Item 1. Description of Business.
Introduction
Municipal Mortgage and Equity, L.L.C. (the "Company") is in the business of originating, investing in and servicing tax-exempt mortgage revenue bonds issued by state and local government authorities to finance multi-family housing developments. The Company, a Delaware limited liability company, is the successor to the business of SCA Tax Exempt Fund Limited Partnership (the "Partnership"), a closed-end limited partnership that was merged into the Company on August 1, 1996. As a limited liability company, the Company combines the limited liability, governance and management characteristics of a corporation with the pass-through income features of a partnership.
The Partnership commenced operations in 1986, when it sold two series of Beneficial Assignee Certificates ("BACs"), representing the assignment of its limited partnership interests. The $296 million proceeds therefrom were invested in 22 mortgage revenue bonds (the "original bonds") and related working capital loans held in two separate pools, "Series I" and "Series II," corresponding with the related series of BACs. In a February 1995 financing (the "1995 Financing"), the Partnership raised $67.7 million through the sale of multifamily revenue bond receipts (the "Receipts") secured by newly refunded bonds issued in exchange for 11 of the original bonds and the cash stream from one additional bond. Effective December 31, 1997, the one additional bond has been released as additional collateral. The refunding of the 11 original bonds (the "Refunding") consisted of the exchange of $126.6 million aggregate principal amount of the original bonds for $67.7 million of Series A bonds, which serve as the collateral for the receipts, and $58.9 million of Series B bonds, which continued to be held by the Partnership along with the $130.6 million aggregate principal amount of the remaining 11 original bonds. The $67.7 million of 1995 Financing proceeds of which $5.0 million was invested in demand notes and the remaining proceeds, after expenses and working capital reserves, of $56.8 million have been principally invested in additional mortgage revenue bonds and other bond related investments.
In connection with the August 1, 1996 merger of the Partnership into the Company (the "Merger"), the Partnership's BAC holders were given the opportunity to elect among three different securities of the Company for which to exchange their BACs-Preferred Shares, Preferred Capital Distribution Shares (collectively the "preferred shares") or Growth Shares. The Preferred Shares were structured to give BAC holders a security substantially the same as their BACs as if the 1995 Financing had not occurred and thus participate in their pro rata share of income from the 22 original bonds as they existed immediately after the Refunding and before the 1995 Financing. The Preferred Capital Distribution Shares (the "Preferred CD Shares") were structured to give their holders the income they would have received from their original BACs, but provided for a distribution of their pro rata share of the proceeds of the 1995 Financing and thus participate in their share of income from the 22 original bonds as they existed immediately after the Refunding and 1995 Financing. The Growth Shares, unlike either the Preferred Shares or Preferred CD Shares, were structured to enable their holders to participate in all of the income from investment of the proceeds of the 1995 Financing, as well as future financings, in addition to their pro rata share of the income from the original bonds as they existed immediately after the 1995 Financing. As a result of the election process, the holders of 8.09% of the outstanding BACs received Preferred Shares, the holders of 4.29% of the outstanding BACs received Preferred CD Shares, and the holders of 86.62% of the outstanding BACs received Growth Shares of the Company.
The Company is required to distribute to the holders of Preferred Shares and Preferred CD Shares cash flow attributable to such shares (as defined in the Company's Amended and Restated Certificate of Formation and Operating Agreement). The Company is required to distribute 2.0% of the net cash flow to the holders of Term Growth Shares. The balance of the Company's net income is allocated to the Growth Shares and the Company's current policy is to distribute to Growth Shareholders approximately 95% of the cash flow associated with this income.
Until the Merger, the bonds held by the Partnership consisted solely of the 22 original bonds purchased with the proceeds from the Partnership's 1986 BAC offerings, as refunded in connection with the 1995 Financing. Since the Merger, the Company has been investing the proceeds from the 1995 Financing in additional bonds and other bond related investments and had invested all of such proceeds as of December 31, 1997. The Company intends, as market conditions warrant, to seek additional funds for bond investment through future debt or equity financings. The Company's current policy is to invest generally in bonds secured by properties having an operating history, which are available both through purchase from their existing holders and in connection with refinancings of existing properties.
The Company's business may be affected by changes in the interest rate environment in a variety of ways. For example, the stock price of the Company's Growth Shares may be affected by increases and decreases in interest rates. In addition, the Company's ability to raise and invest capital in new bond investments may be impacted by volatility in the interest rate environment.
Raising Capital
The raw material which enables the Company to meet investment objectives is capital. In order to facilitate growth, the Company will require additional capital to pursue acquisition opportunities. The Company has primarily used two sources of capital; securitizations and a Growth Share equity offering. The most economically efficient way to fund future acquisitions is through securitizations. Long term, however, securitizations lead to over leveraging. Therefore, periodically the Company through equity offerings will decrease outstanding off-balance debt to reduce leverage. Securitizations
The Company has access to financial programs for the securitization of tax-exempt instruments. This securitization program involves placing a bond in a trust, and selling short term floating rate interest in the trust to qualified third party investors. The Company typically receives the net proceeds from the sale of the floating rate interests and retains the residual interest ("RITES") in the trust. To the extent these transactions create interest rate risks, the Company enters into interest rate swap contracts designed to reduce, but not eliminate such risks.
In December 1997, the Company raised $59 million through the securitization of five mortgage revenue bonds at an effective annual 10-year cost of approximately 5.2%. The proceeds of the securitizations were used to acquire additional bond related investments.
Public Offering
On January 26, 1998, the Company offered and sold to the public 3,000,000 Growth Shares at a price of $20.625 per share and granted the underwriters an option to purchase up to an aggregate of 450,000 Growth Shares to cover over-allotments at the same price. The net proceeds from this offering are intended to fund bond acquisitions totaling $116 million. Net proceeds on the 3,000,000 shares approximated $58 million. On February 13, 1998, the underwriters exercised their option to purchase 246,000 Growth Shares generating net proceeds of approximately $4.8 million.
Preferred Share Tender Offer
On November 26, 1997, the Company offered to purchase up to 20% of the preferred shares for cash at approximately 80% of the September 30, 1997 book value for each class as a result of a tender offer made by an unaffiliated third party, Sierra Fund 3 (the "Sierra Offer"). The Sierra Offer was for 4.9% of the outstanding shares of each class of preferred shares at prices ranging from between 50% to 60% of the September 30, 1997 book value of each class. The Company recognized that there may be preferred shareholders who desire liquidity. Accordingly, the Company determined to offer 80% of the September 30, 1997 book value of each class so that preferred shareholders who decide to liquidate would be able to do so at higher prices. The offer, proration period and the withdrawal rights expired at midnight, eastern time, on December 26, 1997. As a result, on January 1, 1998, 739 Series I and 287 Series II Preferred Shares which had been tendered and purchased at a per share price of $593.43 and $711.77, respectively, and 584 Series I and 274 Series II Preferred CD Shares which had been tendered and purchased at a per share price of $448.77 and $506.67, respectively.
The Mortgage Revenue Bonds
The proceeds of the mortgage revenue bonds held by the Company were used to make mortgage loans for the construction, acquisition or refinancing of multifamily housing developments throughout the United States. The underlying developments are "qualified residential rental properties" under section 142(d) of the Internal Revenue Code of 1986, as amended (the "Code"), which requires that a specified percentage of their rental units be rented to persons whose incomes do not exceed specified percentages of local median income levels. Accordingly, the bonds are "qualified bonds" within the meaning of section 141(e) of the Code, and the interest paid on the bonds is exempt from federal income taxes.
The Company also holds certain working capital loans and related demand notes, the interest on which (representing approximately 16% and 8% of interest received by the Company in 1997 and 1996, respectively) is not tax-exempt.
Each mortgage revenue bond is secured by an assignment to the Company of the related mortgage loan, which in turn is secured by a mortgage on the underlying property and assignment of rents. Although the bonds are issued by state or local governments or their agencies or authorities, the bonds are not general obligations of any state or local government, no government is liable under the bonds, nor is the taxing power of any government pledged to the payment of principal or interest under the 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. Accordingly, the sole source of funds for payment of principal and interest under the bonds is the revenue derived from operation of the mortgaged properties and amounts derived from the sale, refinancing or other disposition of such properties.
The Company's investment portfolio as of December 31, 1997 consisted of: (i) 31 mortgage bonds (12 participating bonds, five non- participating bonds, 12 participating subordinate bonds and two non- participating subordinate bonds, which are collateralized by 28 individual properties) and (ii) nine other bond related investments which are collateralized by ten individual properties, discussed more fully in Note 7 to the Company's consolidated financial statements included herein.
The Company's Preferred Shares, Preferred CD Shares, and Growth Shares all participate in the income from the 11 original bonds and the 11 refunded Series B bonds. The Preferred Shares, because they have been structured so that their holders are allocated the income they would have been allocated had the 1995 Financing not occurred, are allocated an additional amount equal to the income generated by their pro rata portion of the 11 refunded Series A bonds that serve as the collateral for the Receipts issued in the 1995 Financing and are no longer included in the Company's bond portfolio. Only the Growth Shares participate in the income from acquisitions subsequent to the 1995 Financing and will participate in the income generated by additional bonds acquired by the Company in the future. See Item 5 of this report for a description of each class of the Company's shares.
The 11 original bonds not refunded in connection with the 1995 Financing, aggregating $130.6 million in principal amount, are "participating" bonds that provide for the payment of base interest, ranging from 7.5% to 8.125% per annum, plus annual contingent interest, dependent upon the cash flow of the mortgaged property, equal to the difference between the base interest rate and 16%. Such contingent interest, is payable from 100% of "project cash flow" until the non-compounded interest payable is between 1.5% to 2.5% greater than the base interest rate. Any remaining project cash flow is divided equally between the property owner and the Company until the interest paid to the Company reaches 16%. "Project cash flow" is defined generally as the annual revenues received by the owner of the related mortgaged property, less operating expenses paid from such revenues excluding contingent interest payable. To the extent that the aggregate of all interest payments, including contingent interest, for any year does not equal 16%, the deficiency is deferred until the mortgaged property is sold or the mortgage loan repaid. Any deferred contingent interest is payable from 100% of sale or other proceeds remaining after payment of the mortgage loan principal and other specified payments until the base rate plus 1.5% to 2.5% has been paid and thereafter from 50% of such proceeds. The 11 original bonds mature between November 1999 and June 2012.
Of the 11 refunded Series B bonds, eight bonds, aggregating $46.5 million in principal amount, bear annual interest in an amount equal to the greater of (i) 3% and (ii) available cash flow not exceeding 16%. To the extent interest paid is less than 16%, the deficiency, defined as the difference between 16% and the greater of (i) 3% and (ii) interest paid, is payable upon the earlier of the redemption or maturity of the bond. The remaining three refunded Series B bonds, aggregating $12.4 million in principal amount, bear interest at the annual rate of 16%. Each of the refunded Series B bonds is subordinate in priority and right of payment to the related refunded Series A bond that serves as collateral for the Receipts issued in the 1995 Financing. The refunded Series A bonds bear interest at annual rates between 7.05% and 7.40% and are secured by the same mortgaged properties as the related refunded Series B bonds held by the Company. All of the refunded Series B bonds mature in January 2030.
Of the eight bonds and the RITES acquired with proceeds from the 1995 Financing, aggregating $29.1 million in principal amount, one $1.5 million bond bears interest to the extent of available cash flow up to 10% per annum, the remaining bonds are non-participating bonds bearing interest at annual rates ranging from 7.45% to 12.50% and the RITES in conjunction with a swap contract are intended to produce a relatively constant yield of approximately 8.5% over the effective duration of the RITES. The eight bonds mature between December 2015 and July 2026.
For further information concerning the terms of the investments held by the Company, see Notes 6, 7, 8 and 9 to the Company's consolidated financial statements included elsewhere herein.
Property Performance
The 22 original bonds held by the Partnership at the time of the 1995 Financing had been acquired by the Partnership in 1986 and 1987. Due to a variety of factors, including the favorable investment climate for rental real estate in the early 1980s, the ready availability of financing from thrifts and institutional lenders, and the decision of many developers to take advantage of favorable tax treatment for rental properties, unanticipated over building of apartments occurred during the late 1980s in many localities throughout the country. This oversupply affected a number of the markets in which the mortgaged properties collateralizing the original bonds are located. Where this condition existed, there was, until the early 1990s, an inability to increase rents as originally anticipated because of the considerable competition. In addition, the general economic recession that occurred in 1990 and continued into 1992 compounded the problems created by an oversupply of apartment units in some markets. Consequently, the net cash flow from most of the properties was insufficient to pay the base interest due, causing the former managing general partner to draw funds from project level sources such as reserves and guarantees or to declare monetary defaults and initiate loan workout discussions in instances where no project level sources existed.
Construction starts for new apartment units declined significantly throughout the United States since the mid-1980s and fell to a record low in 1993. This decline in new construction and the economic recovery brought about tightening markets, stabilized and higher occupancies, and an ability to realize greater rent increases. Apartment starts have increased since 1993, but overbuilding is anticipated in only certain markets. Aggregate occupancy for all of the properties collateralizing the Company's bonds and bond related investments was 94% at December 31, 1997.
The following table provides certain information for the years ended December 31, 1997 and 1996 with respect to the properties collateralizing the mortgage loans underlying the investments held by the Company.
Real Estate Table
Occupancy --------------------- Month Ended Month Ended Month/Year Apartment December 31,December 31, Apartment Community Location Acquired Units 1997 1996 - ------------------- ------------ --------- -------- ----------- ----------- Participating Bonds: Alban Place Frederick, MD Sep-86 194 90.7% 92.8% Creekside Village Sacramento, CA Nov-87 296 95.3% 95.9% Emerald Hills Issaquah, WA Mar-88 130 96.9% 100.0% Lakeview Miami, FL Sep-87 180 95.6% 94.4% Newport On Seven St. Louis Park,MN Aug-86 167 97.6% 94.0% North Pointe San Bernardino, CA Sep-86 540 91.7% 93.1% Northridge Park II Salinas, CA Aug-87 128 95.3% 90.6% Riverset Memphis, TN Aug-88 352 97.7% 95.5% Southfork Village Lakeville, MN Jan-88 200 98.0% 98.5% Villa Hialeah Hialeah, FL Nov-87 245 92.7% 92.2% Mountain View Tacoma, WA Nov-86 241 93.8% 94.6% The Crossings Lithonia, GA Jan-97 200 98.0% 92.0% -------- Subtotal participating bonds 2,873 -------- Non-Participating Bonds: Riverset II (1) Memphis, TN Jan-96 148 96.6% 95.3% Charter House (2) Lenexa, KS Dec-96 280 93.9% 93.6% Hidden Valley Kansas City, MO Dec-96 82 92.7% 91.5% Oakbrook Topeka, KS Dec-96 170 88.2% 91.2% Torries Chase Olathe, KS Dec-96 99 98.0% 90.9% -------- Subtotal non-participating bonds 779 -------- Participating Subordinate Bonds: Barkley Place Ft. Myers, FL May-87 156 95.5% 96.8% Gilman Meadows Issaquah, WA Mar-87 125 96.0% 94.4% Hamilton Chase Chattanooga, TN Feb-87 300 95.0% 96.3% Mallard Cove I Everett, WA Feb-87 63 98.4% 96.8% Mallard Cove II Everett, WA Feb-87 135 92.6% 97.0% Meadows Memphis, TN Jan-88 200 98.0% 94.5% The Montclair Springfield, MO Oct-86 159 97.5% 95.0% Newport Village Thornton, CO Dec-86 220 97.7% 97.7% Nicollet Ridge Burnsville, MN Dec-87 339 97.6% 99.7% Steeplechase Knoxville, TN Oct-88 450 89.8% 90.2% Whispering Lake Kansas City, MO Oct-87 384 97.1% 98.2% -------- Subtotal participating subordinate bonds 2,531 -------- Non-participating Subordinate Bonds: Independence Ridge Independence, MO Aug-96 336 99.1% 97.9% Locarno Kansas City, MO Aug-96 110 98.2% 100.0% -------- Subtotal non-participating subordinate bonds 446 -------- Other Bond Related Investments: Hunters Ridge St. Louis, MO Oct-96 198 92.4% 89.7% SouthPointe St. Louis, MO Oct-96 192 92.7% 90.4% Indian Lakes Virginia Beach, VA Jul-97 296 92.9% 90.6% Village at Stone Mt Stone Mountain, GA Oct-97 722 93.5% 95.0% Southgate Crossings Columbia, MD Jun-97 215 96.3% 96.2% Southwood Richmond, VA Nov-97 1,286 87.6% 88.5% Poplar Glen Columbia, MD Jun-97 191 95.3% 95.8% Cinnamon Ridge Egan, MN Dec-97 264 97.0% 97.0% -------- Subtotal other bond related investments 3,364 -------- Total/Weighted Average Investments 9,993 94.0% 93.9% ========
Avg. Monthly Rent Per Apartment Unit -------------------------- Year Year Ended Ended December 31, December 31, Apartment Community Location 1997 1996 - -------------------- ------------------ ----------- ---------- Participating Bonds: Alban Place Frederick, MD $767 $754 Creekside Village Sacramento, CA 471 468 Emerald Hills Issaquah, WA 848 760 Lakeview Miami, FL 617 619 Newport On Seven St. Louis Park, MN 856 834 North Pointe San Bernardino, CA 586 585 Northridge Park II Salinas, CA 804 753 Riverset Memphis, TN 642 620 Southfork Village Lakeville, MN 817 795 Villa Hialeah Hialeah, FL 605 613 Mountain View Tacoma, WA 525 517 The Crossings Lithonia, GA 665 643
Non-Participating Bonds: Riverset II (1) Memphis, TN 634 617 Charter House (2) Lenexa, KS 509 482 Hidden Valley Kansas City, MO 484 539 Oakbrook Topeka, KS 430 431 Torries Chase Olathe, KS 430 430
Participating Subordinate Bonds: Barkley Place Ft. Myers, FL 1,740 1,633 Gilman Meadows Issaquah, WA 841 764 Hamilton Chase Chattanooga, TN 576 582 Mallard Cove I Everett, WA 555 493 Mallard Cove II Everett, WA 663 600 Meadows Memphis, TN 539 542 The Montclair Springfield, MO 1,587 1,483 Newport Village Thornton, CO 680 656 Nicollet Ridge Burnsville, MN 771 722 Steeplechase Knoxville, TN 587 584 Whispering Lake Kansas City, MO 569 548
Non-participating Subordinate Bonds: Independence Ridge Independence, MO 469 454 Locarno Kansas City, MO 734 721
Other Bond Related Investments: Hunters Ridge St. Louis, MO 645 618 SouthPointe St. Louis, MO 626 592 Indian Lakes Virginia Beach, VA 644 630 Village at Stone Mt Stone Mountain, GA 651 664 Southgate Crossings Columbia, MD 760 733 Southwood Richmond, VA 468 452 Poplar Glen Columbia, MD 753 726 Cinnamon Ridge Egan, MN 750 726
Total/Weighted Average Investments $ 645 $ 626
(1) In addition to this bond, the Company owns a participating subordinate bond and a RITES interest also collateralized by the Riverset II property. (2) In addition to this bond, the Company owns a RITES interest also collateralized by the Charter House property.
Asset Management
The Company is responsible for a full range of loan servicing and asset management functions for each mortgaged property underlying the mortgage revenue bonds held by the Company. The Company monitors the timely receipt of all debt service payments and promptly notifies a borrower of any delinquency, deficiency, or default. Reporting systems are in place which allow the Company to review and analyze the revenue, expenses, and leasing activity of each property on a monthly basis. In addition, the Company inspects each property and market area at least annually.
The loan servicing and asset management oversight is designed to enable the Company to track the performance of each property and to alert management to potential problems. While actions will vary depending upon the nature of an individual problem, the Company generally notifies borrowers of any problems or concerns and recommends corrective action.
The Company responds to defaults on mortgage revenue bonds on a case-by-case basis. After sending requisite default notices, Company management typically holds discussions with the property owner/developer. In the event that management determines that the owner/developer remains committed to the project and capable of successful operations, a workout or other forbearance arrangement may be negotiated. Where management determines that successful operation by the current owner/developer is not feasible, negotiations for the transfer of a deed, in lieu of foreclosure, to an affiliated entity may be undertaken. In the absence of operating deficit guarantees, the Company may face additional risk from operations with respect to properties so transferred, which may require subsidies from Company reserves to cover potential operating deficits before debt service. The Company does not currently anticipate that any such operating deficits before debt service will occur.
Employees
As of December 31, 1997, the Company had 18 employees.
Item 2.
Item 2. Properties.
The registrant has no physical properties, as its assets consist primarily of the mortgage revenue bonds and other bond related investments described under Item 1 and certain related loans described in Note 9 to the Company's consolidated financial statements included elsewhere herein.
Item 3.
Item 3. Legal Proceedings.
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's shareholders during the three months ended December 31, 1997.
Part II
Item 5.
Item 5. Market for Registrant's Equity Securities and Related Stockholder Matters.
Since August 30, 1996, the Growth Shares have been traded on the American Stock Exchange under the symbol "MMA." The following table sets forth the high and low sale prices per share of the Growth Shares as reported by the American Stock Exchange for each calendar quarter since the commencement of trading, together with the distributions declared with respect to such shares allocable to such period.
Municipal Mortgage and Equity Item 5. table Distributions High Low Declared -------- -------- ------------ Third Quarter (beginning August 30) $16 $14 1/8 $ - Fourth Quarter 16 3/4 13 7/8 0.6325* First Quarter 17 7/8 15 1/2 0.3450 Second Quarter 17 3/8 16 1/4 0.3500 Third Quarter 19 7/8 17 0.3650 Fourth Quarter 20 7/8 19 0.3700 First Quarter (through March 24) 21 7/16 19 5/8 -
* This amount represents a $0.07 distribution for the one month ended July 31, 1996 from the former Partnership and a $0.5625 distribution for the five months ended December 31, 1996 from the Company. Also, the affiliates of the former Managing General Partner of the Partnership who received Growth Shares in the Merger did not receive the July 1996 distribution paid to Growth Shareholders since they were not holders in July 1996.
As of March 19, 1998, there were 13,405 holders of record of Growth Shares.
The Preferred Shares and the Preferred CD Shares are not listed for trading on any national securities exchange, and there is no established public trading market for those shares. As of March 23, 1998, there were 1,238 and 619 holders of record of Preferred Shares and Preferred CD Shares, respectively.
Description of Shares
As of December 31, 1997 there were outstanding 23,966 Preferred Shares (16,329 Series I and 7,637 Series II), 12,718 Preferred CD Shares (8,909 Series I and 3,809 Series II), 2,000 Term Growth Shares, and 11,106,150 Growth Shares. Shareholder approval may not be required for the Company to issue additional shares in the future. Although the Company will not issue additional Preferred Shares or Preferred CD Shares, it may from time to time issue additional Growth Shares depending upon market conditions. In addition, the Company is authorized to issue new classes of shares, which may be senior to the Growth Shares but cannot be senior to the Preferred Shares or Preferred CD Shares. No shareholders have pre-emptive rights.
The rights of the holders of each class of shares of the Company, including the distributions to which each class is entitled, are set forth in full in the Company's Amended and Restated Certificate of Formation and Operating Agreement (the "Operating Agreement"), a copy of which is filed as an exhibit to this report. The following is a summary of the rights, privileges and preferences of the holders of each class.
Preferred Shares. The performance of, and distributions with respect to, each series of Preferred Shares is based solely upon the performance of that portion of the original bonds attributable to such series as they existed immediately following the Refunding and prior to the 1995 Financing. Accordingly, the holders of the Preferred Shares are entitled to their proportionate share of distributions with respect to the 11 original bonds and 11 refunded Series B bonds held by the Company, as well as the distributions they would have received with respect to the 11 refunded Series A bonds had the 1995 Financing not occurred. Distributions to the holders of the Preferred Shares are satisfied, however, on a basis having priority over all payments with respect to the Growth Shares, Term Growth Shares and any other equity class (other than Preferred CD Shares), out of all of the resources of the Company, including revenue from investment of the proceeds from the 1995 Financing. None of the expenses incurred in connection with the 1995 Financing or any future financings are borne by the holders of the Preferred Shares.
The Preferred Shares must be partially redeemed upon (i) the sale or repayment of a bond attributable to such shares, (ii) the sale of a related mortgaged property, or (iii) beginning in the year 2000, an appraisal of a related mortgaged property indicating that its fair market value exceeds the sum of (a) the face value of the bond secured by the property and (b) unpaid accrued interest on such bond. Upon liquidation, the holders of the Preferred Shares are entitled to receive, after payment of creditors, the appraised value of the Company's assets attributable to such shares, together with all unpaid accrued distributions, before any distribution is made to the holders of Growth Shares or other shares ranking junior to the Preferred Shares.
The holders of the Preferred Shares do not have voting rights with respect to the election of the Company's directors, but do have voting rights with respect to any merger or consolidation of the Company in which it is not the surviving entity or the sale of substantially all of its assets, the removal of a director, and any alteration of the rights, privileges or preferences of the Preferred Shares under the Operating Agreement. The voting power of the Preferred Shares, relative to all of the Company's outstanding shares, is equivalent to the relative voting power, immediately prior to the Merger, of the BACs exchanged therefor. Such protection from loss of relative voting power, however, does not extend to issuances of additional shares of the Company subsequent to the Merger.
Preferred CD Shares. The performance of, and distributions with respect to, each series of Preferred CD Shares is based solely upon the performance of that portion of the original bonds attributable to such series as they existed immediately following the 1995 Financing. Accordingly, the holders of the Preferred CD Shares are entitled to their proportionate share of distributions with respect to the 11 original bonds and 11 refunded Series B bonds held by the Company. Because the holders of the Preferred CD Shares received a distribution of their pro rata share of the proceeds of the 1995 Financing, however, they, unlike the holders of the Preferred Shares, (i) receive no distribution relating to the performance of the 11 refunded Series A bonds the Receipts for which were sold in the 1995 Financing and (ii) bear their pro rata share of the expenses of the 1995 Financing and any future financings utilizing any of the original bonds.
The rights, privileges and preferences of the Preferred CD Shares are otherwise substantially the same as those of the Preferred Shares.
Term Growth Shares. The holders of the Term Growth Shares are entitled to distribution of the cash flow attributable to 2% of the Company's net income. Except with respect to distributions and various redemption features as defined in the Operating Agreement, the rights and privileges of the Term Growth Shares are substantially the same as those of the Growth Shares.
Growth Shares. The holders of the Growth Shares, also referred to as common shares, are entitled to such distributions as declared by the Board of Directors out of funds legally available therefor. As of December 31, 1997, the Company's policy is to distribute to the holders of the Growth Shares approximately 95% of its cash flow from operations (exclusive of capital-related items and reserves) after payment of distributions to the holders of the Preferred Shares, Preferred CD Shares and Term Growth Shares. No distributions may be declared or paid with respect to the Growth Shares, however, so long there remains unpaid any required distribution or redemption payment with respect to the Preferred Shares and Preferred CD Shares.
The Growth Shares are not redeemable (except pursuant to certain anti-takeover provisions) and upon liquidation share ratably in any assets remaining after payment of creditors and the liquidation preferences of the Preferred Shares and Preferred CD Shares. The holders of the Growth Shares voting as a single class have the right to elect the directors of the Company and, voting together with the holders of the Preferred Shares and Preferred CD Shares, have voting rights with respect to a merger or consolidation of the Company in which it is not the surviving entity or the sale of substantially all of its assets, the removal of a director, the dissolution of the Company, and certain anti-takeover provisions. Each Growth Share entitles its holder to cast one vote on each matter presented for shareholder vote. Because of provisions providing limited protection against dilution of the voting rights of the holders of the Preferred Shares and Preferred CD Shares, each Preferred Share and Preferred CD Share currently entitles its holder to cast 44 votes on each matter presented for a vote of the holders of those shares.
Item 6.
Item 6. Selected Financial Data.
ITEM 6. SELECTED FINANCIAL DATA
MUNICIPAL MORTGAGE AND EQUITY, L.L.C. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share, per share and per BAC data)
MUNICIPAL MORTGAGE AND EQUITY, L.L.C. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
MUNICIPAL MORTGAGE AND EQUITY, L.L.C. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In thousands, except share data)
General Mortgage Loan Terms
The Company's rights under all of the bonds held by it are defined by the terms of the related mortgage loans, which are assigned to the Company to secure the payment of principal and interest under the bonds. These assignments include assignments of mortgages on the underlying properties and of rents.
Participating Mortgage Bonds
The participating mortgage bonds are collateralized by nonrecourse participating first mortgage loans on multifamily housing developments. At December 31, 1997, the company's investment in participating mortgage bonds includes the 11 bonds not refunded in the 1995 Financing and the Crossings bond purchased in 1997. The following paragraphs describe the general loan terms of the participating mortgage bonds.
Of the 22 original bonds, the 11 bonds not refunded in the 1995 Financing transaction (and the 11 refunded bonds for the period prior to the 1995 Financing) provide for the payment of base interest and additional contingent interest. Principal on the mortgage loans will not be amortized while held by the Company, but will be required to be repaid or refinanced in a lump sum payment at the end of the holding period or at such earlier time as the Company may require. The mortgage loans are non-assumable except with the consent of the Company. Prepayment is prohibited during the first seven years of the mortgage loan. Between years eight and eleven, the mortgage loan may be prepaid at the option of the borrower subject to a declining penalty. Prepayments after the twelfth year, subject to par value appraisals, are allowed without regard to whether the mortgaged property is sold or refinanced. The Company may also require prepayment of the mortgage loan upon the occurrence of an event which would cause significant risk that the interest on the bonds would be subject to federal income taxation.
The mortgage loans bear interest at base rates determined by arms length negotiations that reflected market conditions existing at the time the original bonds were purchased by the Company. Each loan provides for contingent interest in an amount equal to the difference between the stated base interest rate and 16%. During the construction period, each original bond bore interest at base rates that were separately negotiated, and payment of any construction period contingent interest was deferred until the project was sold or refinanced. Contingent interest (other than contingent interest during the construction period) is payable during the year from 100% of the project cash flow until the Company's aggregate non-compounded interest rate equals the base interest rate plus 1.5% to 2.5% (first tier contingent interest), as the case may be, on each mortgage loan. Any remaining cash flow is divided equally with the property owner until the Company reaches its 16% annual limit. To the extent that the aggregate of all interest payments, including contingent interest, for any year does not equal 16%, the difference is deferred until the mortgaged property is sold or the mortgage loan repaid. Sale or repayment proceeds remaining after the repayment of principal and other specified payments are all paid to the Company to the extent necessary for the Company to recover the base rate plus first tier contingent interest previously deferred; thereafter, 50% of any excess sale or repayment proceeds is paid to the Company until it reaches its 16% per annum limit. Accordingly, the ability of the Company to collect contingent interest on the original bonds is dependent upon the level of project cash flow and sale or repayment proceeds.
With respect to the 22 original bonds held by the Company prior to the Refunding, 16 had been placed on non-accrual status as of December 31, 1995. On February 14, 1995, 11 of these 16 were refunded in connection with the 1995 Financing. No additional bonds were placed on non-accrual status during 1996 or 1997. Thus as of December 31, 1997 and 1996, five original bonds were on non-accrual status. Additional interest income that would have been recognized had these original bonds not been placed on non-accrual status was approximately $1.1 million, $1.8 million and $2.2 million for the years ended December 31, 1997, 1996 and 1995, respectively.
On January 27, 1997, the Company acquired a $7.1 million tax-exempt mortgage revenue bond collateralized by a 200-unit multifamily apartment project known as The Crossings, located in DeKalb County, Georgia with a stated annual interest rate of 5.5%. On July 11, 1997, the bond was refunded, and as a result, the stated annual interest rate was changed to 8.0% and the maturity date was extended to a 30-year term (2027) with a prepayment option in the twelfth year. Also as part of the refunding, the Company now may participate in the growth of the value of the underlying property collateral through contingent interest payments from the property's cash flow. These contingent interest payments are taxable income for federal income tax purposes. Prior to the refunding, under the terms of the transaction, the Company received an effective annual interest rate of 8.81% on the bond as a result of a yield maintenance agreement entered into between the borrower and the Company. The 3.31% yield maintenance fee earned on the bonds was taxable income for federal income tax purposes. Additionally, in conjunction with this bond purchase, the Company made a taxable loan discussed further in Note 9.
Non-Participating Mortgage Bonds
At December 31, 1997, the Company owned five non-participating mortgage bonds. The non-participating mortgage bonds bear interest at various fixed annual rates, ranging from 7.45% to 9.5%. Principal amortization on four bonds is received in accordance with amortization tables set forth in the bond documents. The following paragraphs describe the general loan terms of the non-participating mortgage bonds.
On January 19, 1996, a Series A bond collateralized by Riverset II, a multifamily property located in Memphis, Tennessee was acquired for $7.2 million. The bond was purchased at a discount of $402,000, which is being amortized into income to approximate a level yield over the life of the bond. The bond bears interest at the stated annual rate of 9.50%. Principal payments begin in 2013 until maturity in 2019. All but $110,000 face amount of this bond was sold as part of the 1997 Securitization described in Note 3.
On December 12, 1996, the Company purchased for approximately $7.7 million a mortgage revenue bond collateralized by Charter House, a multifamily property located in Lenexa, Kansas. The bond provides for interest at the stated annual rate of 7.45%. Principal amortization on the mortgage began in January 1997 and continues through the initial remarketing date in July 2006. At the remarketing date the remarketing agent is required to adjust the interest rate to enable the bonds to be remarketed at par but in no event shall the interest rate be greater than 12%. Principal amortization will also be adjusted accordingly. The bond matures in July 2026. The bond was purchased at a premium of $76,750 which is being amortized into income to approximate a level yield over the life of the bond. The Company may require mandatory redemption upon the occurrence of an event which would cause significant risk that the interest on the bond would be subject to federal income taxation. All but $35,000 face amount of this bond was sold as part of the 1997 Securitization described in Note 3.
Also, on December 12, 1996, the Company purchased the following three Series A bonds with stated annual interest rates ranging from 8.15% to 8.25%: (i) a bond collateralized by Torries Chase, a multifamily property located in Olathe, Kansas, for approximately $2.1 million; (ii) a bond collateralized by Oakbrook, a multifamily property located in Topeka, Kansas, for approximately $3.2 million; and (iii) a bond collateralized by Hidden Valley, a multifamily property located in Kansas City, Missouri, for approximately $1.7 million. The Oakbrook bond was purchased at a premium of $32,100 which is being amortized into income to approximate a level yield over the life of the bond. Principal amortization for Hidden Valley and Torries Chase began in July 1996 and continues through maturity, January 2026. Principal amortization for Oakbrook began January 1997 and continues through maturity, July 2026. Between years ten and twelve, the bonds are subject to optional redemption at the option of the borrowers subject to a declining penalty. The Company may require mandatory redemption upon the occurrence of an event which would cause significant risk that the interest on the bonds would be subject to federal income taxation.
On June 11, 1997, the Company acquired a $11.1 million tax-exempt mortgage revenue bond collateralized by a 215 unit multifamily apartment project known as Southgate, located in Howard County, Maryland. In conjunction with the bond purchase, the Company also made a taxable loan discussed further in Note 9. The bond bears interest at a stated annual rate of 8.0%. Principal payments began in August 1997 until maturity in 2027. In December 1997, the entire bond was sold as part of the 1997 Securitization.
As of December 31, 1997, there were no non-participating mortgage bonds on non-accrual status.
Subordinate Participating Mortgage Bonds
At December 31, 1997, the Company's investment in subordinate participating mortgage bonds includes the 11 Series B Bonds resulting from the Refunding and the Riverset Phase II B Bond. The following paragraphs describe the general loan terms of the subordinate participating mortgage bonds.
The Series B Bonds resulting from the Refunding, except for Steeplechase Falls, Barkley Place and The Meadows, bear annual interest equal to the greater of (i) three percent (3%) per annum ("base interest") and (ii) the amount of available cash flow not exceeding 16%. To the extent annual interest paid on these Series B Bonds for the period is less than 16%, the difference between 16% and the greater of (i) actual interest collected and (ii) base interest is payable on the earlier of the maturity date or the redemption date. The Series B Bonds relating to Steeplechase Falls, Barkley Place and The Meadows bear interest at the annual rate of 16%. Principal amortization on these Series B Bonds prior to their maturity in January 2030 is permitted but not required. To the extent the operating partnerships have available cash flow, as defined, interest is payable monthly.
The Series B Bonds resulting from the Refunding are subordinate in priority and right of payment to the related Series A Bonds and Demand Notes (discussed in Note 9) and are payable only to the extent of available cash flow. For the years ended December 31, 1997 and 1996, interest payments of approximately $4.1 million and $4.8 million, respectively, were received on these Series B Bonds. All 11 of the bonds were on non-accrual status. As of December 31, 1997 and 1996, the three Series B Bonds that bear interest at 16% were unable to pay full base interest. Additional interest income that would have been recognized by the Company had these bonds not been placed on non-accrual status was approximately $693,000 and $760,000 for the years ended December 31, 1997 and 1996, respectively.
In connection with the purchase of the Riverset II Series A bond, the Company also acquired the related Series B mortgage revenue bond, with a face value of $1.5 million, which was allocated $30,000 of the total purchase price. The bond, which matures in 2019, bears interest equal to the extent of available cash flow not to exceed the annual rate of 10%. Principal amortization is required to the extent cash is available in accordance with the bond terms. For the year ended December 31, 1996, the interest and principal payments received on the bond were approximately $25,000 and $30,000, respectively. For the year ended December 31, 1997, no payments for interest or principal were received.
All of the participating subordinate mortgage bonds are on non-accrual status as of December 31, 1997.
Non-Participating Subordinate Mortgage Bonds
At December 31, 1997, the Company had two investments in non-participating subordinate mortgage revenue bonds.
On August 30, 1996, the Company purchased the following two non-participating Series B bonds providing for interest at the stated annual rate of 12.5%: (i) a bond collateralized by Locarno, a multifamily property located in Kansas City, Missouri for $675,000 and (ii) a bond collateralized by Independence Ridge, a multifamily property located in Jackson County, Missouri for $1,045,000. Both bonds were purchased at face value. Principal may be repaid in a lump sum payment any time after the initial remarketing date but is required no later than the maturity date in 2015.
As of December 31, 1997, there were no non-participating subordinate mortgage bonds on non-accrual status.
Valuation Adjustments
For the year ended December 31, 1997 and 1996, the net adjustment to unrealized gains and losses on mortgage revenue bonds available for sale increased shareholders' equity by approximately $13.8 million and $9.4 million, respectively. The Company recorded other-than-temporary impairments totaling $2,580,000 on two bonds: Lakeview ($334,000) and Villa Hialeah ($2,246,000) in the fourth quarter of 1997. The Company recorded other-than-temporary impairments totaling $3,990,000 on five bonds: Creekside ($1,239,000), Lakeview ($1,315,000), Willowgreen ($1,131,000), Mallard I ($143,000) and Mallard II ($162,000) in the second quarter of 1996. For 1995, there were no other-than-temporary impairments.
The other-than-temporary impairments (and the unrealized gains and losses) discussed above do not affect the cash flow generated from property operations, distributions to shareholders, the characterization of the tax- exempt income stream nor the financial obligations under the bonds. The Company will continue to evaluate the need for other-than-temporary impairments in the future as circumstances dictate.
NOTE 7 - OTHER BOND RELATED INVESTMENTS
As of December 31, 1997, the Company held nine other bond related investments which are collateralized by ten individual properties. The other bond related investments are primarily investments in RITES, a security offered by Merrill Lynch through its P-floats Program. The RITES are part of a program under which a bond is placed into a trust and two types of securities are sold by the trust, P-floats and RITES. The P-floats are the senior security and bear interest at a rate that is reset weekly by the Remarketing Agent, Merrill Lynch, to result in the sale of the P-floats at par. The RITES are the subordinate security and receive the residual interest. The residual interest is the remaining interest on the bond after payment of all fees and the P-floats interest. In conjunction with the purchase of the RITES, the Company entered into interest rate swap contracts to hedge against interest rate exposure on the Company's investment in the RITES (see further discussion in Note 8). The following table provides certain information with respect to each of the other bond related investments.
Mr. Mark K. Joseph, the Company's Chairman and Chief Executive Officer, controls and is an officer of, and Mr. Michael L. Falcone, the Company's President, has an interest in and is a board member of, an entity which is responsible for a full range of property management functions for certain properties that serve as collateral for the Company's bond investments. For these services the affiliates receive property management fees pursuant to management fee contracts. Consistent with the Company's Amended and Restated Certificate of Formation and Operating Agreement (the "Operating Agreement"), each affiliate property management contract is presented to the independent members of the Board of Directors for approval with information documenting the comparability of the proposed fees to those in the market area of the property. During the years ended December 31, 1997, 1996 and 1995, these fees approximated $756,000, $638,000, and $589,000, respectively.
Mr. Joseph owns an indirect interest in the general partners of the Southgate Crossings operating partnership. Also, Mr. Joseph controls the general partners of 17 of the 22 operating partnerships whose property collateralizes the Company's original bonds and Mr. Thomas R. Hobbs, the Company's Senior Vice President, serves as an officer of such general partners. In order to preserve the loan obligations and the participation in cash flow for the Company and thereby assure that the Company will continue to recognize tax-exempt income, 13 of the 17 operating partnerships were created as successors to the original borrowers. With respect to the other four operating partnerships, an entity controlled by Mr. Joseph was designated as the general partner of the original borrowing entities. However, such entities could have interests which do not fully coincide with, or even are adverse to, the interests of the Company. Such entities could choose to act in accordance with their own interests, which could adversely affect the Company. Among the actions such entities could desire to take might be selling a property, thereby causing a redemption event, at a time and under circumstances which would not be advantageous to the Company.
Shelter Development Holdings, Inc. (the "Special Shareholder") is personally liable for the obligations and liabilities of the Company. Mr. Joseph owns 100% of the Special Shareholder. In the event that a business combination or change in control occurs, and the Special Shareholder does not approve of such transaction, then the Special Shareholder has the right to terminate its status as the Special Shareholder. In the event of such termination, the Company would be obligated to pay the Special Shareholder $1,000,000.
Prior to the Merger, the former Associate General Partner received fees for mortgage servicing from the operating partnerships owning the mortgaged properties. The fees paid by all operating partnerships to the former Associate General Partner approximated $1.2 million for the period January 1 through July 31, 1996 and approximately $2 million for the year ended December 31, 1995. As discussed in Note 4, on August 1, 1996, the former General Partners and their affiliates contributed to the Company their mortgage servicing activities in exchange for Growth Shares, and the Company now receives the cash flow associated with these fees. Upon receipt of the mortgage servicing activities, the Company terminated the mortgage servicing fees paid on bonds collateralized by properties controlled by affiliates of the Company. As a result, the Company now receives these fees in two forms, (1) as mortgage servicing fees from the bonds collateralized by properties controlled by non-affiliates, and (2) as additional bond interest for bonds collateralized by properties controlled by affiliates of the Company. For the year ended December 31, 1997, the cash flow associated with these fees paid to the Company approximated $495,000 in mortgage servicing fees and $1.5 million in additional bond interest. For the five months ended December 31, 1996, the cash flow associated with these fees paid to the Company approximated $206,000 in mortgage servicing fees and $616,000 in additional bond interest.
An affiliate of the former Managing General Partner was engaged as MLP II's exclusive project acquisition and servicing agent. The affiliate received as compensation, project selection and acquisition fees (one percent of the gross proceeds) and annual mortgage servicing fees to the extent the net proceeds raised by the 1995 Financing are permanently invested. On August 1, 1996, the rights to these fees were exchanged for Growth Shares in connection with the Merger transaction. Prior to the Merger, $97,000 was earned by the affiliate related to such fees.
In addition, 177061 Canada Ltd. (formerly Shelter Corporation of Canada Limited), a general partner of the former Associate General Partner, is contractually obligated to the nonaffiliated borrowers of North Pointe and Whispering Lake to fund operating deficits. The unaccrued and unpaid balances due under the limited operating deficit guarantees, including interest as of December 31, 1997, totaled $27,000 and $33,000 for North Pointe and Whispering Lake, respectively. Scheduled payments totaling $63,000, $98,000 and $ 116,000 were received on the North Pointe obligation and recorded as income during 1997, 1996 and 1995, respectively. Under the Whispering Lake obligation, $33,000, $139,000 and $165,000 were received and recorded as income during 1997, 1996 and 1995, respectively.
In October 1997, the Company purchased a $33.9 million bond collateralized by the Village of Stone Mountain. The Company subsequently sold this bond and as a result at December 31, 1997 owns a RITES investment and interest-only strip which represent an interest in the cash flows from this $33.9 million bond. The borrower of the $33.9 million mortgage revenue bond is the Shelter Foundation, a public non-profit foundation that provides housing and related services to families of low and moderate income. Mark K. Joseph, the Company's Chairman and Chief Executive Officer, is the President and one of five directors of the Shelter Foundation. In addition, companies of which Mr. Joseph owns an indirect minority interest and Mr. Falcone owns a direct minority interest, received a development fee of 1.0% of the loan amount and serve as property manager of the related apartment project for a fee of $13,750 per month.
An affiliate of Merrill Lynch owns 1,250 Term Growth Shares of the Company and 128,367 Growth Shares. The Company may from time to time enter into various investment banking, financial advisory and other commercial services with Merrill Lynch for which Merrill Lynch receives and will receive (in the future) customary compensation. The Company also enters into various RITES and interest rate swap transactions with Merrill Lynch on terms generally available in the marketplace.
NOTE 13 - SHAREHOLDERS' EQUITY
The Company's Preferred Shares, Preferred CD Shares, Term Growth Shares and Growth Shares differ principally with respect to allocation of income and cash distributions, as provided by the terms of the Operating Agreement as summarized below. In addition, the Preferred Shares and Preferred CD Shares, which retain their BAC series distinctions, have priority over the Growth Shares and Term Growth Shares with respect to distributions and redemptions.
Preferred Shares
Taking into account their respective series distinctions, the Preferred Shares are allocated their proportionate share of the income generated by the 22 original bonds and related parity working capital loans held by the Partnership immediately prior to the 1995 Financing (collectively the "original bonds") including income attributable to the refunded Series A Bonds no longer held by the Company. While the Preferred Shares bore their proportionate share of the expenses of the Refunding and will bear their share of the expenses of any future refunding of the original bonds, the Preferred Shares are not allocated any income or expense related to the 1995 Financing and the investment of the proceeds therefrom or from any future financings. The Company is required to distribute to the holders of the Preferred Shares cash flow attributable to such shares, as defined by the Operating Agreement. The Preferred Shares must be partially redeemed when any bond attributable to the shares is sold or beginning in the year 2000 when any bond attributable to the shares reaches par value (which includes accrued but unpaid base interest under the original bond terms and accrued but unpaid interest under the then-current bond terms) based on receipt of an appraisal of the property securing the bond. Additionally, beginning in the year 2004, and every second year thereafter, Preferred Shareholders may exchange their remaining Preferred Shares, at the then current value of the remaining attributable assets for either Growth Shares or cash, as determined by the Company's Board of Directors.
Preferred CD Shares
The Preferred CD Shares are allocated their proportionate share of income on the same basis as the Preferred Shares, except that in addition the Preferred CD Shares received a one-time special distribution of their proportionate share of the net proceeds from the 1995 Financing, will receive a similar distribution with respect to any future financings of the original bonds, are not allocated any income attributable to the refunded Series A Bonds and are allocated their proportionate share of the annual costs of the 1995 Financing (and any such future financings utilizing any of the original bonds). The Company is required to distribute to the holders of the Preferred CD Shares cash flow attributable to such shares, as defined by the Operating Agreement. The Preferred CD Shares must be partially redeemed when any bond attributable to the shares is sold or beginning in the year 2000 when any bond attributable to the shares reaches par value (which includes accrued but unpaid base interest under the original bond terms and accrued but unpaid interest under the then-current bond terms) based on receipt of an appraisal of the property securing the bond. Additionally, beginning in the year 2004, and every second year thereafter, Preferred CD Shareholders may exchange their remaining Preferred CD Shares, at the then current value of the remaining attributable assets, for either Growth Shares or cash, as determined by the Company's Board of Directors.
Term Growth Shares
The Term Growth Shares are allocated an aggregate of 2% of the Company's net cash flow after allocation to the Preferred Shares and Preferred CD Shares, and the holders of the Term Growth Shares are entitled to distribution of the cash flow attributable to such allocable income before any distributions to the holders of the Growth Shares. Term Growth Shares will be redeemed when Preferred and Preferred CD Shares are fully redeemed or converted (subject to certain conditions defined in the Operating Agreement).
Growth Shares
The Growth Shares are allocated the balance of the Company's income after allocation to the Preferred Shares, Preferred CD Shares and Term Growth Shares. Consequently, the Growth Shares are allocated their proportionate share of the income generated by the original bonds (excluding the income generated by the Series A Bonds that serve as collateral for the Receipts) and all of the income generated by bonds acquired with the proceeds from the 1995 Financing and any future financings. As of December 31, 1997, it is the Company's policy to distribute to the holders of the Growth Shares approximately 95% of cash flow from operations after distributions to the holders of the Preferred Shares, Preferred CD Shares and Term Growth Shares.
The following table reflects distributions for the year ended December 31, 1997 and includes distributions declared and paid in 1998 for the quarter ended December 31, 1997.
NOTE 14 - OTHER INCOME
For the year ended December 31, 1997 and 1996, the Company's other income included mortgage servicing fees received from the bonds that are collateralized by properties controlled by non-affiliates (see Note 12) and guarantee fees received from the Village of Stone Mountain. Also in 1997, the Company recognized $40,000 of the program development fee received from the Montford Group discussed further in Note 11.