(1) The class, series title or designation and stated value (if any)
for such Offered Preferred Shares;
(2) The maximum number of shares of Offered Preferred Shares in such
series, the liquidation preference per share and the offering price per
share for such Offered Preferred Shares;
(3) The distribution preferences and the distribution rate(s),
period(s) and/or payment date(s) or method(s) of calculation thereof
applicable to such Offered Preferred Shares;
(4) The date from which distributions on such Offered Preferred Shares
will accumulate, if applicable, and whether distributions will be
cumulative;
(5) The provisions for a retirement or sinking fund, if any, with
respect to such Offered Preferred Shares;
(6) The provisions for redemption, if applicable, of such Offered
Preferred Shares;
(7) The voting rights, if any, of shares of such Offered Preferred
Shares;
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(8) Any listing of such Offered Preferred Shares for trading on any
securities exchange or any authorization of such Offered Preferred Shares
for quotation in an interdealer quotation system of a registered national
securities association;
(9) The terms and conditions, if applicable, upon which such Offered
Preferred Shares will be convertible into, or exchangeable for, any other
equity securities of the Company, including the title of any such
securities and the conversion or exchange price therefor;
(10) A discussion of federal income tax considerations applicable to
such Offered Preferred Shares; and
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such Offered Preferred Shares.
Subject to the terms of the Operating Agreement and to any limitations
contained in the resolutions of the Board of Directors pertaining to any series
of Outstanding Preferred Shares, the Company may issue additional series of
Preferred Shares at any time or from time to time, with such powers, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, as the Board of Directors
shall determine, all without further action of the shareholders, including the
holders of any series of Outstanding Preferred Shares of the Company.
DISTRIBUTIONS
Holders of any series of Offered Preferred Shares will be entitled to
receive cash distributions when, as and if declared by the Board of Directors of
the Company out of funds of the Company legally available therefor, at such rate
and on such dates as will be set forth in the applicable Prospectus Supplement.
Each distribution will be payable to holders of record as they appear on the
share ledger of the Company on the record date fixed by the Board of Directors.
Distributions, if cumulative, will be cumulative from and after the date set
forth in the applicable Prospectus Supplement.
LIQUIDATION RIGHTS
The Company's Operating Agreement provides that, in the event of a
liquidation or dissolution of the Company, or a winding up of its affairs,
whether voluntary or involuntary, or in the event of a merger or consolidation
of the Company, no distributions will be made to holders of any class of the
Company's capital shares until after payment or provision for payment of the
debts or liabilities of the Company. The holders of the Outstanding Preferred
Shares have priority on the proceeds derived from the liquidation of the
Original Bonds and to the allocation of items of income and deduction up to the
value of their respective capital accounts. The applicable Prospectus Supplement
will specify the amount and type of distributions to which the holders of any
series of Offered Preferred Shares would be entitled upon the occurrence of any
such event.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Offered
Preferred Shares will be redeemable in whole or in part at the option of the
Company, at the times, at the redemption prices and in accordance with any
additional terms and conditions set forth therein. The Operating Agreement
provides that the Company may not redeem shares of any series until all of the
Outstanding Preferred Shares are redeemed.
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VOTING RIGHTS
Except as indicated in the applicable Prospectus Supplement, or except as
expressly required by applicable law, the holders of any series of Offered
Preferred Shares will not be entitled to vote.
CONVERSION
The terms and conditions, if any, on which shares of the Offered Preferred
Shares are convertible into any other class of the Company's securities will be
set forth in the Prospectus Supplement relating thereto. Such terms will include
the designation of the security into which such shares are convertible, the
conversion price, the conversion period, provisions as to whether conversion
will be at the option of the holder or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of the Offered Preferred Shares. In the case of
conversion of the Offered Preferred Shares into Common Shares or into any other
security of the Company for which there exists an established public trading
market at the time of such conversion, such terms may include provisions under
which the amount of such security to be received by the holders of the Offered
Preferred Shares would be calculated according to the market price of such
security as of a time stated in the Prospectus Supplement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Offered Preferred Shares will be
named in the applicable Prospectus Supplement.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Common Shares, Preferred
Shares or any combination thereof. Warrants may be issued independently,
together with any other Securities offered by a Prospectus Supplement, and may
be attached to or separate from such Securities. Warrants may be issued under
warrant agreements (each, a "Warrant Agreement") to be entered into between the
Company and a warrant agent specified in the applicable Prospectus Supplement
(the "Warrant Agent"). The Warrant Agent will act solely as an agent of the
Company in connection with the Warrants of a particular series and will not
assume any obligation or relationship of agency or trust for or with any holders
or beneficial owners of Warrants. The following sets forth certain general terms
and provisions of the Warrants offered hereby. Further terms of the Warrants and
the applicable Warrant Agreement will be set forth in the applicable Prospectus
Supplement.
The applicable Prospectus Supplement will describe the terms of the
Warrants in respect of which this Prospectus is being delivered, including,
where applicable, the following: (i) the title of such Warrants; (ii) the
aggregate number of such Warrants; (iii) the price or prices at which such
Warrants will be issued; (iv) the designation, number and terms of the Common
Shares, Preferred Shares or combination thereof, purchasable upon exercise of
such Warrants; (v) the designation and terms of the other Securities, if any,
with which such Warrants are issued and the number of such Warrants issued with
each such Security; (vi) the date, if any, on and after which such Warrants and
the related underlying Securities will be separately transferable; (vii) the
price at which each underlying Security purchasable upon exercise of such
Warrants may be purchased; (viii) the date on which the right to exercise such
Warrants shall commence and the date on which such right shall expire; (ix) the
minimum amount of such Warrants which may be exercised at any one time; (x)
information with respect to book-entry procedures, if any; (xi) a discussion of
any applicable federal income tax considerations; and
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(xii) any other terms of such Warrants, including terms, procedures and
limitations relating to the transferability, exchange and exercise of such
Warrants.
PLAN OF DISTRIBUTION
The Company may sell Securities to or through underwriters or dealers,
directly to other purchasers, or through agents. The Prospectus Supplement with
respect to any Securities will set forth the terms of the offering of the
Securities, including the name or names of any underwriters, dealers or agents,
the price of the offered Securities and the net proceeds to the Company from
such sale, any underwriting discounts or other items constituting underwriters'
compensation, any discounts or concessions allowed or reallowed or paid to
dealers and any national securities exchanges on which such Securities may be
listed.
If underwriters are used in the sale, the Securities will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
price or at varying prices determined at the time of sale. The underwriter or
underwriters with respect to a particular underwritten offering of Securities
will be named in the Prospectus Supplement relating to such offering, and if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of such Prospectus Supplement. Unless otherwise set forth
in the Prospectus Supplement, the obligations of the underwriters or agents to
purchase the Securities will be subject to certain conditions precedent and the
underwriters will be obligated to purchase all the Securities if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
If a dealer is utilized in the sale of any Securities in respect of which
this Prospectus is delivered, the Company will sell such Securities to the
dealer, as principal. The dealer may then resell such Securities to the public
at varying prices to be determined by such dealer at the time of resale. The
name of the dealer and the terms of the transaction will be set forth in the
Prospectus Supplement relating thereto.
Securities may be sold directly by the Company to one or more institutional
purchasers, or through agents designated by the Company from time to time, at a
fixed price, or prices, which may be changed, or at varying prices determined at
the time of sale. Any agent involved in the offer or sale of the Securities will
be named, and any commissions payable by the Company to such agent will be set
forth, in the Prospectus Supplement relating thereto. Unless otherwise indicated
in the Prospectus Supplement, any such agent will be acting on a best efforts
basis for the period of its appointment.
In connection with the sale of the Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities for whom
they may act as agents in the form of discounts, concessions, or commissions.
Underwriters, agents, and dealers participating in the distribution of the
Securities may be deemed to be underwriters, and any discounts or commissions
received by them from the Company and any profit on the resale of the Securities
by them may be deemed to be underwriting discounts or commissions under the
Securities Act.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Securities, other than the Common Shares, will be a new issue with no
established trading market. Any Common Shares sold pursuant to a Prospectus
Supplement will be listed on the NYSE subject to official notice of issuance.
The Company may elect to list any series of the Securities on an exchange, but
it is not obligated to do so. Any underwriters to whom Securities are sold by
the Company for public offering and sale may make a market in such Securities,
but such underwriters will not be obligated to do so and
15
may discontinue any market making at any time without notice. No assurance can
be given as to the liquidity of the trading market for any Securities.
Under agreements entered into with the Company, underwriters, dealers, and
agents may be entitled to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments that such agents, dealers, or underwriters may be
required to make with respect thereto. Underwriters, dealers, or agents and
their associates may be customers of, engage in transactions with and perform
services for, the Company in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
the Securities shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject. The underwriters and such
other agents will not have any responsibility in respect of the validity or
performance of such contracts.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of Securities offered hereby may not engage in
market making activities with respect to the Securities for a period of two
business days prior to the commencement of such distribution.
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K of the Company for the year ended December 31,
1997 have been so incorporated in reliance on the report (which contains an
explanatory paragraph relating to management's estimates of fair value of
mortgage revenue bonds and other bond related investments as described in Note 2
to the financial statements) of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Rogers & Wells
LLP, New York, New York.
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Through and including March 2, 2003 (the 25(th) day after the date of this
prospectus supplement), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
2,800,000 SHARES
[MUNIMAE MIDLAND LOGO]
MUNICIPAL MORTGAGE & EQUITY, LLC
COMMON SHARES
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PRICE $23.60 PER SHARE
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RBC CAPITAL MARKETS MERRILL LYNCH & CO. UBS WARBURG
LEGG MASON WOOD WALKER WACHOVIA SECURITIES
INCORPORATED
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PROSPECTUS SUPPLEMENT
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February 5, 2003
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