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As filed with the Securities and Exchange Commission on
March 27, 2002
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number 0-17440
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION
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(Exact name of registrant as specified in its charter)
Federally chartered
instrumentality 52-1578738
of the United States
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(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
1133 21st Street, N.W., Suite
600, 20036
Washington, D.C.
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(Address of principal executive (Zip code)
offices)
(202) 872-7700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Exchange on Which Registered
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Class A Voting Common Stock New York Stock Exchange
Class C Non-Voting Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Class B Voting
Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R. ss.229.405) is not contained herein, and will
not be contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market values of the Class A Voting Common Stock and Class C
Non-Voting Common Stock held by non-affiliates of the Registrant were
$35,067,135.60 and $433,593,283.90, respectively, based upon the closing prices
for the respective classes on March 11, 2002, as reported by the New York Stock
Exchange. The aggregate market value of the Class B Voting Common Stock is not
ascertainable due to the absence of publicly available quotations or prices for
the Class B Voting Common Stock as a result of the limited market for, and
infrequency of trades in, Class B Voting Common Stock and the fact that any such
trades are privately negotiated transactions.
There were 1,030,780 shares of Class A Voting Common Stock, 500,301 shares
of Class B Voting Common Stock and 10,060,169 shares of Class C Non-Voting
Common Stock outstanding as of March 11, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be filed on or about April 19, 2002 in connection with
the Annual Meeting of Stockholders to be held on June 6, 2002 (portions of which
are incorporated by reference into Part III of this Annual Report on Form 10-K).
PART I
Item 1. Business
General
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") is a stockholder-owned, federally chartered instrumentality of
the United States that was created to establish a secondary market for
agricultural real estate and rural housing mortgage loans ("Qualified Loans").
Farmer Mac was created by the Agricultural Credit Act of 1987 (12 U.S.C. ss.ss.
2279aa et seq.), which amended the Farm Credit Act of 1971 (collectively, as
amended, the "Act") to provide for the existence of a secondary market for
agricultural mortgages. Farmer Mac provides liquidity to the agricultural
mortgage market by: (1) purchasing newly originated Qualified Loans directly
from lenders through its "cash window" and existing, or "seasoned," Qualified
Loans from lenders and other third parties in negotiated transactions; (2)
exchanging securities guaranteed by Farmer Mac for newly originated and seasoned
Qualified Loans that back those securities through its "swap" program; (3)
issuing long-term standby purchase commitments for newly originated and seasoned
Qualified Loans; and (4) purchasing mortgage-backed bonds secured by Qualified
Loans through its "AgVantage" program. Generally, the loans involved in swap and
long-term standby purchase commitment transactions are seasoned loans.
Farmer Mac conducts its business through two programs--"Farmer Mac I" and
"Farmer Mac II." Under the Farmer Mac I Program, Farmer Mac purchases, or
commits to purchase, Qualified Loans, or obligations backed by Qualified Loans,
that are not guaranteed by any instrumentality or agency of the United States.
Under the Farmer Mac II Program, Farmer Mac purchases the guaranteed portions
(the "Guaranteed Portions") of loans guaranteed by the United States Department
of Agriculture (the "USDA") pursuant to the Consolidated Farm and Rural
Development Act (7 U.S.C. ss.ss. 1921 et seq.; the "ConAct").
Pursuant to its statutory authority, Farmer Mac guarantees timely payments
of principal and interest on securities backed by Qualified Loans or Guaranteed
Portions ("Farmer Mac Guaranteed Securities") and retains those securities in
its portfolio or sells them in the capital markets. As of December 31, 2001,
outstanding Farmer Mac guarantees totaled $4.187 billion. For more information
about Farmer Mac's securities and its financial performance, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Farmer Mac's current principal sources of revenue are: (1) fees received in
connection with the issuance of its guarantee and commitments to purchase
Qualified Loans; and (2) net interest income earned on its retained portfolio of
Farmer Mac Guaranteed Securities, Qualified Loans, AgVantage bonds and
investments.
Farmer Mac funds its program operations primarily through the issuance of
debt obligations of various maturities. See "Farmer Mac Guarantee Program --
Financing." As of December 31, 2001, Farmer Mac had outstanding $2.197 billion
of Discount Notes and $1.004 billion of Medium-Term Notes, net of unamortized
hedging costs, discounts and premiums. During 2001, Farmer Mac continued its
strategy of using debt issuances to increase its presence in the capital markets
in order to improve the mortgage rates available to farmers, ranchers and rural
homeowners. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Net Interest Income."
Farmer Mac is an institution of the Farm Credit System (a "System
Institution"), but is not liable for any debt or obligation of any other System
Institution. Likewise, neither the Farm Credit System nor any other individual
System Institution is liable for any debt or obligation of Farmer Mac.
The Farm Credit Administration (the "FCA"), acting through its Office of
Secondary Market Oversight ("OSMO"), has general regulatory and enforcement
authority over Farmer Mac, including the authority to promulgate rules and
regulations governing the activities of Farmer Mac and to apply FCA's general
enforcement powers to Farmer Mac and its activities. For a discussion of Farmer
Mac's statutory capital requirements and its capital levels, see "Government
Regulation of Farmer Mac -- Regulation -- Capital Standards" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Overview" and "-- Liquidity and Capital Resources --
Capital Requirements."
Farmer Mac has three classes of common stock outstanding--Class A Voting,
Class B Voting and Class C Non-Voting (collectively, the "Common Stock"). The
Class A and Class B Voting Common Stock are collectively referred to herein as
the "Voting Common Stock." See "Market for Registrant's Common Equity and
Related Stockholder Matters" for information regarding Farmer Mac's Common
Stock.
As of December 31, 2001, Farmer Mac employed 30 persons, located primarily
at its principal executive offices at 1133 Twenty-First Street, N.W., Suite 600,
Washington, D.C. 20036. Its telephone number is (202) 872-7700.
FARMER MAC GUARANTEE PROGRAM
Farmer Mac I
Qualified Loans
Under the Farmer Mac I Program, Farmer Mac purchases, or commits to
purchase, Qualified Loans and guarantees securities backed by, or representing
interests in, Qualified Loans. A Qualified Loan is a loan secured by a fee
simple mortgage or a long-term leasehold mortgage, with status as a first lien
on Agricultural Real Estate or Rural Housing (as defined below) located within
the United States. A Qualified Loan must also be an obligation of: (1) a citizen
or national of the United States or an alien lawfully admitted for permanent
residence in the United States; or (2) a private corporation or partnership
whose members, stockholders or partners holding a majority interest in the
corporation or partnership are individuals described in clause (1). A Qualified
Loan must also be an obligation of a person, corporation or partnership having
sufficient indicia of creditworthiness to indicate a reasonable likelihood of
repayment of the loan according to its terms. A Qualified Loan may be a seasoned
or newly originated mortgage loan that conforms to Farmer Mac's requirements.
Qualified Loans must be secured either by Agricultural Real Estate or by
Rural Housing. "Agricultural Real Estate" is defined as a parcel or parcels of
land, which may be improved by permanently affixed buildings or other
structures, that (1) are used for the production of one or more agricultural
commodities or products; and (2) consist of a minimum of five acres or are used
in producing minimum annual receipts of $5,000. The maximum principal amount of
a Qualified Loan secured by Agricultural Real Estate is $3.8 million (as
adjusted for inflation as of December 1, 2001) for loans secured by more than
1,000 acres of land and $10.0 million for loans secured by 1,000 acres or less.
"Rural Housing" is defined as a one- to four-family, owner-occupied,
moderately priced principal residence located in a community having a population
of 2,500 or fewer inhabitants, where the dwelling (excluding the land to which
the dwelling is affixed) does not have a purchase price or current appraised
value of more than $153,386 (as adjusted for inflation as of October 1, 2001).
In addition to the dwelling itself, a Rural Housing Qualified Loan can be
secured by land associated with the dwelling having an appraised value of no
more than 50 percent of the total appraised value of the combined property. To
date, Rural Housing Qualified Loans have not represented a significant part of
Farmer Mac's business.
Purchases
Qualified Loan Purchases. Farmer Mac purchases Qualified Loans directly
from approved lenders ("Sellers") for cash on a continuing basis through its
"cash window." Farmer Mac also purchases portfolios of newly originated or
seasoned Qualified Loans on a negotiated basis. Farmer Mac primarily purchases
fixed- and adjustable-rate Qualified Loans, but may also purchase other types of
Qualified Loans, including convertible mortgage loans. Qualified Loans purchased
by Farmer Mac have a variety of maturities and often include balloon payments.
Certain Qualified Loans also include provisions that require a yield maintenance
payment in the event of prepayment (depending upon the level of interest rates
at the time of prepayment). Farmer Mac seeks to develop and offer loan products
that are in demand by agricultural borrowers and the lenders who serve them and
that can be efficiently securitized and sold into the capital markets. Because
the securitization process requires the grouping of loans into uniform pools,
Farmer Mac emphasizes the importance of conformity to its program requirements,
including the interest rate, amortization, maturity and payment specifications,
when it offers to purchase loans.
During 2001, Farmer Mac purchased $266.6 million of Qualified Loans through
its Farmer Mac I cash window program. During the year, the top 10 Sellers
generated 72.2 percent of the total Farmer Mac I cash window loan volume, of
which total Zions First National Bank, Farmer Mac's largest combined Class A and
Class C stockholder, accounted for 34.4 percent. For more information regarding
loan volume, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations -- Business Volume."
Mortgage-Backed Bond Purchases. Under the "AgVantage" program, Farmer Mac
purchases (and guarantees timely payment of principal and interest on)
mortgage-backed bonds issued by Sellers who also have been certified as
"AgVantage certified facilities" (each, an "AgVantage Issuer") based upon Farmer
Mac's assessment of their agricultural loan underwriting and servicing
capabilities, as well as their creditworthiness. Each AgVantage bond is a
general obligation of the related AgVantage Issuer and is secured by eligible
collateral in an amount ranging from 120 percent to 150 percent of the bond's
outstanding principal amount. Eligible collateral consists of Qualified Loans
having an aggregate principal balance equal to at least 100 percent of the
bond's outstanding principal amount plus cash or securities issued by the U.S.
Treasury or guaranteed by an agency or instrumentality of the United States that
makes up any remaining required collateral. During 2001, Farmer Mac purchased 18
AgVantage bonds with maturities ranging from one month to three years (most of
which were less than one year) from five AgVantage Issuers resulting in Farmer
Mac guarantees of $126.4 million. As of December 31, 2001, the outstanding
principal amount of AgVantage bonds was $24.5 million.
Off-Balance Sheet Guarantees
Farmer Mac offers two alternatives to lenders who seek the benefits of
Farmer Mac's guarantee without selling loans to Farmer Mac through the cash
window--"swap" transactions and long-term standby purchase commitments
("LTSPCs"). In a swap transaction, Farmer Mac acquires Qualified Loans from
lenders in exchange for Farmer Mac Guaranteed Securities backed by such
Qualified Loans. Unlike cash window transactions, which generally involve loans
with terms specified by Farmer Mac in advance, swap transactions usually are
negotiated with the lender and often involve loans with payment, maturity and
interest rate characteristics that differ from those of Farmer Mac's cash window
purchases. Regardless of variances in loan terms from the cash window products,
Qualified Loans must conform to Farmer Mac's credit standards to be eligible for
swap transactions. Farmer Mac's credit standards are discussed under "--
Underwriting and Appraisal Standards" below.
Farmer Mac's variant to a swap transaction, the LTSPC, is available for a
Seller seeking to obtain all of the benefits of a swap transaction (other than
the replacement of loans with securities on the Seller's books) while retaining
title to the Qualified Loans. An LTSPC permits a Seller to segregate a pool of
Qualified Loans in its portfolio and transfer the credit risk on those loans to
Farmer Mac. Under an LTSPC, Farmer Mac commits to purchase any Qualified Loan in
a segregated pool of loans if: (a) the Qualified Loan becomes four months
delinquent; (b) the Qualified Loan meets Farmer Mac's loan purchase requirements
at the time the Seller requests that Farmer Mac purchase the loan; or (c) the
Seller requests that Farmer Mac purchase all of the identified Qualified Loans.
In the case of a delinquent Qualified Loan, Farmer Mac will pay the Seller a
predetermined price for the loan--generally, principal plus accrued interest
(the payment of the accrued interest being delayed until the delinquent
Qualified Loan is liquidated); in the case of a Qualified Loan under clause (b)
or (c), the price for the Qualified Loan(s) would be negotiated at the time of
purchase. This structure permits the Seller to retain the segregated loans in
its portfolio while reducing its credit and concentration exposures and,
consequently, its regulatory capital requirements. In consideration for Farmer
Mac's assumption of the credit risk on the segregated loans, the Seller pays
fees to Farmer Mac based on the outstanding balance of the loans at a level
approximating what would have been Farmer Mac's guarantee fee had the loans been
exchanged with Farmer Mac in a swap transaction. The credit risk to Farmer Mac
related to an LTSPC is the same as that of a swap transaction or Farmer Mac
Guaranteed Security.
In 2001, the LTSPC continued to develop as a significant portion of the
Farmer Mac I Program and was the preferred alternative to swaps for non-cash
transactions. Through December 31, 2001, a total of $2.044 billion of Qualified
Loans had been placed under LTSPCs with 15 System Institutions. As of December
31, 2001, a cumulative total of 8,286 Qualified Loans with an aggregate
principal balance of $1.884 billion remained under LTSPCs. For more information
regarding guarantee volume, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations --
Business Volume."
Underwriting and Appraisal Standards
Farmer Mac has established Underwriting and Appraisal Standards for
Qualified Loans in an effort to reduce the risk of loss from borrower defaults
and to provide guidance concerning the management, administration and conduct of
underwriting and appraisals to all participants in the Farmer Mac I Program.
These standards were developed on the basis of industry norms for agricultural
mortgage loans qualified to be sold in the secondary market and were designed to
assess the creditworthiness of the borrower, as well as the value of the
mortgaged property relative to the amount of the Qualified Loan. Farmer Mac
requires Sellers to make representations and warranties regarding the conformity
of Qualified Loans to these standards and other requirements it may impose from
time to time.
The Underwriting Standards require, among other things, that the
loan-to-value ratio for any Qualified Loan (other than a part-time farm loan and
a loan on an agricultural facility with a related integrator contract) not
exceed 70 percent. In the case of newly originated Agricultural Real Estate
Qualified Loans that are not part-time farm loans, borrowers must also meet
certain credit ratios, including: (1) a pro forma (after closing the new loan)
debt-to-asset ratio of 50 percent or less; (2) a pro forma cash flow debt
service coverage ratio on the mortgaged property of not less than 1:1; (3) a pro
forma total debt service coverage ratio, including farm and non-farm income, of
not less than 1.25:1; and (4) a pro forma ratio of current assets to current
liabilities of not less than 1:1. In early 1998, Farmer Mac introduced a premium
loan program for loans to highly creditworthy borrowers. Under that program,
Qualified Loans meeting certain more stringent Underwriting Standards than the
foregoing loan-to-value and credit ratios would qualify for guarantee at a lower
fee than those applicable to loans not meeting the higher standards. In 1999,
Farmer Mac introduced a loan product for borrowers with high credit scores and
whose security properties have low loan-to-value ratios. For these borrowers,
loan processing has been simplified and documentation of the credit ratios
described above is not necessary.
In the case of a seasoned loan (a loan that has been outstanding for five
or more years), Farmer Mac considers sustained performance to be a reliable
alternative indicator of a borrower's ability to pay the loan according to its
terms. A seasoned loan generally will be deemed an eligible Qualified Loan if it
has been outstanding for at least five years and has a loan-to-value ratio
(based on an updated estimate of value) of 60 percent or less, and there have
been no payments more than 30 days past due during the previous three years and
no material restructurings or modifications for credit reasons during the
previous five years. Existing loans that have been outstanding for fewer than
five years must comply with the Underwriting Standards for newly originated
loans when the loan was originated.
In the case of Rural Housing Qualified Loans and Qualified Loans under the
part-time farm program, up to 85 percent of the appraised value of the property
may be financed if the amount above 80 percent is covered by private mortgage
insurance. For newly originated Qualified Loans on part-time farm properties,
the borrower must generate sufficient income from all sources to repay all
creditors. A borrower's capacity to repay debt obligations is determined by two
tests: (1) the borrower's monthly mortgage payment-to-income ratio should be 28
percent or less and (2) the borrower's monthly debt payment-to-income ratio
should be 36 percent or less.
The Underwriting Standards provide that Farmer Mac may, on a loan-by-loan
basis, accept loans that do not conform to one or more of the Underwriting
Standards when: (1) those loans exceed one or more of the Underwriting Standards
to a degree that compensates for noncompliance with one or more other Standards
("compensating strengths"); and (2) those loans are made to producers of
particular agricultural commodities in a segment of agriculture in which such
compensating strengths are typical of the financial condition of sound
borrowers. Farmer Mac's acceptance of loans that do not conform to one or more
of the Underwriting Standards is not intended to provide a basis for waiving or
lessening in any way the requirement that loans be of consistently high quality
in order to be eligible Qualified Loans.
The Appraisal Standards for newly originated Qualified Loans require, among
other things, that the appraisal function be performed independently of the
credit decision making process and conform to the Uniform Standards of
Professional Appraisal Practice promulgated by the Appraisal Standards Board.
The Appraisal Standards require the appraisal function to be conducted or
administered by an individual meeting certain qualification criteria and who (a)
is not associated, except by the engagement for the appraisal, with the credit
underwriters making the loan decision, though both the appraiser and the credit
underwriter may be directly or indirectly employed by a common employer; (b)
receives no financial or professional benefit of any kind relative to the report
content, valuation or credit decision made or based on the appraisal product;
and (c) has no present or contemplated future direct or indirect interest in the
appraised property. The Appraisal Standards also require uniform reporting of
reliable and accurate estimates of the market value, market rent and net
property income characteristics of the mortgaged property and the relative
market forces.
Sellers
A Seller may be a System Institution, bank, insurance company, business and
industrial development company, savings and loan association, association of
agricultural producers, agricultural cooperative, commercial finance company,
trust company, credit union or other financial entity. In order to participate
in the Farmer Mac I Program, the Seller must meet minimum eligibility
requirements, which include: (1) maintaining an acceptable level of net worth
(as defined by Farmer Mac); (2) having a staff experienced in agricultural
lending and servicing; and (3) maintaining a fidelity bond and either an errors
and omissions, mortgage impairment or mortgagee protection policy providing
coverage in an amount determined by Farmer Mac. Sellers must also make
representations and warranties to Farmer Mac regarding the Qualified Loans sold
to or guaranteed by Farmer Mac. In addition, to facilitate a wide distribution
of Farmer Mac's Voting Common Stock and give program participants an ownership
interest in the secondary market, Farmer Mac has established minimum Voting
Common Stock ownership requirements for Sellers, subject to limited exceptions.
Servicing
Farmer Mac does not directly service Qualified Loans held in its portfolio,
although it does act as "master servicer" for Qualified Loans underlying Farmer
Mac Guaranteed Securities. Qualified Loans are serviced only by Farmer Mac
approved servicing entities that have entered into central servicing contracts
with Farmer Mac. Sellers of Qualified Loans sold into the Farmer Mac I Program
have a right to retain certain servicing functions (typically direct borrower
contacts) and may enter into field servicing contracts with central servicers to
specify such servicing functions.
Farmer Mac I Securities
Farmer Mac Guaranteed Securities are guaranteed by Farmer Mac as to timely
payment of principal and interest. Farmer Mac Guaranteed Securities issued under
the Farmer Mac I Program are referred to as "Farmer Mac I Securities."
By statute, public offerings of Farmer Mac Guaranteed Securities are
required to be registered with the U.S. Securities and Exchange Commission (the
"SEC") under the federal securities laws. Accordingly, Farmer Mac, through its
subsidiary Farmer Mac Mortgage Securities Corporation, maintains a shelf
registration statement with the SEC pursuant to which Farmer Mac Guaranteed
Securities are publicly offered. Farmer Mac may also offer Farmer Mac Guaranteed
Securities in private, unregistered transactions. U.S. Bank Trust National
Association, a national banking association based in Minneapolis, Minnesota,
serves as trustee for each trust underlying registered Farmer Mac I Securities,
although Farmer Mac may assume some or all of the trustee function, thereby
potentially eliminating some of the cost associated with a third party trustee.
Farmer Mac I Securities are mortgage pass-through certificates guaranteed
by Farmer Mac that represent beneficial interests in pools of Qualified Loans or
in obligations backed by pools of Qualified Loans. All Farmer Mac I Securities
issued during and since 1996 have been single class or multiclass "grantor
trust" pass-through certificates, referred to as "AMBS." These securities
entitle each investor in a class of securities to receive a portion of the
payments of principal and interest on the related underlying pool of Qualified
Loans equal to the investor's proportionate interest in the pool. AMBS may
support other Farmer Mac I Securities, including real estate mortgage investment
conduit securities ("REMICs") and other agricultural mortgage-backed securities.
Farmer Mac I Securities issued prior to the enactment of changes to Farmer Mac's
statutory charter in 1996 are supported by unguaranteed subordinate interests
that represented 10 percent of the balance of the loans underlying the
securities at issuance.
Farmer Mac I Securities are not assets of Farmer Mac, except when acquired
for investment purposes, nor are Farmer Mac I Securities recorded as liabilities
of Farmer Mac. Farmer Mac, however, is liable under its guarantee on the
securities to make timely payments to investors of principal (including balloon
payments) and interest based on the scheduled payments on the underlying
Qualified Loans, even if Farmer Mac has not actually received such scheduled
payments. Farmer Mac I Securities enable Farmer Mac to further its statutory
purpose of increasing the liquidity of the agricultural mortgage market and
create a source of guarantee fee income for Farmer Mac. Because it guarantees
timely payments on Farmer Mac I Securities, Farmer Mac assumes the ultimate
credit risk of borrower defaults on the underlying Qualified Loans, which are
subject to the Farmer Mac's Underwriting Standards described above in "--
Underwriting and Appraisal Standards." See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk Management --
Credit Risk Management."
Farmer Mac receives guarantee fees in return for its guarantee obligations
on Farmer Mac I Securities. These fees are collected with installment payments
on the underlying Qualified Loans until those loans have been repaid or
otherwise liquidated (generally as a result of default). The aggregate amount of
guarantee fees received on Farmer Mac I Securities depends upon the amount of
such securities outstanding and on the guarantee fee rate, which is capped by
statute at 50 basis points (0.50 percent) per annum. The Farmer Mac I guarantee
fee rate generally ranges from 40 to 50 basis points, depending on the credit
quality of and other criteria regarding the Qualified Loans. The amount of
Farmer Mac I Securities outstanding is influenced by the repayment rates on the
underlying Qualified Loans and by the rate at which Farmer Mac issues new Farmer
Mac I Securities. In general, when the level of interest rates declines
significantly below the interest rates on loans underlying Farmer Mac I
Securities, the rate of prepayments is likely to increase; conversely, when
interest rates rise above the interest rates on the loans underlying Farmer Mac
I Securities, the rate of prepayments is likely to decrease. In addition to
changes in interest rates, the rate of principal payments on Farmer Mac I
Securities is also influenced by a variety of economic, demographic and other
considerations, including yield maintenance provisions that are associated with
many of the fixed-rate Qualified Loans underlying Farmer Mac I Securities. For
more information regarding yield maintenance provisions, see "-- Risk Management
- -- Interest-Rate Risk Management."
Farmer Mac I Transactions
During the year ended December 31, 2001, Farmer Mac purchased or guaranteed
$1.3 billion Qualified Loans under the Farmer Mac I Program. As of December 31,
2001, $3.5 billion Farmer Mac I Securities guaranteed after the changes to
Farmer Mac's statutory charter by the Farm Credit System Reform Act of 1996 (the
"1996 Act") were outstanding. The following table summarizes Qualified Loans
purchased or guaranteed under the Farmer Mac I Program for each of the years
ended December 31, 2001, 2000 and 1999.
Post-1996 Act Farmer Mac I Loans
Purchased or Guaranteed
----------------------------------------------
2001 2000 1999
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(in thousands)
Purchases $ 266,553 $ 442,246 $ 391,448
Swaps 5,574 - 176,788
LTSPCs 1,032,967 373,202 637,685
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Total $1,305,094 $ 815,448 $1,205,921
-------------- -------------- ---------------
In addition, as of December 31, 2001, $49.0 million of Farmer Mac I
Securities issued prior to the 1996 Act were outstanding. These securities are
supported by unguaranteed subordinate interests that represented 10 percent of
the balance of the loans underlying the securities at issuance.
Funding of Guarantee Claims
The primary source of funding for the payment of claims made under Farmer
Mac guarantees is the fees Farmer Mac receives for providing its guarantees. The
Act requires Farmer Mac to set aside a portion of the guarantee fees it receives
as a reserve for losses from its guarantee activities. Among other things, this
reserve account must be exhausted before Farmer Mac may issue obligations to the
Secretary of the Treasury against the $1.5 billion Farmer Mac is authorized to
borrow from the Secretary of the Treasury pursuant to the Act to fulfill its
guarantee obligations. This authorization is not intended to be used as a
routine funding source and has never been used.
Although total outstanding guarantees exceed the amount held in reserve and
the amount it may borrow from the Treasury, Farmer Mac does not expect claims
under the guarantees to exceed amounts available to satisfy those claims. For
information regarding the reserve account, see Note 7 to the Consolidated
Financial Statements. For a more detailed discussion of Farmer Mac's borrowing
authority from the Treasury, see "Farmer Mac's Borrowing Authority From The U.S.
Treasury."
Portfolio Diversification
One of Farmer Mac's policies is to diversify its portfolio of Qualified
Loans both geographically and by commodity. Farmer Mac manages its credit
exposure in particular geographic regions and commodities as a percentage of the
total principal amount of all loans outstanding, adjusted for the credit quality
of the loans in that particular geographic region or commodity group based on
the loan-to-value, debt service coverage, equity-to-asset and working
capital-to-current asset ratios. For information regarding the diversification
of Farmer Mac's existing portfolio of Qualified Loans, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Management -- Credit Risk Management" and Note 11 to the Consolidated Financial
Statements.
Farmer Mac II
General
The Farmer Mac II Program was initiated in 1992 and is authorized under
Sections 8.0(3) (12 U.S.C. ss. 2279aa(3)) and 8.0(9)(B) (12 U.S.C. ss.
2279aa(9)(B)) of the Act. Under those Sections: (1) Guaranteed Portions are
statutorily included in the definition of loans eligible as "Qualified Loans"
for Farmer Mac's secondary market programs; (2) Guaranteed Portions are exempted
from the underwriting, appraisal and repayment standards that all other
Qualified Loans must meet, and pools of Guaranteed Portions are exempted from
any diversification and internal credit enhancement that may be required of
pools of Qualified Loans that are not Guaranteed Portions; and (3) Farmer Mac is
authorized to pool Guaranteed Portions and issue "Farmer Mac II Securities"
backed by such Guaranteed Portions.
United States Department of Agriculture Guaranteed Loan Programs
The USDA, acting through its various agencies, currently administers the
federal rural credit programs first developed in the mid-1930s. The USDA makes
direct loans and issues guarantees on loans made and serviced by USDA-qualified
loan originators (each, a "Lender") for various purposes.
Under the Farmer Mac II Program, Farmer Mac is one of several competing
purchasers of Guaranteed Portions of farm ownership loans, farm operating loans,
business and industry loans and other loans that are guaranteed by the Secretary
of Agriculture pursuant to the ConAct (collectively, the "Guaranteed Loans").
Guaranteed Portions, which represent up to 95 percent of the principal amount of
Guaranteed Loans, are fully guaranteed as to principal and interest by the USDA.
The USDA's guarantee is supported by the full faith and credit of the United
States.
USDA Guarantees. The maximum loss covered by a USDA guarantee can never
exceed the lesser of: (1) 95 percent of the principal and interest indebtedness
on the Guaranteed Loan, any loan subsidy due, and 95 percent of principal and
interest indebtedness on secured protective advances for protection and
preservation of the related mortgaged property made with USDA authorization; and
(2) 95 percent of the principal advanced to or assumed by the borrower under the
Guaranteed Loan and any interest due (including a loan subsidy).
Each USDA guarantee is a full faith and credit obligation of the United
States and becomes enforceable if a Lender fails to repurchase the Guaranteed
Portion from its owner (the "Owner") within thirty (30) days after written
demand from the Owner when (a) the borrower under the Guaranteed Loan (the
"Borrower") is in default not less than sixty (60) days in the payment of any
principal or interest due on the Guaranteed Portion, or (b) the Lender has
failed to remit to the Owner the payment made by the Borrower on the Guaranteed
Portion or any related loan subsidy within thirty (30) days after the Lender's
receipt thereof.
If the Lender does not repurchase the Guaranteed Portion as provided above,
the USDA is required to purchase the unpaid principal balance of the Guaranteed
Portion together with accrued interest (including any loan subsidy) to the date
of purchase, less the servicing fee, within thirty (30) days after written
demand to the USDA from the Owner. While the USDA guarantee will not cover the
note interest to the Owner on Guaranteed Portions accruing after ninety (90)
days from the date of the original demand letter of the Owner to the Lender
requesting repurchase, Farmer Mac has established procedures to require prompt
tendering of Guaranteed Portions.
If in the opinion of the Lender (with the concurrence of the USDA) or in
the opinion of the USDA, repurchase of the Guaranteed Portion is necessary to
service the related Guaranteed Loan adequately, the Owner will sell the
Guaranteed Portion to the Lender or USDA for an amount equal to the unpaid
principal balance and accrued interest (including any loan subsidy) on such
Guaranteed Portion less the Lender's servicing fee. Federal regulations prohibit
the Lender from repurchasing Guaranteed Portions for arbitrage purposes.
Lenders. All Guaranteed Loans must be originated and serviced by eligible
Lenders. Under applicable regulations, all eligible Lenders must be subject to
credit examination and supervision by either an agency of the United States or a
state, must be in good standing with their licensing authorities and must have
met any licensing, lending, loan servicing and other applicable requirements of
the state in which the collateral for a Guaranteed Loan will be located. Each
Lender must inform the USDA that it qualifies as an eligible Lender and which
agency or authority supervises it.
Loan Servicing. The Lender on each Guaranteed Loan is required by
regulation to retain the unguaranteed portion of the Guaranteed Loan (the
"Unguaranteed Portion"), to service the entire underlying Guaranteed Loan,
including the Guaranteed Portion, and to remain mortgagee and/or secured party
of record. The Guaranteed Portion and the Unguaranteed Portion of the underlying
Guaranteed Loan are to be secured by the same security with equal lien priority.
The Guaranteed Portion cannot be paid later than or in any way be subordinated
to the related Unguaranteed Portion.
Farmer Mac II Securities
Farmer Mac guarantees the timely payment of principal and interest on
Farmer Mac II Securities, which are backed by Guaranteed Portions. Farmer Mac
does not guarantee the repayment of the Guaranteed Portions, only the Farmer Mac
II Securities that are backed by Guaranteed Portions. In addition to offering
Farmer Mac II Securities to Lenders in swap transactions or to other investors
for cash, Farmer Mac purchases Guaranteed Portions for retention in its
portfolio.
Farmer Mac II Transactions
During the year ended December 31, 2001, Farmer Mac guaranteed $198.2
million of Farmer Mac II Securities. As of December 31, 2001, $595.2 million
Farmer Mac II Securities were outstanding. See Notes 4 and 11 to the
Consolidated Financial Statements.
Financing
Debt Issuances
Farmer Mac issues debt obligations, consisting of Discount Notes and
Medium-Term Notes (collectively, "Notes"), to obtain funds for the Farmer Mac I
and Farmer Mac II Programs to cover transaction costs, guarantee payments and
the costs of purchasing Guaranteed Portions, Qualified Loans and securities
(including Farmer Mac Guaranteed Securities). Farmer Mac also issues Notes to
meet other needs associated with its business operations, including liquidity,
and to increase its presence in the capital markets in order to enhance the
efficiency of its debt and AMBS securities transactions and so improve the
mortgage rates available to farmers, ranchers and rural homeowners. Farmer Mac's
Board of Directors has authorized the issuance of up to $4.0 billion of Notes,
subject to periodic review of the adequacy of that level relative to Farmer
Mac's borrowing requirements. Farmer Mac invests the proceeds of such issuances
in program and non-program assets in accordance with policies established by its
Board of Directors. The current policies authorize Farmer Mac to invest in U.S.
Treasury, agency and instrumentality obligations; repurchase agreements;
commercial paper; guaranteed investment contracts; certificates of deposit;
federal funds and bankers acceptances; certain securities and debt obligations
of corporate and municipal issuers; asset-backed securities; and corporate money
market funds. For information about Farmer Mac's outstanding investments and
indebtedness, see Notes 3 and 6 to the Consolidated Financial Statements.
Equity Issuances
By statute, Farmer Mac is authorized to issue Voting Common Stock,
non-voting common stock and non-voting preferred stock. Voting Common Stock may
be held only by banks, other financial entities, insurance companies and System
Institutions that qualify as eligible participants in the Farmer Mac programs.
Under the Act, no holder of Class A Voting Common Stock may directly or
indirectly be a beneficial owner of more than 33 percent of the outstanding
shares of Class A Voting Common Stock. There are no ownership restrictions
applicable to non-voting common stock or preferred stock. To date, Farmer Mac
has not issued any preferred stock. Any preferred stock issued by Farmer Mac
would have priority over the Common Stock in payment of dividends and
liquidation proceeds. The Class C Non-Voting Common Stock is, and any preferred
stock would be, freely transferable. The holders of any preferred stock would be
paid in full at par value, plus all accrued dividends, before the holders of
shares of Common Stock received any payment upon liquidation, dissolution or
winding up of the business of Farmer Mac. To date, Farmer Mac has not paid any
dividends on its Common Stock, nor does it expect to pay dividends in the
foreseeable future. Farmer Mac's ability to declare and pay dividends could be
restricted if it were to fail to comply with regulatory capital requirements.
See Note 8 to the Consolidated Financial Statements and "Government Regulation
of Farmer Mac -- Regulation -- Capital Standards -- Enforcement levels."
As of December 31, 2001, 1,030,780 shares of Class A Stock, 500,301 shares
of Class B Stock and 10,033,037 shares of Class C Stock were outstanding. Farmer
Mac may obtain additional capital from future issuances of common stock (both
voting and non-voting) or non-voting preferred stock. Farmer Mac has no present
intention to issue any additional shares of Common Stock, except pursuant to
programs in which employees, members of management or the Board of Directors may
be granted Class C Non-Voting Common Stock, or exercise options to purchase
Class C Non-Voting Common Stock granted, as part of their compensation
arrangements.
FARMER MAC'S BORROWING AUTHORITY FROM THE U.S. TREASURY
Farmer Mac may, in extreme circumstances, issue obligations to the U.S.
Treasury in a cumulative amount not to exceed $1.5 billion. The proceeds of such
obligations may be used solely for the purpose of fulfilling Farmer Mac's
guarantee commitments under the Farmer Mac I and Farmer Mac II Programs. The Act
provides that the U.S. Treasury is required to purchase such obligations of
Farmer Mac if Farmer Mac certifies that: (1) a portion of the guarantee fees
assessed by Farmer Mac has been set aside as a reserve against losses arising
out of Farmer Mac's guarantee activities in an amount determined by Farmer Mac's
Board to be necessary and such reserve has been exhausted; and (2) the proceeds
of such obligations are needed to fulfill Farmer Mac's guarantee obligations.
Such obligations would bear interest at a rate determined by the U.S. Treasury,
taking into consideration the average rate on outstanding marketable obligations
of the United States as of the last day of the last calendar month ending before
the date of the purchase of the obligations from Farmer Mac, and would be
required to be repaid to the U.S. Treasury within a "reasonable time," which the
Act does not define.
The United States government does not guarantee payments due on Farmer Mac
Guaranteed Securities, funds invested in the stock or indebtedness of Farmer
Mac, any dividend payments on shares of Farmer Mac stock or the profitability of
Farmer Mac.
GOVERNMENT REGULATION OF FARMER MAC
General
Public offerings of Farmer Mac Guaranteed Securities must be registered
with the SEC under the federal securities laws. Farmer Mac also is required to
file reports with the SEC pursuant to the SEC's periodic reporting requirements.
Regulation
Office of Secondary Market Oversight
As a System Institution, Farmer Mac is subject to the regulatory authority
of the FCA. The FCA, acting through OSMO, has general regulatory and enforcement
authority over Farmer Mac, including the authority to promulgate rules and
regulations governing the activities of Farmer Mac and to apply its general
enforcement powers to Farmer Mac and its activities. The Director of OSMO, who
was selected by and reports to the FCA Board, is responsible for the examination
of Farmer Mac and the general supervision of the safe and sound performance by
Farmer Mac of the powers and duties vested in it by the Act. The Act requires an
annual examination of the financial transactions of Farmer Mac and authorizes
the FCA to assess Farmer Mac for the cost of its regulatory activities,
including the cost of any examination. Farmer Mac is required to file quarterly
reports of condition with the FCA, as well as copies of all documents filed with
the SEC under the federal securities laws.
Department of the Treasury
In connection with the passage of the 1996 Act, the Chairmen of the House
and Senate Agriculture Committees requested the FCA, in a cooperative effort
with the Department of the Treasury, to "monitor and review the operations and
financial condition of Farmer Mac and to report in writing to the appropriate
subcommittees of the House Agriculture Committee, the House Financial Services
Committee and the Senate Agriculture, Nutrition and Forestry Committee at
six-month intervals during the capital deferral period and beyond, if
necessary." Although the "capital deferral period" expired on January 1, 1999,
Farmer Mac anticipates this cooperative monitoring effort between the Treasury
and the FCA will continue at least until May 23, 2002, the date that Farmer Mac
is required to comply with the final risk-based capital standards adopted by the
FCA.
Comptroller General/General Accounting Office
The Act permits the Comptroller General of the United States to perform a
review of the actuarial soundness and reasonableness of the guarantee fees
established by Farmer Mac.
Capital Standards
General. The Act, as amended by the 1996 Act, establishes three capital
standards for Farmer Mac--minimum, critical and risk-based. The minimum and
critical capital requirements are expressed as a percentage of on-balance sheet
assets and a lower percentage of "off-balance sheet obligations" (primarily
outstanding Farmer Mac Guaranteed Securities not owned by Farmer Mac or its
subsidiary). The Act does not specify the required level of risk-based capital,
but directs the FCA to establish a risk-based capital test for Farmer Mac. On
April 12, 2001, the FCA issued its final risk-based capital regulation for
Farmer Mac. The regulation became effective on May 23, 2001, and Farmer Mac will
be required to meet the risk-based capital standards by May 23, 2002. See "--
Enforcement levels" below.
As of December 31, 2001, Farmer Mac's minimum and critical capital
requirements were $110.6 million and $55.3 million, respectively, and its actual
core capital level was $126.0 million, $15.4 million above the minimum
requirement. Based on the risk-based capital regulation, Farmer Mac's risk-based
capital requirement as of December 31, 2001 would have been $30.2 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Capital Requirements" for a
presentation of Farmer Mac's current regulatory capital position.
Minimum capital. Farmer Mac's minimum capital level is an amount of core
capital equal to the sum of 2.75 percent of Farmer Mac's aggregate on-balance
sheet assets, as calculated for regulatory purposes, plus 0.75 percent of the
aggregate off-balance sheet obligations of Farmer Mac, specifically including:
(1) the unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities; (2) instruments issued or guaranteed by Farmer Mac that are
substantially equivalent to Farmer Mac Guaranteed Securities; and (3) other
off-balance sheet obligations of Farmer Mac.
Critical capital. By statute, Farmer Mac's critical capital level at any
time must be an amount of core capital equal to 50 percent of the total minimum
capital requirement at that time.
Risk-based capital. The Act directs the FCA to establish a risk-based
capital test for Farmer Mac, using specified stress-test parameters. While the
Act does not specify the required level of risk-based capital, that level is
permitted to exceed the statutory minimum capital requirement applicable to
Farmer Mac.
On April 12, 2001, the FCA issued its final risk-based capital regulation
for Farmer Mac. The regulation requires Farmer Mac to meet the risk-based
capital standards by May 23, 2002. As noted in our June 12, 2000 comment letter
to the FCA on the proposed regulation, Farmer Mac believes that certain
significant aspects of the risk-based capital regulation do not comply with the
authorizing statute. We have maintained a dialogue with the FCA regarding the
application of the regulation and the complex underlying economic
model--particularly the provisions that suggest to us that the FCA went outside
the authorizing statute. If no change is made to the regulation, it could lead
to an increase in the capital requirement for certain newly guaranteed program
assets and so cause Farmer Mac to alter its strategic plan for future growth.
While we are at this time uncertain whether the regulation, as issued, would
alter that strategic plan, we believe that Farmer Mac will be in compliance when
required to meet the standards. We continue to expect that any significant
issues raised by the regulation will be resolved in accordance with the
authorizing statute before Farmer Mac is required to materially alter its
strategic plan for future growth to meet the risk-based capital standards.
While a risk-based capital requirement significantly above the statutory
minimum capital level could have a materially adverse effect on Farmer Mac, the
ultimate impact of the risk-based capital test adopted by the FCA will have to
be evaluated in light of the level of risk-based capital required relative to
Farmer Mac's existing capital position, the categories of assets against which
risk-based capital would have to be maintained, growth in Farmer Mac's business,
Farmer Mac's ability and need to raise additional equity in the capital markets
and alternative business strategies available to Farmer Mac, as well as legal
and public policy considerations affecting the applicability to Farmer Mac of
the risk-based capital requirement.
Enforcement levels. The Act directs the FCA to classify Farmer Mac within
one of four enforcement levels for purposes of determining compliance with
capital standards. Prior to the effective date of the final risk-based capital
regulation for Farmer Mac, the Act provides that Farmer Mac shall be classified
as within "level I" (the highest compliance level) so long as its capital equals
or exceeds the then applicable minimum capital level. As of December 31, 2001,
Farmer Mac was classified as within level I.
Failure to comply with the applicable minimum capital level in the Act
would result in Farmer Mac being classified as within level III (below the
minimum but above the critical capital level) or level IV (below the critical
capital level). (Level II is not applicable prior to the effective date of the
final risk-based capital regulation since it contemplates the failure to comply
with the risk-based capital standard.) In the event that Farmer Mac were
classified as within level III or IV, the Act requires the Director of OSMO to
take a number of mandatory supervisory measures and provides the Director with
discretionary authority to take various optional supervisory measures depending
on the level in which Farmer Mac is classified. The mandatory measures
applicable to level III include: requiring Farmer Mac to submit (and comply
with) a capital restoration plan; prohibiting the payment of dividends if such
payment would result in Farmer Mac being reclassified as within level IV and
requiring the pre-approval of any dividend payment even if such payment would
not result in reclassification as within level IV; and reclassifying Farmer Mac
as within a lower level if it does not submit a capital restoration plan that is
approved by the Director or the Director determines that Farmer Mac has failed
to make, in good faith, reasonable efforts to comply with such a plan and
fulfill the schedule for the plan approved by the Director.
If Farmer Mac were classified as within level III, then, in addition to the
foregoing mandatory supervisory measures, the Director of OSMO could take any of
the following discretionary supervisory measures: imposing limits on any
increase in, or ordering the reduction of, any obligations of Farmer Mac,
including off-balance sheet obligations; limiting or prohibiting asset growth or
requiring the reduction of assets; requiring the acquisition of new capital in
an amount sufficient to provide for reclassification as within a higher level;
terminating, reducing or modifying any activity the Director determines creates
excessive risk to Farmer Mac; or appointing a conservator or a receiver for
Farmer Mac. The Act does not specify any supervisory measures, either mandatory
or discretionary, to be taken by the Director in the event Farmer Mac were
classified as within level IV.
The Director of OSMO has the discretionary authority to reclassify Farmer
Mac to a level that is one level below its then current level (i.e., from level
III to level IV) if the Director determines that Farmer Mac is engaging in any
action not approved by the Director that could result in a rapid depletion of
core capital or if the value of property subject to mortgages backing Farmer Mac
Guaranteed Securities has decreased significantly.
Item 2. Properties
On June 28, 2001, Farmer Mac entered into a long-term lease for its
principal offices, which are located at 1133 Twenty-First Street, N.W., Suite
600, Washington, D.C. 20036. The lease, which expires November 30, 2011, covers
approximately 13,500 square feet of office space. Farmer Mac's offices are
suitable and adequate for its present needs and provide excess space that is
available either for expansion or sublet. As of March 15, 2002, Farmer Mac was
evaluating alternatives related to the space available for sublet.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Farmer Mac has three classes of common stock outstanding. Class A Voting
Common Stock may be held only by banks, insurance companies and other financial
institutions or similar entities that are not System Institutions. Class B
Voting Common Stock may be held only by System Institutions. There are no
ownership restrictions on the Class C Non-Voting Common Stock.
The Class A and Class C Common Stock trade on the New York Stock Exchange
(the "NYSE") under the symbols AGMA and AGM, respectively. Prior to June 18,
1999, Class A Common Stock traded on The Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol FAMCA, and the Class C Common Stock traded
on The Nasdaq National Market tier of The Nasdaq Stock Market under the symbol
FAMCK. The Class B Voting Common Stock, which has a limited market and trades
infrequently, is not listed or quoted on any exchange or other medium, and
Farmer Mac is unaware of any publicly available quotations or prices for that
class.
The information below represents the high and low closing sale prices for
the Class A and Class C Common Stock for the periods indicated as reported by
the NYSE.
Sales Price
---------------------------------------------------
Class A Stock Class C Stock
------------------------- -------------------------
High Low High Low
------------ ------------ ------------ ------------
(dollars per share)
2002
First quarter (through March 11, 2002) $ 34.55 $ 28.60 $ 47.80 $ 38.96
2001
Fourth quarter 33.60 27.80 46.33 31.78
Third quarter 28.40 26.60 35.23 29.58
Second quarter 28.55 21.60 32.25 23.75
First quarter 23.25 19.00 27.94 22.50
2000
Fourth quarter 18.38 16.13 23.38 17.50
Third quarter 17.88 16.75 18.06 13.63
Second quarter 17.13 14.75 16.13 13.31
First quarter 16.50 15.63 20.75 15.50
As of March 11, 2002, it was estimated that there were 1,419 registered
owners of the Class A Voting Common Stock, 104 registered owners of the Class B
Voting Common Stock and 1,478 registered owners of the Class C Non-Voting Common
Stock outstanding.
To date, Farmer Mac has not paid any dividends on its Common Stock, nor
does it expect to pay dividends in the foreseeable future. Farmer Mac's ability
to declare and pay dividends could be restricted if it were to fail to comply
with regulatory capital requirements.
Item 6. Selected Financial Data
December 31,
---------------------------------------------------------------------
Summary of Financial Condition: 2001 2000 1999 1998 1997
-------------- ------------ ------------- ------------- ------------
(dollars in thousands)
Cash and cash equivalents $ 437,831 $537,871 $336,282 $540,626 $177,617
Investment securities 1,007,954 836,757 847,220 643,562 656,737
Farmer Mac guaranteed securities 1,690,376 1,679,993 1,306,223 552,205 442,311
Loans 201,812 30,279 38,509 168,064 47,177
Total assets 3,417,208 3,160,899 2,590,410 1,935,971 1,348,135
Notes and bonds payable
Due within one year 2,233,267 2,141,548 1,722,061 1,473,688 856,028
Due after one year 968,463 827,635 750,337 366,122 402,803
Total liabilities 3,282,771 3,028,238 2,503,267 1,855,057 1,273,074
Stockholders' equity 134,437 132,661 87,143 80,914 75,061
Selected Financial Ratios:
Return on average assets 0.49% 0.36% 0.31% 0.35% 0.47%
Return on average equity 12.19% 9.50% 8.24% 7.36% 7.57%
Average equity to assets 4.06% 3.82% 3.71% 4.75% 6.27%
Year ended December 31,
---------------------------------------------------------------------
Summary of Operations: 2001 2000 1999 1998 1997
-------------- ------------ ------------- ------------- ------------
(dollars in thousands, except per share amounts)
Interest income $ 181,213 $195,420 $140,377 $103,561 $ 80,153
Interest expense 154,274 177,722 125,419 92,992 72,992
-------------- ------------ ------------- ------------- ------------
Net interest income 26,939 17,698 14,958 10,569 7,161
Losses on financial derivatives
and trading assets (726) - - - -
Guarantee fee income 15,807 11,677 7,396 3,727 2,575
Gain on sale of AMBS - - - 1,400 2,362
Miscellaneous 560 399 220 142 253
-------------- ------------ ------------- ------------- ------------
Total revenues 42,580 29,774 22,574 15,838 12,351
Total expenses 17,155 13,588 11,983 9,323 7,840
-------------- ------------ ------------- ------------- ------------
Income before income taxes and
extraordinary item 25,425 16,186 10,591 6,515 4,511
Income tax expense/(benefit) 8,419 5,749 3,670 772 (115)
Cumulative effect of change in
accounting principles, net of tax (726) - - - -
-------------- ------------ ------------- ------------- ------------
Net income $ 16,280 $ 10,437 $ 6,921 $ 5,743 $ 4,626
-------------- ------------ ------------- ------------- ------------
Earnings Per Share:
Basic earnings per share $ 1.44 $ 0.94 $ 0.64 $ 0.53 $ 0.48
Diluted earnings per share $ 1.38 $ 0.92 $ 0.62 $ 0.52 $ 0.46
Earnings per share excluding cumulative
effect of change in accounting principles
Basic earnings per share $ 1.50 $ 0.94 $ 0.64 $ 0.53 $ 0.48
Diluted earnings per share $ 1.45 $ 0.92 $ 0.62 $ 0.52 $ 0.46
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial information as of and for each of the years ended December 31,
2001, 2000 and 1999 is consolidated to include the accounts of Farmer Mac and
its wholly owned subsidiary, Farmer Mac Mortgage Securities Corporation
("FMMSC"). During 1999, the operations of another wholly owned subsidiary of
Farmer Mac, Farmer Mac Acceptance Corporation, were merged into FMMSC. All
material inter-company transactions have been eliminated in consolidation. The
following discussion should be read together with Farmer Mac's consolidated
financial statements and is not necessarily indicative of our future results.
Forward-Looking Statements
Certain statements made in this Form 10-K are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
pertaining to management's current expectations as to Farmer Mac's future
financial results, business prospects and business developments. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
typically are accompanied by, and identified with, such terms as "anticipates,"
"believes," "expects," "intends," "should" and similar phrases. The following
management's discussion and analysis includes forward-looking statements
addressing Farmer Mac's prospects for earnings and growth in loan purchase,
guarantee and securitization volume; trends in net interest income and provision
for losses; changes in capital position; and other business and financial
matters. Management's expectations for Farmer Mac's future necessarily involve a
number of assumptions, estimates and the evaluation of risks and uncertainties.
Various factors could cause Farmer Mac's actual results or events to differ
materially from the expectations as expressed or implied by the forward-looking
statements, including: uncertainties regarding the rate and direction of
development of the secondary market for agricultural mortgage loans; the
possible establishment of additional statutory or regulatory restrictions
applicable to Farmer Mac, such as the imposition of regulatory risk-based
capital requirements in excess of the statutory minimum capital level or
restrictions on Farmer Mac's investment authority; substantial changes in
interest rates, agricultural land values, commodity prices, export demand for
U.S. agricultural products and the general economy; protracted adverse weather,
market or other conditions affecting particular geographic regions or particular
commodities related to agricultural mortgage loans backing Farmer Mac Guaranteed
Securities; legislative or regulatory developments or interpretations of Farmer
Mac's statutory charter that could adversely affect Farmer Mac or the ability of
certain lenders to participate in its programs or the terms of any such
participation; the availability of debt funding in sufficient quantities and at
favorable rates to support continued growth; the rate of growth in agricultural
mortgage indebtedness; the size of the agricultural mortgage market; borrower
preferences for fixed-rate agricultural mortgage indebtedness; the willingness
of lenders to sell agricultural mortgage loans into the Farmer Mac secondary
market; the willingness of investors to invest in agricultural mortgage-backed
securities; competition in the origination or purchase of agricultural mortgage
loans and the sale of agricultural mortgage-backed and debt securities; the
level of government payments for agriculture that are expected to be provided
for in the pending farm bill and the effects of the level of such payments on
the agricultural economy; or changes in Farmer Mac's status as a
government-sponsored enterprise.
The foregoing factors are not exhaustive. Other sections of this report may
include additional factors that could adversely impact Farmer Mac's business and
its financial performance. Given these potential risks and uncertainties, no
undue reliance should be placed on any forward-looking statements expressed
herein. Furthermore, Farmer Mac undertakes no obligation to release publicly the
results of revisions to any forward-looking statements that may be made to
reflect any future events or circumstances.
Critical Accounting Policies
Farmer Mac's significant accounting policies are described in Note 2 to the
Consolidated Financial Statements included in Item 8 of this Form 10-K. The
accounting policy for loss reserves is critical to assessing Farmer Mac's
financial position and results of operations due to the high degree of
subjectivity and complexity involved, as well as the significant underlying
estimates and judgments.
Farmer Mac maintains a reserve for losses to cover potential losses on
loans, including post-1996 Act loans underlying Farmer Mac I Securities and
LTSPCs. The reserve is maintained at a level management deems adequate to cover
potential principal losses and interest losses related to loans that are 90 days
or more delinquent. The reserve is increased through periodic provisions charged
to expense and reduced by charge-offs for actual loan losses, net of recoveries.
In estimating potential losses on loans and outstanding Farmer Mac guarantees,
management considers economic conditions, geographic and agricultural commodity
concentrations, the credit profile of the Qualified Loans, delinquency trends
and historical charge-off and recovery activity. Significant estimates and
judgments are used to determine the appropriate level of loss reserves and any
changes in the underlying criteria could result in materially different results
or an alternate conclusion regarding the adequacy of the outstanding loan loss
reserve.
No reserve for losses has been made for Farmer Mac I Securities issued
prior to the 1996 Act or Farmer Mac II Securities. Farmer Mac I Securities
issued prior to the 1996 Act are supported by unguaranteed subordinated
interests, which are expected to exceed the estimated credit losses on those
securities. Guaranteed Portions collateralizing Farmer Mac II Securities are
guaranteed by the USDA. As such, management does not expect to incur loan
losses, either for principal or interest, on Farmer Mac I Securities issued
prior to the 1996 Act or Farmer Mac II Securities.
Further information regarding loss reserves is included in Note 2(i) and
Note 7 to the Consolidated Financial Statements.
Results of Operations
Operating Results. Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133")
requires the change in the fair values of certain financial derivatives to be
reflected in the Corporation's net income or other comprehensive income.
Management believes that reporting results by reference to operating income and
operating revenues, excluding the cumulative effect of the change in accounting
principles recognized on January 1, 2001 under SFAS 133 and its ongoing effects
during the reporting periods, provides meaningful operating measures of Farmer
Mac's financial performance. Such information is presented to supplement, not
replace, net income, revenues, cash from operations, or any other operating or
liquidity performance measures prescribed by generally accepted accounting
principles.
Overview. 2001 was another year of solid growth and strong financial
performance for Farmer Mac, notwithstanding challenges created by the continuing
industry-wide weakness in new agricultural mortgage volume due to uncertainties
in the agricultural sector. Net income rose to $16.3 million in 2001 from $10.4
million in 2000, marking the sixth consecutive year during which Farmer Mac
achieved significant increases in profitability. Diluted earnings per share were
$1.38 for 2001, a 50 percent increase over 2000 diluted earnings per share of
$0.92. Operating income for 2001, excluding the cumulative and ongoing effects
of SFAS 133 during the year, was $17.1 million, or diluted operating earnings
per share of $1.45, a 58 percent increase compared to $0.92 for 2000.
Reconciliation of the effects of SFAS 133
2001
------------
(in thousands)
Operating Income $ 17,071
Cumulative effect of change
in accounting principles, net of tax (726)
Gains/(Losses) on financial derivatives
and trading assets, net of tax (469)
Benefit from non-amortization of
premium payments, net of tax 404
------------
Net Income $ 16,280
------------
The principal factors contributing to the year's record earnings were
increases in net interest income on retained cash window and portfolio Qualified
Loan purchases, net interest income on non-program investments and guarantee
fees on the higher cumulative amount of guarantees outstanding. Net interest
income was up $9.2 million to $26.9 million in 2001, from $17.7 million in 2000,
as interest-earning assets increased by $270.7 million to $3.3 billion in 2001,
from $3.0 billion in 2000. Guarantee fee income grew 35 percent from $11.7
million in 2000 to $15.8 million in 2001, as outstanding guarantees increased
$1.1 billion, or 35 percent, to $4.2 billion. The year's increase in guarantee
fee income is indicative of the annuity-like nature of that income. The increase
in outstanding guarantee volume was achieved while Farmer Mac continued to
maintain control over its operating expenses. During 2001, operating expenses
were 24 percent of total revenues, compared to 30 percent in 2000, even though
those expenses increased by 18 percent over 2000.
At year-end, the percentage of Farmer Mac I loans purchased or guaranteed
after changes to the Corporation's statutory charter in 1996 that placed Farmer
Mac in the position of first loss guarantor ("post-1996 Act loans") that were 90
days or more delinquent increased to 1.70 percent, compared to 1.25 percent at
the end of 2000. (External 10 percent first loss interests mitigate Farmer Mac's
credit exposure to pre-1996 Act loans.) Farmer Mac anticipates fluctuations in
the delinquency rate from quarter to quarter, with higher levels likely in the
first and third quarters of each year, due to the semiannual payment
characteristics of most Farmer Mac loans. Farmer Mac experienced $2.5 million in
loan losses charged against the reserve in 2001, compared with no losses in
2000.
In 2002, it is likely that delinquencies will increase and it is expected
that quarterly charge-offs will be at somewhat higher levels, similar to the
$850,000 in losses recognized during fourth quarter 2001, due to a growing
percentage of the guarantee portfolio entering its peak loss years, pressures
from growing agricultural inventories, weak markets for agricultural commodities
and products worldwide along with low prices and economic uncertainty in the
agricultural sector, following the trend of the last several years.
Nevertheless, as reported by the USDA, agricultural income during 2001 was
strong, due in large part to record government support payments made to farmers
during the year, which generally helped to maintain economic stability in the
agricultural sector and contributed to stable agricultural land prices in most
regions of the nation during 2001. As a result, the overall financial condition
of the agricultural sector, with the exception of certain producer groups that
do not receive significant government payments, remains sound and agricultural
mortgage credit quality generally remains good.
It is too early to predict what level of federal support will be provided
to agriculture in 2002, but Farmer Mac believes that the preservation of the
economic stability of the agricultural sector will continue to be a high
priority for both Congress and the Administration, as it has been during the
last several years. Though continued reliance on government payments enabled
farmers and ranchers to meet their existing mortgage obligations during 2001,
the economic uncertainty of the agricultural economy is likely to continue to
mute farmers' demand for new agricultural mortgage loans during 2002. We believe
that Farmer Mac has responded effectively to these market conditions by
expanding its product offerings to include, among other things, revolving lines
of credit backed by agricultural mortgages to help farm borrowers with equity in
their land meet short-term liquidity needs. In addition, by re-emphasizing to
agricultural lenders the opportunity to reduce their concentrated exposures to
local agricultural credit risks, Farmer Mac believes it can develop swap and
LTSPC transactions and similar structures during 2002, as lenders become more
attentive to their own liquidity issues and portfolio diversification needs.
As we evaluate Farmer Mac's business prospects for 2002 and beyond, certain
factors and conditions remain likely to constrain our progress. Many
institutions still prefer to retain agricultural mortgage loans in portfolio
rather than sell them into the secondary market, notwithstanding the corporate
finance and capital planning benefits they might realize through participation
in Farmer Mac's programs. Some lending institutions subsidize their agricultural
mortgage loan rates out of higher rates on non-mortgage loans, or by low-return
use of equity, both of which generate uneconomic competition with Farmer Mac's
loan rates.
Although Farmer Mac has grown steadily stronger during the last six years,
that growth has depended, and will continue to depend, upon ongoing increases in
the volume of Qualified Loans covered by its guarantee. Farmer Mac's current
share of the agricultural mortgage market remains relatively small, due to the
gradual nature of market penetration in a mature market. However, our dramatic
growth rates in the years since 1996 imply a significant ongoing opportunity to
expand business volume. Over the long term, our strategy for realizing Farmer
Mac's business development and profitability goals is to prompt agricultural
mortgage lenders, whether traditional or non-traditional, to continue to expand
their use of our guarantee through market-oriented programs and products that
clearly benefit the nation's farmers, ranchers and rural homeowners, whether
they sell their loans to Farmer Mac for cash or access our programs though a
swap or LTSPC.
A detailed presentation of Farmer Mac's financial results for the years
ended December 31, 2001, 2000 and 1999 follows.
Net Interest Income. Net interest income totaled $26.9 million in 2001
compared to $17.7 million in 2000, and the net interest yield was 0.83 percent
in 2001 compared to 0.63 percent in 2000. The increase in net interest income
was due to a 14.4 percent increase in the average balance of interest-earnings
assets, driven by a 25.4 percent increase in average on-balance sheet program
assets (Farmer Mac Guaranteed Securities and loans). The increase in on-balance
sheet program assets resulted from Farmer Mac's retention of cash purchases
during 2001 (for further information, see "-- Business Volume" and "-- Balance
Sheet Review -- Assets"). During 2001, the average balance of non-program assets
(cash and cash equivalents and investments) increased by 3.3 percent.
Additionally, with the adoption of Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 140") on April 1, 2001, loans purchased
after that date, which had previously been classified as Farmer Mac Guaranteed
Securities, are classified as loans and the interest income recognized on those
loans includes amounts that would have been classified as guarantee fees prior
to April 1, 2001.
Net interest income totaled $15.0 million in 1999. The $2.7 million
increase from 1999 to 2000 was due to a 19 percent increase in the average
balance of interest-earning assets, driven by a 34 percent increase in average
on-balance sheet program assets. Net interest yield for 1999 was also 0.63
percent.
The following table provides information regarding interest-earning assets
and funding for the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
------------------------------- -------------------------------- -------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------------------------------- -------------------------------- -------------------------------
(dollars in thousands)
Interest-earning assets:
Cash and cash
equivalents $ 522,227 $ 21,464 4.11% $ 510,779 $ 32,675 6.40% $ 568,398 $29,384 5.17%
Investments 922,856 43,870 4.75% 888,765 59,230 6.66% 737,275 41,170 5.58%
Farmer Mac guaranteed
securities 1,690,776 110,169 6.52% 1,379,660 100,649 7.30% 958,593 63,054 6.58%
Loans 87,825 5,710 6.50% 39,048 2,866 7.34% 99,518 6,769 6.80%
----------- ---------- ---------- ------------ ---------- -------- ----------- -------- -------
Total interest-earning
assets $3,223,684 181,213 5.62% $2,818,252 195,420 6.93% $2,363,784 140,377 5.94%
---------- ---------- ----------
Funding:
Discount notes $2,175,087 95,424 4.39% $1,945,276 125,952 6.47% $1,725,647 88,062 5.10%
Medium-term notes 926,878 58,850 6.35% 825,433 51,770 6.27% 580,164 37,357 6.44%
----------- ---------- ---------- ------------ ---------- --------- ------------ -------- -------
Total interest-bearing
liabilities 3,101,965 154,274 4.97% 2,770,709 177,722 6.41% 2,305,811 125,419 5.44%
Net non-interest-bearing
funding 121,719 - 0.00% 47,543 - 0.00% 57,973 - 0.00%
----------- ---------- ---------- ------------ ---------- --------- ------------ -------- -------
Total funding $3,223,684 154,274 4.79% $2,818,252 177,722 6.31% $2,363,784 125,419 5.31%
----------- ---------- ---------- ------------ ---------- --------- ------------ -------- -------
Net interest income/
yield $ 26,939 0.83% $ 17,698 0.63% $14,958 0.63%
---------- ---------- ---------- --------- -------- -------
The table below sets forth the effects of changes in rates and volume on
the components of net interest income for the years ended December 31, 2001 and
2000. Combined rate/volume variances are allocated based on their relative size.
2001 vs. 2000 2000 vs. 1999
------------------------------------- -----------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------- -----------------------------------
Rate Volume Total Rate Volume Total
------------ ----------- ------------ ----------- ----------- -----------
(in thousands)
Income from interest-earning assets:
Cash and cash equivalents $ (11,960) $ 749 $ (11,211) $ 6,482 $ (3,191) $ 3,291
Investments (17,737) 2,377 (15,360) 8,756 9,304 18,060
Farmer Mac guaranteed securities (8,659) 18,179 9,520 7,481 30,114 37,595
Loans held for securitization (286) 3,130 2,844 495 (4,398) (3,903)
------------ ----------- ------------ ----------- ----------- -----------
Total (38,642) 24,435 (14,207) 23,214 31,829 55,043
Expense from interest-bearing liabilities (47,565) 24,117 (23,448) 24,616 27,687 52,303
------------ ----------- ------------ ----------- ----------- -----------
Change in net interest income $ 8,923 $ 318 $ 9,241 $ (1,402) $ 4,142 $ 2,740
------------ ----------- ------------ ----------- ----------- -----------
Other Income. Other income, which is comprised of guarantee fee income,
gain on sale of AMBS and miscellaneous income, totaled $16.4 million for 2001,
compared to $12.1 million for 2000. During 2001, total outstanding guarantees
increased by 35 percent. Similarly, guarantee fee income, the largest component
of other income, increased to $15.8 million from $11.7 million the prior year,
an increase of 35 percent. Miscellaneous income totaled $560,000 for 2001,
compared to $399,000 for 2000. Miscellaneous income includes fees and hedging
gains and losses related to program activities, which fluctuate from period to
period due to various factors including the level of program activity and
delinquencies.
Other income increased 59 percent to $12.1 million in 2000 from $7.6
million in 1999. Guarantee fee income, the largest component of other income,
increased to $11.7 million in 2000 from $7.4 million in 1999 due to a
corresponding increase in the outstanding balance of guaranteed securities. See
"-- Business Volume."
Other Expenses. Operating expenses totaled $10.4 million in 2001, compared
to $8.9 million in 2000 and $8.3 million in 1999. Operating expenses equaled 24
percent of total revenues in 2001, compared to 30 percent in 2000 and 37 percent
in 1999. Farmer Mac's provision for losses totaled $6.7 million in 2001,
compared to $4.7 million in 2000 and $3.7 million in 1999. The increases in the
provision for losses were due to increases in outstanding AMBS for which Farmer
Mac assumes 100 percent of the credit risk and the aging of the portfolio. See
"-- Risk Management -- Credit Risk Management."
Income Tax Expense/Benefit. Income tax expense totaled $8.4 million in
2001, compared to expenses of $5.8 million in 2000 and $3.7 million in 1999.
Farmer Mac expects its effective tax rate in 2002 to approximate 33 percent due
to the effects of certain tax-advantaged investments. For more information about
income taxes, see Note 9 to the Consolidated Financial Statements.
Business Volume. The following table sets forth information regarding the
volume and balance of loans purchased or guaranteed and AMBS issued by Farmer
Mac for the periods indicated:
2001 2000 1999
--------------- -------------- --------------
(in thousands)
Purchase and guarantee volume:
Farmer Mac I
Loans & AMBS $ 266,553 $ 442,246 $ 391,448
Swap transactions 5,574 - 176,788
LTSPC 1,032,967 373,202 637,685
--------------- -------------- --------------
Total Farmer Mac I volume 1,305,094 815,448 1,205,921
Farmer Mac II 198,171 193,505 116,148
--------------- -------------- --------------
Total loans and guaranteed portions
purchased or guaranteed $1,503,265 $1,008,953 $1,322,069
--------------- -------------- --------------
AMBS issuances:
Retained $ 33,932 $ 360,037 $ 517,801
Sold 65,930 159,910 -
Swap transactions 5,574 - 176,788
--------------- -------------- --------------
Total AMBS issuances $ 105,436 $ 519,947 $ 694,589
--------------- -------------- --------------
Outstanding balance of loans held or
guaranteed by Farmer Mac as of December 31 $4,187,111 $3,110,213 $2,381,608
--------------- -------------- --------------
During 2001, the volume of loans purchased or guaranteed by Farmer Mac
totaled $1.5 billion, a 49 percent increase from 2000 volume. This was largely a
result of increases in LTSPCs from $373.2 million in 2000 to $1.0 billion in
2001. See "Business -- Farmer Mac Guarantee Program -- Farmer Mac I --
Off-Balance Sheet Guarantees" and "-- Risk Management -- Credit Risk Management"
for a description of LTSPCs. The net balance of loans held or guarantees
outstanding increased 35 percent to $4.2 billion from $3.1 billion.
LTSPCs typically involve seasoned loans, while cash purchase transactions
usually represent acquisitions of newly originated loans. The increased activity
in LTSPCs is a result of institutions recognizing the capital planning and
corporate finance advantages that the structure offers. Management expects that
LTSPCs will constitute a significant portion of Farmer Mac's new guarantees
during 2002.
Based on market conditions, Farmer Mac either retains AMBS or sells AMBS to
capital markets investors. During 2001, Farmer Mac issued $105.4 million of
AMBS, $33.9 million of which were retained by Farmer Mac.
Indicators of future loan purchase and guarantee volume (but not of LTSCP,
swap or bulk purchase volume) in the immediately succeeding reporting period
include outstanding commitments to purchase loans and the total balance of loans
submitted for approval or approved but not yet purchased. Most purchase
commitments entered into by Farmer Mac are mandatory delivery commitments. If a
Seller obtains a mandatory commitment and is unable to deliver the loans
required thereunder, Farmer Mac requires the Seller to pay a fee to modify,
extend or cancel the commitment. As of December 31, 2001, outstanding
commitments to purchase Farmer Mac I loans totaled $21.1 million, compared to
$13.2 million as of December 31, 2000, while loans submitted for approval or
approved but not yet committed to purchase totaled $106.1 million as of December
31, 2001, compared to $58.0 million as of December 31, 2000. Not all of these
loans are purchased, as some are denied for credit reasons or withdrawn by the
Seller.
While significant progress has been made in developing the secondary market
for agricultural mortgages, Farmer Mac continues to face the challenges of
establishing a new market where none previously existed. Acceptance of Farmer
Mac's programs is increasing among lenders, reflecting the competitive rates,
terms and products offered and the advantages Farmer Mac believes its programs
provide. For Farmer Mac to succeed in realizing its business development and
profitability goals over the longer term, the use of Farmer Mac's programs and
products by agricultural mortgage lenders, whether traditional or
non-traditional, must continue to expand.
Balance Sheet Review
Assets. As of December 31, 2001, total assets were $3.4 billion compared to
$3.2 billion as of December 31, 2000. The increase in total assets was primarily
due to growth in program assets, which increased $181.9 million during 2001 to a
total of $1.9 billion. During 2001, Farmer Mac purchased $464.7 million of
Qualified Loans and Guaranteed Portions. Non-program assets increased to $1.5
billion as of December 31, 2001, from $1.4 billion as of December 31, 2000.
The remaining growth in total assets was due to increases in the balance of
interest and guarantee fees receivable, which increased in proportion to the
growth of program assets and total guarantees.
Liabilities. Total liabilities increased from $3.0 billion as of December
31, 2000 to $3.3 billion as of December 31, 2001. The increase in liabilities
was primarily due to growth in notes payable, which corresponded to the growth
in on-balance sheet program assets. The remaining increase in total liabilities
was due to increases in accrued interest payable, the reserve for losses and the
recognition of financial derivatives on the balance sheet that resulted from the
adoption of SFAS 133. For more information about the implementation and effects
of SFAS 133, see "-- Other Matters -- New Accounting Standards." For more
information about Farmer Mac's loss reserves, see "-- Risk Management -- Credit
Risk Management." For more information about Farmer Mac's funding and
interest-rate risk practices, see "-- Risk Management -- Interest-Rate Risk
Management."
Capital. As of December 31, 2001, stockholders' equity totaled $134.4
million, compared to $132.7 million as of December 31, 2000. The increase was
primarily due to net income earned during 2001 of $16.3 million, offset by a
$7.6 million reduction in unrealized gains and the adverse effect of SFAS 133 on
other comprehensive income of $15.5 million. As of December 31, 2001 and
December 31, 2000, Farmer Mac's statutory minimum capital requirement was $110.6
million and $96.9 million, compared with actual statutory core capital of $126.0
million and $101.2 million, respectively. See "-- Liquidity and Capital
Resources -- Capital Requirements."
Off-Balance Sheet Guarantees. As of December 31, 2001, outstanding
off-balance sheet guarantees totaled $2.3 billion, compared to $1.5 billion as
of December 31, 2000. For more information about off-balance sheet Farmer Mac
Guaranteed Securities, see "-- Risk Management -- Credit Risk Management."
Risk Management
Interest-Rate Risk Management. Interest-rate risk is the risk that interest
rate changes could materially affect the value, or future earnings, of Farmer
Mac. Farmer Mac is exposed to two primary sources of interest-rate risk: (a)
Farmer Mac I and II Securities and other assets held for investment, and (b)
loans.
Farmer Mac is subject to interest-rate risk on all assets held for
investment because of possible timing differences in the cash flows of the
assets and related liabilities. This risk is primarily related to Farmer Mac I
and II Securities because of the ability of borrowers to prepay their mortgages
before the scheduled maturities, thereby increasing the risk of asset and
liability cash flow mismatches. Cash flow mismatches in a changing rate
environment can reduce the value or earnings of the Corporation if assets repay
sooner than expected and the resulting cash flows must be reinvested in
lower-yielding investments when Farmer Mac's funding costs cannot be
correspondingly reduced, or if assets repay more slowly than expected and the
associated debt must be replaced by higher-cost debt. Yield maintenance
provisions associated with many of the loans underlying Farmer Mac I Securities
reduce, but do not eliminate, this risk. Yield maintenance provisions require
borrowers to make an additional payment when they prepay their loans. When
reinvested with the prepaid principal, this payment generates substantially the
same cash flows that would have been generated had the loan not prepaid. None of
the loans underlying Farmer Mac II Securities have yield maintenance provisions,
although some carry fixed or declining percentage prepayment penalties.
Fixed-rate loans without yield maintenance provisions represented 12 percent of
the total balance of loans underlying on-balance sheet Farmer Mac I and II
Securities as of December 31, 2001 and December 31, 2000.
There is less interest-rate risk related to Farmer Mac's portfolio of
non-program assets than to its portfolio of program assets, because the former
consists almost entirely of investments that mature or reprice within one year.
However, Farmer Mac does invest in certain adjustable-rate investments that
limit or "cap" the amount that an investment coupon rate can increase. Such
capped investments totaled $295.4 million and $370.4 million as of December 31,
2001, and December 31, 2000, respectively.
Farmer Mac's primary strategy for managing interest-rate risk related to
Farmer Mac I and II Securities and other assets held for investment is to fund
them with liabilities that have similar durations, or average cash flow patterns
over time, and provide flexibility to accommodate changing prepayment rates in
changing interest rate environments. To achieve the desired funding objective,
Farmer Mac uses a mix of short-term Discount Notes and callable and non-callable
Medium-Term Notes. By using a mix of liabilities that includes callable debt,
the duration of the liabilities will tend to increase or decrease as interest
rates change in a manner similar to changes in the duration of the assets (the
rate of change in the duration of an asset or liability to a change in interest
rates is referred to as convexity). Farmer Mac manages the interest-rate risk
related to capped adjustable-rate investments by purchasing interest rate
contracts that effectively "uncap" the investments. See Note 5 to the
Consolidated Financial Statements.
Farmer Mac is also subject to interest-rate risk on loans, including loans
that Farmer Mac has committed to acquire, but not yet purchased. When Farmer Mac
commits to purchase a Qualified Loan, it is exposed to interest-rate risk
between the time it commits to purchase the loan and the time it either: (a)
sells AMBS backed by the loan, or (b) issues debt to retain the loan in its
portfolio (although issuing debt to fund the loans as an investment does not
fully mitigate interest-rate risk due to the possible timing differences in the
cash flows of the assets and related liabilities, as discussed above). As of
December 31, 2001, the balance of loans committed or purchased and not yet sold
or funded as retained investments totaled $1.5 million. Farmer Mac manages the
interest-rate risk related to such loans, and the debt to be issued to fund the
loans as retained investments, through the use of forward sale contracts on the
debt and mortgage-backed securities of other government-sponsored enterprises
("GSEs") and futures contracts involving U.S. Treasury securities. As of
December 31, 2001, Farmer Mac owned eight open Treasury futures contracts to
offset the interest-rate risk associated with approximately $1.5 million in
loans. Farmer Mac uses GSE forward sale contracts to reduce Farmer Mac's
interest-rate exposure to changes in both Treasury rates and AMBS and debt
spreads. For more information about financial derivatives, see Note 5 to the
Consolidated Financial Statements.
Farmer Mac has established policies and implemented interest-rate risk
management procedures to monitor its exposure to interest-rate risk. The primary
methodology Farmer Mac uses to monitor interest-rate risk exposure is
measurement of the sensitivity of Farmer Mac's market value of equity ("MVE") to
changes in interest rates. This and other risk measures are reviewed regularly
by management's Asset and Liability Committee and the Finance Committee of the
Board of Directors to monitor compliance with Farmer Mac's interest-rate risk
policy limits.
The simulation of MVE involves generating multiple paths for future
interest rates starting from a "base" yield curve and then discounting the
estimated cash flows under those rate paths to arrive at the estimated fair
value of Farmer Mac's assets, liabilities and off-balance sheet items. Farmer
Mac uses a commercially developed model to perform the MVE analyses. The
analysis, which is based on Farmer Mac's existing assets, liabilities and
off-balance sheet financial instruments, does not assume any new business and
measures the change in MVE under seven interest rate scenarios. The interest
rate scenarios include a "base case" in which the "base" yield curve is equal to
the current yield curve, and six parallel and instantaneous shocks to the "base"
yield curve (plus and minus 100, 200 and 300 basis points). Inherent in the MVE
sensitivity analysis presented is the assumption that interest rate changes
occur as instantaneous parallel shifts in the yield curve; in reality, such
shifts are rarely instantaneous or parallel. In addition, actual future market
conditions may differ materially from those assumed in the analysis. For
example, actual loan prepayments and Farmer Mac AMBS and debt spreads may differ
significantly from those assumed in the analysis. Accordingly, the results of
the MVE sensitivity analysis should not be viewed as a projection of future
results. The following schedule summarizes the results of Farmer Mac's MVE
sensitivity analysis as of December 31, 2001 and 2000.
Percentage Change in MVE
from Base Case
--------------------------------
December 31,
Interest Rate --------------------------------
Scenario 2001 2000
- ------------------- ----------------- -----------------
+ 300 bp -1.3% -10.2%
+ 200 bp -0.1% -5.9%
+ 100 bp 0.6% -2.0%
- 100 bp -2.4% -0.5%
- 200 bp -6.4% -3.2%
- 300 bp -16.2% -6.5%
As of December 31, 2001, Farmer Mac was in compliance with the policy
limits established by the Corporation to monitor its exposure to interest-rate
risk.
Credit Risk Management. Farmer Mac's primary exposure to credit risk is the
risk of loss resulting from the inability of borrowers to repay their mortgages.
Farmer Mac is exposed to credit risk on loans it holds, as well as on loans
backing securities issued to third parties, because of Farmer Mac's guarantee of
the timely payment of principal, including any balloon payments, and interest on
the securities. Farmer Mac is also exposed to credit risk on loans it has
committed to purchase through LTSPC transactions. The LTSPC transaction, which
is a variation on a swap transaction, permits a lender to segregate a pool of
loans in its portfolio and transfer the credit risk on those loans to Farmer
Mac. In return, Farmer Mac receives fees based on the outstanding balance of the
segregated loans which approximate what would have been Farmer Mac's guarantee
fee had the loans been exchanged with Farmer Mac in a swap transaction.
For several years, Farmer Mac has conducted its own guarantee fee adequacy
analyses, using stress-test models developed internally and with the assistance
of outside experts. These analyses have taken into account the diverse and
dissimilar characteristics of the various asset categories for which Farmer Mac
must manage its risk exposures, and have evolved as the mix and character of
assets under management shifts with growth in the business and the addition of
new asset categories.
Loans held or guaranteed by Farmer Mac can be divided into three groups:
(a) pre-1996 Act Farmer Mac I loans; (b) post-1996 Act Farmer Mac I loans; and
(c) Farmer Mac II loans. For pre-1996 Act loans, Farmer Mac's credit risk
exposure is mitigated by subordinated interests. Before Farmer Mac incurs a
credit loss, full recourse must first be taken against the subordinated
interest. The 1996 Act eliminated the subordinated interest requirement. As a
result, Farmer Mac assumes 100 percent of the credit risk on post-1996 Act
Farmer Mac I loans. Farmer Mac mitigates the credit risk related to pre- and
post-1996 Act loans through the application of its Underwriting and Appraisal
Standards and by requiring collateral in the form of Agricultural Real Estate.
See "Business -- Farmer Mac I -- Underwriting and Appraisal Standards." In
response to the increased credit risk related to post-1996 Act loans, Farmer Mac
increased the guarantee fee rate and lowered the loan-to-value requirements for
post-1996 Act loans relative to those previously required for pre-1996 Act
loans. Farmer Mac's credit exposure on Farmer Mac II loans is covered by the
"full faith and credit" of the United States by virtue of the USDA guarantee of
the principal and interest on all Guaranteed Portions. Farmer Mac believes it
has little or no credit risk exposure to pre-1996 Act Farmer Mac I loans because
of the subordinated interests, or to Farmer Mac II loans because of the USDA
guarantee. The outstanding principal balance of loans held or guaranteed by
Farmer Mac is summarized in the table below.
December 31,
-----------------------------------
2001 2000
------------------ ---------------
(in thousands)
Farmer Mac I loans
Post-1996 Act $ 3,542,976 $ 2,509,007
Pre-1996 Act 48,979 83,503
Farmer Mac II loans 595,156 517,703
--------------- ---------------
$ 4,187,111 $ 3,110,213
--------------- ---------------
Farmer Mac continually assesses its credit risk exposure related to
post-1996 Act Farmer Mac I loans by monitoring agricultural economic conditions
and evaluating the credit quality of those loans. Despite adverse trends in
agricultural economic conditions, including low commodity prices and reduced
export demand, in 2001 and continuing into 2002, Farmer Mac believes that the
credit quality of the post-1996 Act Farmer Mac I loans remains good, based on
Farmer Mac's credit underwriting, appraisal and diversification standards and
the actual performance of the loans. Farmer Mac manages its credit exposure in
particular geographic regions and commodities as a percentage of the total
principal amount of all loans outstanding, adjusted for the credit quality of
the loans in that particular geographic region or commodity group based on the
loan-to-value, debt service coverage, equity-to-asset and working
capital-to-current asset ratios. The following tables set forth the
loan-to-value (based on current loan balance), geographic and commodity
distributions of the post-1996 Act Farmer Mac I loans as of December 31, 2001
and 2000. For information regarding loan-to-value, commodity and geographic
distributions of all Farmer Mac I loans, see Note 11 to the Consolidated
Financial Statements.
Distribution of Post-1996
Act Loans as of
December 31,
----------------------
2001 2000
----------- ----------
By original loan-to-value ratio:
0.00% to 40.00% 26% 23%
40.01% to 50.00% 21% 21%
50.01% to 60.00% 26% 25%
60.01% to 70.00% 24% 26%
70.01% to 80.00% 2% 4%
80.01% to 90.00% 1% 1%
----------- ----------
Total 100% 100%
----------- ----------
Weighted average loan-to-value ratio 49% 51%
----------- ----------
By geographic region (1):
Northwest 31% 33%
Southwest 42% 40%
Mid-North 12% 16%
Mid-South 4% 5%
Northeast 6% 4%
Southeast 5% 2%
----------- ----------
Total 100% 100%
----------- ----------
By commodity:
Crops 46% 51%
Livestock 19% 18%
Permanent plantings 30% 27%
Part-time farms 5% 4%
----------- ----------
Total 100% 100%
----------- ----------
(1) Regions are defined in Note 11 to the Consolidated Financial Statements.
As of December 31, 2001, Farmer Mac's highest geographic concentrations
were in the Southwest and Northwest regions. Farmer Mac's largest commodity
concentration as of December 31, 2001 was crops; however, this group consists of
several specific commodities, including cotton, feed grains, vegetables and
other crops, none of which comprised more than 12 percent of the total
portfolio.
The effectiveness of Farmer Mac's underwriting, appraisal and
diversification standards is reflected primarily through the level of defaulted
loans and related credit losses. As of December 31, 2001, post-1996 Act Farmer
Mac I loans that were 90 days or more past due (referred to as non-performing or
"impaired" loans) totaled $59.8 million, or 1.70 percent of the total principal
amount of all post-1996 Act loans. The balance of non-performing loans as of
December 31, 2000, was $38.8 million, or 1.53 percent of all post-1996 Act
loans. The increase in the delinquency rate of the post-1996 Act Farmer Mac I
loans from December 31, 2000 to December 31, 2001 is attributable to a larger
portion of the portfolio entering its peak loss years and continuing liquidity
issues in the agricultural sector rather than to a decline in land values or
other drivers of loan losses. The following table segregates the post-1996 Act
loan delinquency rate as of December 31, 2001 by year of origination, geographic
region and commodity.
Post-1996 Act Delinquency Rates
----------------------------------
By year of origination:
Prior to 1996 0.72%
1996 5.34%
1997 3.65%
1998 2.71%
1999 1.11%
2000 0.62%
2001 0.00%
By geographic region (1):
Northwest 3.13%
Southwest 1.24%
Mid-north 0.69%
Mid-south 1.07%
Northeast 0.44%
Southeast 1.04%
By commodity:
Crops 1.57%
Livestock 1.09%
Permanent plantings 2.46%
Part-time farms 1.02%
(1) Regions are defined in Note 11 to the Consolidated Financial Statements.
The USDA is forecasting net cash income on farms at $50.9 billion for 2002,
down $8.6 billion from the revised 2001 forecast of $59.5 billion, assuming
government payments of $10.7 billion for 2002. The USDA's government payments
assumption is based on existing legislation however, and does not take into
account increases expected to be enacted in the pending farm bill or any
emergency assistance that may be contained in special legislation, which
represented $9.1 billion of the $21.0 billion in government payments to the
agricultural sector for 2001. The USDA currently expects farm real estate values
to rise during 2002 by about 1 percent. Regionally, farm real estate values may
vary with differing rates of increase, or even decrease, depending on
commodities grown and regional economic factors.
Farmer Mac anticipates that post-1996 Act loan delinquencies may increase
again in 2002, due to both the growing number of loans held or securitized by
Farmer Mac that are gradually approaching their anticipated peak default years
and the expectation of continued stress in the agricultural and overall
economies. Nevertheless, based on strong agricultural income figures reported by
the USDA for 2001, continued stable agricultural land values in most regions of
the country and anticipated federal financial support for agricultural producers
again in 2002, Farmer Mac believes that overall credit quality and sound
business development opportunities remain strong.
The primary determinant of the loss that may be incurred on non-performing
loans is the loan-to-value ratio. As of December 31, 2001, the weighted-average
loan-to-value ratio for all post-1996 Act loans was 49 percent, and the
weighted-average loan-to-value ratio for all post-1996 Act loans that were 90
days or more past due, in foreclosure or in bankruptcy was 59 percent. The
following table illustrates the distribution of non-performing loans as of
December 31, 2001 by loan-to-value ratio (based on current loan balance and
appraised value at the date of initial guarantee by Farmer Mac):
Distribution of
Post-1996 Act
Delinquencies
-----------------
By loan-to-value ratio:
0.00% to 40.00% 5%
40.01% to 50.00% 9%
50.01% to 60.00% 38%
60.01% to 70.00% 45%
70.01% to 80.00% 3%
-----------------
Total 100%
-----------------
Farmer Mac maintains a reserve to cover potential credit losses on
post-1996 Act loans underlying Farmer Mac I Securities and LTSPCs. As of
December 31, 2001, Farmer Mac's loan loss reserve was $15.9 million, compared to
$11.3 million as of December 31, 2000. Farmer Mac's provision for losses was
$6.7 million for 2001, compared to $4.7 million for 2000. Farmer Mac incurred
$2.5 million in charge-offs against the loan loss reserve during 2001. Farmer
Mac had no property acquired through foreclosure as of December 31, 2001 and the
cost basis in property acquired through foreclosure and held by Farmer Mac as of
December 31, 2000, was $208,000.
The reserve, as a percentage of outstanding post-1996 Act Farmer Mac I
loans, was 0.45 percent as of both December 31, 2001 and 2000, respectively.
Management evaluates the adequacy of the reserve on a monthly basis and
considers a number of factors, including: historical charge-off and recovery
activity; trends in delinquencies, bankruptcies and non-performing loans; trends
in loan volume and the size of credit risks; current and anticipated economic
conditions; the condition of agricultural segments, commodities and geographic
areas experiencing or expected to experience particular economic adversities,
particularly areas where Farmer Mac may have geographic or commodity
concentrations; the degree of risk inherent in the composition of Farmer Mac's
guaranteed portfolio; the results of quality control reviews; and underwriting
standards.
To a lesser extent, Farmer Mac is also exposed to institutional credit risk
related to: (1) issuers of AgVantage bonds and other investments held by Farmer
Mac; (2) Sellers and servicers; and (3) interest-rate contract counterparties.
AgVantage bonds are general obligations of the AgVantage Issuers and are secured
by collateral in an amount ranging from 120 percent to 150 percent of the bond
amount. In addition to requiring collateral, Farmer Mac mitigates credit risk
related to AgVantage bonds by evaluating and monitoring the financial condition
of the AgVantage Issuers. Outstanding AgVantage bonds totaled $24.5 million as
of December 31, 2001, and $28.1 million as of December 31, 2000.
The credit risk inherent in other investments held by Farmer Mac is
mitigated by Farmer Mac's policy of establishing concentration limits and
investing in highly-rated instruments, which reduce exposure to any one
counterparty. Farmer Mac's policy limits the Corporation's total credit exposure
to a single entity by limiting the dollar amount of investments with one entity,
excluding GSEs and agencies of the U.S. government, to the greater of 25 percent
of Farmer Mac's regulatory core capital or $25 million. The policy also requires
the entity to be rated in one of the three highest rating categories of at least
one nationally recognized statistical rating organization for investments with
terms greater than 270 days and in one of the two highest rating categories for
investments with terms of 270 days or less.
As of December 31, 2001, Farmer Mac had investments in commercial paper,
corporate debt securities, asset-backed securities and preferred stock issued by
52 entities totaling $750 million, of which 26 exceeded 10 percent of Farmer
Mac's stockholders' equity (the cumulative balance of investments in such
entities totaled $624.5 million), and 9 entities with a total balance of $331.0
million exceeded 15 percent of stockholders' equity. In addition, as of December
31, 2001, Farmer Mac held $373.2 million of securities issued by GSEs or
agencies of the U.S. government and $298.6 million in money market investment
accounts, with the maximum amount held in any one money market investment fund
at any time during 2001 being approximately $350 million. The short-term nature
of the investment portfolio also limits Farmer Mac's credit risk. As of December
31, 2001, 41.6 percent of the investment portfolio, excluding GSE and agency
investments, consisted of short-term highly liquid investments.
Farmer Mac manages institutional credit risk related to Sellers and
servicers by requiring such institutions to meet certain standards and by
monitoring their financial condition and servicing performance. Credit risk
related to interest-rate contracts is discussed in Note 5 to the Consolidated
Financial Statements.
Liquidity and Capital Resources
Liquidity. The funding needs of Farmer Mac's business programs are driven
by the purchase of Qualified Loans, payment of principal and interest on Farmer
Mac Guaranteed Securities and the maturities of debt. Farmer Mac's primary
sources of funds to meet these needs are issuances of debt obligations,
principal and interest payments on mortgages underlying Farmer Mac Guaranteed
Securities and net operating cash flows. Because of Farmer Mac's regular
participation in the capital markets and its status as a GSE, Farmer Mac has
been able to access the capital markets at favorable rates. Farmer Mac also
maintains a portfolio of cash equivalent investments, comprised of commercial
paper and other short-term instruments, to draw upon as necessary. As of
December 31, 2001 and 2000, Farmer Mac's cash and cash equivalents totaled
$437.8 million and $537.9 million, respectively.
Capital Requirements. The Act, as amended by the 1996 Act, establishes
three capital standards for Farmer Mac--minimum, critical and risk-based. The
minimum capital requirement is expressed as a percentage of on-balance sheet
assets and off-balance sheet obligations, with the critical capital requirement
equal to one-half of the minimum capital amount. Higher minimum and critical
capital requirements were phased in over a transition period, which ended on
January 1, 1999, when the highest level of minimum capital became applicable.
The Act does not specify the required level of risk-based capital. It directs
the FCA to establish a risk-based capital test for Farmer Mac, using specified
stress-test parameters. For a discussion of risk-based capital, including the
potential future impact on Farmer Mac of the risk-based capital requirements
adopted by the FCA, see "Government Regulation of Farmer Mac -- Regulation --
Capital Standards -- Risk-based capital."
Certain enforcement powers are given to the FCA depending upon Farmer Mac's
compliance with the capital standards. See "Government Regulation of Farmer Mac
- -- Regulation -- Capital Standards -- Enforcement levels." As of December 31,
2001 and 2000, Farmer Mac was classified as within "level I" (the highest
compliance level). The following table sets forth Farmer Mac's minimum capital
requirement as of December 31, 2001 and 2000 based on the fully phased-in
requirements.
December 31, 2001 December 31, 2000
--------------------------------------- ----------------------------------------
Capital Capital
Amount Ratio Required Amount Ratio Required
------------- ------------- ----------- ------------ ------------- -------------
(dollars in thousands)
On-balance sheet assets $3,380,157 2.75% $92,954 $3,112,058 2.75% $85,582
Outstanding balance of Farmer Mac
Guaranteed Securities held by others 2,329,879 0.75% 17,474 1,498,029 0.75% 11,235
Derivative and hedging obligations 20,762 0.75% 156 8,061 0.75% 60
----------- ------------
Minimum capital level 110,584 96,877
Actual core capital 126,042 101,163
----------- ------------
Capital surplus $15,458 $ 4,286
----------- ------------
Based on the current minimum capital requirements established in the 1996
Act, Farmer Mac's current capital surplus of $15.5 million would support
additional guarantee growth in amounts ranging from $562 million of on-balance
sheet guarantees to more than $2.0 billion of off-balance sheet guarantees.
Furthermore, should Farmer Mac deem it appropriate, on-balance sheet non-program
assets (cash and cash equivalents and investment securities) of $1.4 billion
could be replaced with on- and off-balance sheet program guarantees, resulting
in the ability to carry additional guarantees ranging from $1.4 billion of
on-balance sheet guarantees to over $5.1 billion of off-balance sheet
guarantees. Ultimately, Farmer Mac could sell on-balance sheet program assets of
$1.9 billion in order to support further increases of on- and off-balance sheet
program guarantees, resulting in the ability to carry an additional cumulative
$14.1 billion of off-balance sheet guarantees. Any of these transactions would,
of course, be evaluated to optimize Farmer Mac's return on equity and capital
flexibility. Accordingly, in the opinion of management, Farmer Mac has
sufficient capital and liquidity for the next twelve months.
Other Matters
New Accounting Standards. As amended, SFAS 133 became effective as of
January 1, 2001. SFAS 133 requires financial derivatives to be measured and
recorded at fair value. Pursuant to generally accepted accounting practices
prior to SFAS 133, derivatives were accounted for as off-balance sheet items and
disclosed in the consolidated financial statement footnotes.
The cumulative effect of this change in accounting principles recognized on
January 1, 2001 was a reduction to net income of $726,000 and a negative
adjustment to other comprehensive income within stockholders' equity of $8.6
million. The Corporation expects that SFAS 133 will increase volatility in
earnings and accumulated other comprehensive income.
Beginning in the first quarter of 2001, Farmer Mac disclosed an additional
earnings per share measure that excludes the effects of the mark-to-market of
derivative instruments and the one-time transition adjustment that resulted from
the implementation of SFAS 133. This operating earnings per share measure is
determined on a basis consistent with pre-SFAS 133 earnings per share.
In September 2000, the Financial Accounting Standards Board issued SFAS
140. SFAS 140 was applied as of April 1, 2001 as required by the standard. SFAS
140 does not materially affect the Corporation's results of operations or
financial position, but does result in the Corporation classifying as loans
certain AMBS that were previously classified as Farmer Mac Guaranteed Securities
and requires the Corporation to classify as interest income certain amounts that
were previously classified as guarantee fees.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Farmer Mac is exposed to market risk from changes in interest rates. Farmer
Mac manages this market risk by entering into various financial transactions,
including off-balance sheet derivative financial instruments, and by monitoring
its exposure to changes in interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk Management --
Interest-Rate Risk Management" for more information about Farmer Mac's exposure
to interest rate risk and strategies to manage such risk. For information
regarding Farmer Mac's use of and accounting policies for financial derivatives,
see Notes 2(g) and 5 to the Consolidated Financial Statements.
Item 8. Financial Statements
Report of Independent Public Accountants
The Board of Directors and Stockholders of
Federal Agricultural Mortgage Corporation:
We have audited the accompanying consolidated balance sheets of the Federal
Agricultural Mortgage Corporation ("Farmer Mac") and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of Farmer Mac's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Farmer Mac and subsidiaries as
of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2001, Farmer Mac changed its method of accounting for financial
derivatives.
Arthur Andersen LLP
Vienna, VA
January 23, 2002
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2001 2000
-------------- --------------
(in thousands)
Assets:
Cash and cash equivalents $ 437,831 $ 537,871
Investment securities 1,007,954 836,757
Farmer Mac guaranteed securities 1,690,376 1,679,993
Loans 201,812 30,279
Financial derivatives 15 -
Interest receivable 56,253 55,681
Guarantee fees receivable 6,004 5,494
Prepaid expenses and other assets 16,963 14,824
-------------- --------------
Total Assets $3,417,208 $3,160,899
-------------- --------------
Liabilities and Stockholders' Equity:
Liabilities:
Notes payable:
Due within one year $2,233,267 $2,141,548
Due after one year 968,463 827,635
-------------- --------------
Total notes payable 3,201,730 2,969,183
Financial derivatives 20,762 -
Accrued interest payable 26,358 20,852
Accounts payable and accrued expenses 18,037 26,880
Reserve for losses 15,884 11,323
-------------- --------------
Total Liabilities 3,282,771 3,028,238
-------------- --------------
Stockholders' Equity:
Common stock:
Class A Voting, $1 par value, no maximum authorization,
1,030,780 and 1,030,780 shares issued and outstanding
as of December 31, 2001 and 2000, respectively 1,031 1,031
Class B Voting, $1 par value, no maximum authorization,
500,301 and 500,301 shares issued and outstanding
as of December 31, 2001 and 2000, respectively 500 500
Class C Non-Voting, $1 par value, no maximum authorization,
10,033,037 and 9,620,112 shares issued and outstanding
as of December 31, 2001 and 2000, respectively 10,033 9,621
Additional paid-in capital 80,960 72,773
Accumulated other comprehensive income 8,395 31,498
Retained earnings 33,518 17,238
-------------- --------------
Total Stockholders' Equity 134,437 132,661
-------------- --------------
Total Liabilities and Stockholders' Equity $3,417,208 $3,160,899
-------------- --------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For Year Ended December 31,
---------------------------------------
2001 2000 1999
------------ ------------ -----------
(in thousands, except per share amounts)
Interest income:
Investments and cash equivalents $ 65,334 $ 91,905 $ 70,554
Farmer Mac guaranteed securities 110,169 100,649 63,054
Loans 5,710 2,866 6,769
------------ ------------ -----------
Total interest income 181,213 195,420 140,377
Interest expense 154,274 177,722 125,419
------------ ------------ -----------
Net interest income 26,939 17,698 14,958
Losses on financial derivatives
and trading assets (726) - -
Other income:
Guarantee fees 15,807 11,677 7,396
Miscellaneous 560 399 220
------------ ------------ -----------
Total other income 16,367 12,076 7,616
------------ ------------ -----------
Total revenues 42,580 29,774 22,574
------------ ------------ -----------
Expenses:
Compensation and employee benefits 5,601 4,521 4,577
Regulatory fees 735 584 502
General and administrative 4,094 3,744 3,232
------------ ------------ -----------
Total operating expenses 10,430 8,849 8,311
Provision for losses 6,725 4,739 3,672
------------ ------------ -----------
Total expenses 17,155 13,588 11,983
------------ ------------ -----------
Income before income taxes 25,425 16,186 10,591
Income tax expense 8,419 5,749 3,670
---------------------------------------
Net income before cumulative effect 17,006 10,437 6,921
Cumulative effect of change
in accounting principles, net of tax (726) - -
---------------------------------------
Net income $ 16,280 $ 10,437 $ 6,921
---------------------------------------
Earnings per share:
Basic net earnings $ 1.44 $ 0.94 $ 0.64
Diluted net earnings $ 1.38 $ 0.92 $ 0.62
Earnings per share excluding cumulative
effect of change in accounting principles:
Basic earnings per share $ 1.50 $ 0.94 $ 0.64
Diluted earnings per share $ 1.45 $ 0.92 $ 0.62
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Comprehensive Retained
Additional Paid- Income / Earnings/
Common Stock in Capital (Deficit) (Deficit) Total
------------ ----------------- ------------- ---------- ----------
(in thousands)
Balance, December 31, 1998 $ 10,801 $ 69,984 $ 249 $ (120) $ 80,914
Issuance of Common Stock
Class A 6 96 102
Class C 95 1,017 1,112
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $982,000 (1,906) (1,906)
Net income 6,921 6,921
------------
Comprehensive income 5,015
------------ ------------ ------------ ------------ -----------
Balance, December 31, 1999 10,902 71,097 (1,657) 6,801 87,143
------------ ------------ ------------ ------------ -----------
Issuance of Common Stock
Class C 250 1,676 1,926
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $18.2 million 33,155 33,155
Net income 10,437 10,437
------------
Comprehensive income 43,592
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 11,152 72,773 31,498 17,238 132,661
------------ ------------ ------------ ------------ ------------
Issuance of Common Stock
Class C 412 8,187 8,599
Change in unrealized gain/loss
on securities available-for-sale,
net of taxes of $4.2 million (7,601) (7,601)
Cumulative effect of change in
accounting principles,
net of taxes of $4.8 million (8,632) (8,632)
Change in unrealized gain/loss
on financial derivatives,
net of taxes of $3.7 million (6,870) (6,870)
Net income 16,280 16,280
------------
Comprehensive income (6,823)
------------ ------------ ------------ ----------- ------------
Balance, December 31, 2001 $ 11,564 $ 80,960 $ 8,395 $ 33,518 $ 134,437
------------ ------------ ------------ ----------- ------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------------------------
2001 2000 1999
---------------- --------------- ---------------
(in thousands)
Cash flows from operating activities:
Net income $ 16,280 $ 10,437 $ 6,921
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization of investment premiums and discounts (7,885) 1,269 3,857
Increase in interest receivable (572) (12,781) (18,374)
Increase in guarantee fees receivable (510) (1,136) (2,223)
Increase in other assets (1,695) (166) (8,867)
Amortization of debt premiums, discounts and issuance costs 89,131 126,653 88,337
Increase in accrued interest payable 5,506 2,303 9,436
Increase in other liabilities 3,762 2,960 2,861
Proceeds from repayment of trading investment securities (21,717) - -
Mark-to-market on trading securities and derivatives (202) - -
Amortization of settled financial derivatives contracts 461 - -
Provision for losses 6,725 4,739 3,672
---------------- --------------- ---------------
Net cash provided by operating activities 89,284 134,278 85,620
---------------- --------------- ---------------
Cash flows from investing activities:
Purchases of investment securities (592,747) (254,937) (509,741)
Purchases of Farmer Mac guaranteed securities (261,569) (464,917) (979,967)
Purchases of loans (273,415) (446,251) (395,845)
Proceeds from repayment of investment securities 455,744 264,403 304,235
Proceeds from repayment of Farmer Mac guaranteed securities 268,351 435,602 739,483
Proceeds from repayment of loans 2,021 1,183 6,080
Proceeds from sale of Farmer Mac guaranteed securities 65,929 159,910 -
Settlement of financial derivatives (5,230) - -
Purchases of office equipment (71) - -
---------------- --------------- ---------------
Net cash used by investing activities (340,987) (305,007) (835,755)
---------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of discount notes 105,736,192 64,284,888 74,159,998
Proceeds from issuance of medium-term notes 295,186 215,027 450,454
Payments to redeem discount notes (105,641,354) (64,072,223) (74,004,635)
Payments to redeem medium-term notes (246,960) (57,300) (61,240)
Proceeds from common stock issuance 8,599 1,926 1,214
---------------- --------------- ---------------
Net cash provided by financing activities 151,663 372,318 545,791
---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (100,040) 201,589 (204,344)
Cash and cash equivalents at beginning of period 537,871 336,282 540,626
---------------- --------------- ---------------
Cash and cash equivalents at end of period $ 437,831 $ 537,871 $ 336,282
---------------- --------------- ---------------
See accompanying notes to consolidated financial statements.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
1. ORGANIZATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac" or the
"Corporation") is a stockholder-owned, federally chartered instrumentality of
the United States that was created to establish a secondary market for
agricultural real estate and rural housing mortgage loans ("Qualified Loans").
Farmer Mac was created with the enactment of the Agricultural Credit Act of 1987
(12 U.S.C. ss.ss. 2279aa et seq.), which amended the Farm Credit Act of 1971
(collectively, as amended, the "Act") to provide for the existence of a
secondary market for agricultural mortgages. Farmer Mac provides liquidity to
the agricultural mortgage market by: (1) purchasing newly originated Qualified
Loans directly from lenders through its "cash window" and existing, or
"seasoned," Qualified Loans from lenders and other third parties in negotiated
transactions; (2) issuing Long-Term Standby Purchase Commitments ("LTSPCs") for
newly originated and seasoned Qualified Loans; (3) exchanging securities issued
and guaranteed by Farmer Mac for Qualified Loans that back those securities (the
"swap" program); and (4) purchasing mortgage-backed bonds secured by Qualified
Loans through its "AgVantage" program.
Farmer Mac conducts its business through two programs, "Farmer Mac I" and
"Farmer Mac II." Under the Farmer Mac I Program, Farmer Mac purchases, or
commits to purchase, Qualified Loans, or obligations backed by Qualified Loans,
that are not guaranteed by any instrumentality or agency of the United States.
Under the Farmer Mac II Program, Farmer Mac purchases the guaranteed portions
(the "Guaranteed Portions") of loans guaranteed by the United States Department
of Agriculture (the "USDA") pursuant to the Consolidated Farm and Rural
Development Act (7 U.S.C. ss.ss. 1921 et seq.; the "ConAct").
Pursuant to its statutory authority, Farmer Mac guarantees timely payments of
principal and interest on securities backed by Qualified Loans or Guaranteed
Portions ("Farmer Mac Guaranteed Securities") and retains those securities in
its portfolio or sells them in the capital markets.
Farmer Mac's current principal sources of revenue are: (1) fees it receives in
connection with its guarantees and commitments to purchase Qualified Loans; and
(2) net interest income earned on its retained portfolio of Farmer Mac
Guaranteed Securities, Qualified Loans, AgVantage bonds and investments.
During 2001, Farmer Mac purchased Qualified Loans through its Farmer Mac I cash
window program from 63 Sellers operating throughout the United States. During
the year, the top 10 Sellers generated 72.2 percent of the Farmer Mac I cash
window loan volume. This included Qualified Loans sold by Zions First National
Bank ("Zions"), Farmer Mac's largest combined Class A and Class C stockholder.
Of Farmer Mac's 2001 Farmer Mac I cash window volume for the year, 34.4 percent
was purchased from Zions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Farmer Mac conform with generally
accepted accounting principles in the United States. The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities (including, but not limited to,
the reserve for losses) as of the date of the consolidated financial statements
and the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates. The following are the
significant accounting policies that Farmer Mac follows in preparing and
presenting its consolidated financial statements:
(a) Principles of Consolidation
Prior to 1999, Farmer Mac maintained two wholly owned subsidiaries. During 1999,
these subsidiaries and their principal activities, which were to facilitate the
purchase and issuance of Farmer Mac Guaranteed Securities and to act as a
registrant under registration statements filed with the Securities and Exchange
Commission, were merged into one subsidiary. The consolidated financial
statements include the accounts of Farmer Mac and a wholly owned subsidiary. All
intercompany balances and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Farmer Mac considers highly liquid investment securities with original
maturities of three months or less to be cash equivalents. Changes in the
balance of cash and cash equivalents are reported in the Consolidated Statements
of Cash Flows. The following table sets forth information regarding certain cash
and non-cash transactions for the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
------------ ------------- -------------
(in thousands)
Cash paid during the year for:
Interest $ 75,821 $ 50,493 $ 29,810
Income taxes 8,200 6,825 4,987
Non-cash activity:
Real estate owned acquired through foreclosure - - 2,102
Loans acquired and securitized as AMBS 99,862 452,124 517,801
Certain loans acquired and securitized as AMBS after the adoption of Statement
of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"),
on April 1, 2001, but do not meet the security accounting requirements of SFAS
140, are classified as loans on the accompanying 2001 Consolidated Balance Sheet
and the securitization of those loans is excluded from the non-cash activity
presented in the table above.
(c) Investments and Farmer Mac Guaranteed Securities
Farmer Mac classifies investments and Farmer Mac Guaranteed Securities that
Farmer Mac has the positive intent and ability to hold to maturity as
held-to-maturity. Such securities are carried at cost, adjusted for unamortized
premiums and unearned discounts. Securities for which Farmer Mac does not have
the positive intent to hold to maturity are classified as available-for-sale and
are carried at estimated fair value. Unrealized gains and losses on
available-for-sale securities are reported as a separate component of
stockholders' equity. Certain of the securities previously classified as
available-for-sale were reclassified as trading securities with the adoption of
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), and are reported at their fair
value, with unrealized gains and losses included in earnings. Premiums,
discounts and other deferred costs are amortized to interest income over the
estimated life of the security using the effective interest method. Interest
income on investments and Farmer Mac Guaranteed Securities is recorded on an
accrual basis unless the collection of interest is considered doubtful.
Farmer Mac receives yield maintenance payments when certain Qualified Loans
prepay. These payments mitigate Farmer Mac's exposure to reinvestment risk and
are calculated such that, when reinvested with the prepaid principal, they
should generate substantially the same cash flows that would have been generated
had the Qualified Loans not prepaid. Yield maintenance payments are recognized
as interest income in the Consolidated Statements of Operations upon receipt.
(d) Loans
Loans for which Farmer Mac has the positive intent and ability to hold for the
foreseeable future are classified as held for investment and reported at
amortized cost. Loans that Farmer Mac does not intend to hold for the
foreseeable future are classified as held for sale and reported at the lower of
cost or market. Of the loans held by Farmer Mac as of December 31, 2001, $175.8
million were held for investment and $25.8 million were held for sale. Of the
loans held by Farmer Mac as of December 31, 2000, $18.6 million were held for
investment and $11.6 million were held for sale.
(e) Securitization of Qualified Loans
Farmer Mac issues guaranteed securities backed by Qualified Loans. Farmer Mac
generates guarantee fees for the Corporation as compensation for assuming the
credit risk on the Qualified Loans underlying the securities. Farmer Mac issued
$99.9 million, $519.9 million and $694.6 million of Farmer Mac Guaranteed
Securities during each of the years ended December 31, 2001, 2000, and 1999,
respectively. The guarantee fees are recognized as earned over the lives of the
underlying loans. After the adoption of SFAS 140 on April 1, 2001, certain loans
that were acquired and securitized as AMBS, but do not meet the security
accounting requirements of SFAS 140, are classified as loans on the accompanying
2001 Consolidated Balance Sheet and the guarantee fees earned are classified as
interest income on the accompanying 2001 Consolidated Statement of Operations.
Periodically, Farmer Mac sells its guaranteed securities to capital market
investors. When sold, a gain is recognized to the extent sale proceeds exceed
the cost basis of the security.
(f) Non-Performing Loans
Non-performing (or "impaired") loans are loans for which it is probable that
Farmer Mac will not receive all amounts contractually due and include all loans
90 days or more past due. When a Qualified Loan collateralizing a Farmer Mac I
Security is placed on non-accrual status, the interest income due to the
security holder is accrued as part of the provision for losses until Farmer Mac
purchases the loan from the pool and the principal amount is passed through to
the investor. When a loan held by Farmer Mac is determined to be impaired,
interest due on the loan is not recognized as interest income until the payment
is received from the borrower. Interest previously accrued on loans held by
Farmer Mac or interest advanced to security holders is charged against the loss
reserve when deemed uncollectible.
(g) Financial Derivatives
A financial derivative is a financial instrument that has one or more
underlyings and one or more notional amounts, requires no significant initial
net investment, and has terms that require net settlement. Farmer Mac enters
into financial derivative contracts as an end-user, not for trading or
speculative purposes. Farmer Mac uses financial derivatives to adjust the
characteristics of Farmer Mac's debt to match the characteristics of Farmer
Mac's mortgage assets.
When financial derivatives meet specific criteria, they are accounted for as
either fair value hedges or cash flow hedges. Financial derivatives that do not
satisfy SFAS 133 hedge criteria are not accounted for as hedges. Changes in fair
value of those financial derivatives are reported in income or expense.
Prior to the adoption of SFAS 133, when financial derivatives met specific
criteria, they were accounted for either as synthetic instruments or as hedges.
When financial derivatives were accounted for as synthetic instruments,
primarily interest-rate contracts, the net differential received or paid was
recognized on an accrual basis. When financial derivatives were accounted for as
hedges, the related fair value gains or losses were deferred as an adjustment to
the hedged asset or liability. Upon termination of a hedge relationship, the
deferred gain or loss was amortized over the remaining effective life of the
hedged asset or liability. Interest payments received or paid under financial
derivatives qualifying as hedges were recognized on an accrual basis.
(h) Notes and Bonds Payable
Notes and bonds payable are classified as due within one year or due after one
year based on their contractual maturities. Debt issuance costs, including gains
and losses related to hedging activities, are deferred and amortized to interest
income or expense using the effective interest method over the estimated life of
the related debt.
(i) Reserve for Losses
Farmer Mac maintains a reserve for losses to cover potential losses on loans,
including Qualified Loans underlying Post-1996 Act Farmer Mac I Securities and
LTSPCs. The reserve is maintained at a level management deems adequate to cover
potential principal losses and interest losses related to loans that are 90 days
or more delinquent. The reserve is increased through periodic provisions charged
to expense and reduced by charge-offs for actual loan losses, net of recoveries.
In estimating potential losses on loans and outstanding Farmer Mac guarantees,
management considers economic conditions, geographic and agricultural commodity
concentrations, the credit profile of the Qualified Loans, delinquency trends
and historical charge-off and recovery activity. No reserve has been made for
Farmer Mac I Securities issued prior to the 1996 Act or securities issued under
the Farmer Mac II Program ("Farmer Mac II Securities"). Farmer Mac I Securities
issued prior to the 1996 Act are supported by unguaranteed subordinated
interests, which are expected to exceed the estimated credit losses on those
securities. Guaranteed Portions collateralizing Farmer Mac II Securities are
guaranteed by the USDA.
(j) Earnings Per Share
The following schedule reconciles basic and diluted earnings per share for the
years ended December 31, 2001, 2000 and 1999. Basic earnings per share is based
on the weighted average common shares outstanding. Diluted earnings per share is
based on the weighted average number of common shares outstanding adjusted to
include all potentially dilutive common stock.
2001 2000 1999
------------------------------- ------------------------------ -------------------------------
Dilutive Dilutive Dilutive
Basic stock Diluted Basic stock Diluted Basic stock Diluted
EPS options EPS EPS options EPS EPS options EPS
------------------------------- ------------------------------ -------------------------------
(in thousands, except per share amounts)
Net income $16,280 $ - $16,280 $10,437 $ - $10,437 $ 6,921 $ - $ 6,921
Weighted-average 11,329 440 11,769 11,064 293 11,357 10,839 397 11,236
shares
Earnings per share $ 1.44 $ 1.38 $ 0.94 $ 0.92 $ 0.64 $ 0.62
(k) Income Taxes
Deferred tax assets and liabilities are recognized based on the expected future
tax effect of existing differences between the financial reporting and tax
reporting bases of assets and liabilities using enacted statutory tax rates.
Income tax expense is equal to the income taxes payable in the current year plus
the net change in the deferred tax asset or liability balance.
(l) Comprehensive Income
Comprehensive income, which is presented in the Consolidated Statements of
Changes in Stockholders' Equity, represents all changes in stockholders' equity
except those resulting from investments by or distributions to stockholders, and
is comprised of net income, unrealized gain/(loss) on securities
available-for-sale and the cumulative effect of the mark-to-market of financial
derivatives classified as cash flow hedges pursuant to SFAS 133.
(m) New Accounting Standards
As amended, SFAS 133 became effective as of January 1, 2001. SFAS 133 requires
financial derivatives to be measured and recorded at fair value. Pursuant to
generally accepted accounting practices prior to SFAS 133, derivatives were
generally accounted for as off-balance sheet items and disclosed in the
consolidated financial statement footnotes.
The cumulative effect of this change in accounting principles recognized on
January 1, 2001 was a reduction to net income of $726,000 and a negative
adjustment to other comprehensive income within stockholders' equity of $8.6
million. The Corporation expects that SFAS 133 will increase volatility in
earnings and accumulated other comprehensive income.
In September 2000, the Financial Accounting Standards Board issued SFAS 140.
SFAS 140 was applied as of April 1, 2001 as required by the standard. SFAS 140
does not materially affect the Corporation's results of operations or financial
position, but does result in the Corporation classifying as loans certain Farmer
Mac Guaranteed Securities ("AMBS") that prior to the implementation of SFAS 140
would have been classified as securities.
(n) Reclassifications
Certain reclassifications of prior year information were made to conform to the
2001 presentation.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investments as of December 31,
2001 and 2000 were as follows. Fair value was estimated based on quoted market
prices.
2001 2000
------------------------------------------------------ ------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
-------------- ------------ ------------ ------------- ------------ ----------- ------------ -----------
(in thousands)
Held-to-maturity:
Cash investment in
guaranteed investment
contract $ 10,602 $ - $ (263) $ 10,339 $ 57,937 $ 1,209 $ (26) $ 59,120
------------- ----------- ----------- ---------------- ------------ ----------- ------------ ----------
Total held-to-maturity 10,602 - (263) 10,339 57,937 1,209 (26) 59,120
Available-for-sale:
Asset-backed
securities 17,970 9 - 17,979 84,680 56 - 84,736
Corporate debt
securities 438,333 971 - 439,304 247,967 40 - 248,007
Certificates of deposit - - - - 35,992 14 - 36,006
Preferred Stock 166,581 637 - 167,218 - - - -
Mortgage-backed
securities 337,622 - (945) 336,677 413,599 - (3,528) 410,071
------------- ----------- ----------- ---------------- ----------- ----------- ----------- ------------
Total available-for-sale 960,506 1,617 (945) 961,178 782,238 110 (3,528) 778,820
Trading:
Mortgage-backed
securities 35,575 599 - 36,174 - - - -
------------- ----------- ----------- ---------------- ----------- ----------- ----------- ------------
Total trading 35,575 599 - 36,174 - - - -
Total $1,006,683 $ 2,216 $ (1,208) $ 1,007,691 $ 840,175 $ 1,319 $ (3,554) $ 837,940
------------- ----------- ----------- ---------------- ----------- ----------- ----------- ------------
The amortized cost, fair value and yield of investments by remaining contractual
maturity as of December 31, 2001 are set forth below. Asset- and mortgage-backed
securities are included based on their final maturities, although the actual
maturities may differ due to prepayments of the underlying assets or mortgages.
As part of the implementation of SFAS 133, Farmer Mac reclassified certain
investments from held-to-maturity and available-for-sale securities to trading
securities.
Available-for-Sale Trading Total
--------------------------------- --------------------------------- ---------------------------------
Amortized Amortized Amortized
Cost Fair Value Yield Cost Fair Value Yield Cost Fair Value Yield
---------- ----------- ---------- ----------- ------------- ------- ---------- ------------ --------
(dollars in thousands)
Due within one year $105,021 $105,044 2.44% $ - $ - - $ 105,021 $ 105,044 2.44%
Due after one year
through five years 345,851 346,108 3.08% - - - 345,851 346,108 3.08%
Due after five years
through ten years 168,427 169,068 8.08% - - - 168,427 185,769 8.08%
Due after ten years 341,207 340,958 2.39% 35,576 36,174 6.38% 376,783 377,131 2.77%
---------------------- ---------- ----------- ------------- ------- ----------- ------------ --------
Total $960,506 $961,178 3.64% $ 35,576 $ 36,174 6.38% $ 996,082 $1,014,052 3.74%
---------------------- ---------- ----------- ------------- ------- ----------- ------------ --------
4. FARMER MAC GUARANTEED SECURITIES
As of December 31, 2001 and 2000, Farmer Mac Guaranteed Securities included the
following:
As of December 31,
---------------------------------------------------------------------------------
2001 2000
----------------------------------------- ------------------------------------
Premiums, Premiums,
Discounts Discounts
and Other and Other
Principal Deferred Amortized Principal Deferred Amortized
Balance Costs Cost Balance Costs Cost
------------- ----------- ----------- ------------ ---------- ------------
(in thousands)
Farmer Mac I
AMBS $ 1,065,897 $ (2,858) $ 1,063,039 $ 1,093,898 $ (3,480) $ 1,090,418
Other 73,018 (48) 72,970 109,278 490 109,768
Farmer Mac II 516,746 59 516,805 427,502 45 427,547
------------- ----------- ----------- ------------ ---------- ------------
Total $ 1,655,661 $ (2,847) $ 1,652,814 $ 1,630,678 $ (2,945) $ 1,627,733
------------- ----------- ----------- ------------ ---------- ------------
The following table sets forth the amortized costs, unrealized gains and losses
and estimated fair values of the Farmer Mac Guaranteed Securities as of December
31, 2001 and 2000. The method used to estimate fair value is described in Note
12.
As of December 31,
----------------------------------------------------------------------------------
2001 2000
----------------------------------------- --------------------------- -----------
Held-to- Available- Held-to- Available-
Maturity for-Sale Total Maturity for-Sale Total
------------ ------------- ------------- ------------ ------------- -----------
(in thousands)
Amortized cost $ 589,775 $1,063,039 $1,652,814 $ 537,315 $ 1,090,41 $1,627,733
Unrealized gain 34,321 37,562 71,883 19,572 52,260 71,832
Unrealized loss - - - - - -
------------ ------------- ------------- ------------ ------------- -----------
Fair value $ 624,096 $1,100,601 $1,724,697 $ 556,887 $ 1,142,67 $1,699,565
------------ ------------- ------------- ------------ ------------- -----------
Of the total Farmer Mac Guaranteed Securities held by Farmer Mac as of December
31, 2001, $1.5 billion are fixed-rate or reprice after one year. During 2001,
Farmer Mac sold $99.9 million of AMBS from its available-for-sale portfolio at
par. During 2000, Farmer Mac sold $159.9 million of AMBS from its
available-for-sale portfolio at par.
Certain loans that were purchased and securitized after the adoption of SFAS 140
on April 1, 2001, but fail to meet the security accounting requirements of SFAS
140, are classified as loans on the accompanying 2001 Consolidated Balance
Sheet.
5. FINANCIAL DERIVATIVES
A financial derivative is a financial instrument that has one or more
underlyings and one or more notional amounts, requires no significant initial
net investment, and has terms that require net settlement. Farmer Mac enters
into derivative instruments as an end-user, not for speculative purposes. Farmer
Mac enters into interest-rate contracts, including interest-rate swaps and caps,
to adjust the characteristics of Farmer Mac's debt to match more closely the
characteristics of the Corporation's assets and to derive an overall lower
effective fixed-rate cost of borrowing than would otherwise be available to the
Corporation in the conventional debt market. Farmer Mac enters into
interest-rate swaps, forward sale contracts of GSE debt and mortgage-backed
securities and U.S. Treasury based futures contracts to manage interest-rate
risk exposure related to loan purchases and anticipated debt issuances.
Interest-Rate Contracts and Hedge Instruments
Farmer Mac uses interest-rate swaps and caps to reduce interest-rate risk
related to specific assets (asset-linked) or liabilities (debt-linked).
Interest-rate swaps are contractual agreements between two entities for the
exchange of periodic payments based on a notional amount and agreed-upon fixed
and variable rates. Interest-rate swaps are entered into in conjunction with the
purchase of Qualified Loans and investments or the issuance of debt to
synthetically create LIBOR-based variable rate instruments. Interest-rate caps
are agreements in which one entity makes a one-time, up-front premium payment to
another party in exchange for the right to receive payments based on a notional
amount and the amount, if any, by which the agreed-upon index rate exceeds the
specified "cap" rate. Interest-rate caps are purchased to effectively "uncap"
certain variable-rate investments or loans.
Although interest-rate contracts reduce Farmer Mac's exposure to interest-rate
risk, they may increase credit risk exposure. Credit risk arises from the
possibility that a counterparty will not perform according to the terms of the
contract. Farmer Mac mitigates credit risk by dealing with counterparties with
high credit ratings (no less than BBB+ as of December 31, 2001), establishing
and maintaining collateral requirements and entering into netting agreements.
Netting agreements provide for netting all amounts receivable and payable under
all transactions between Farmer Mac and a single counterparty covered by the
netting agreement. Farmer Mac's exposure to credit risk related to interest-rate
contracts is based on the cost to replace all outstanding interest-rate
contracts for each counterparty with which Farmer Mac was in a net gain position
("net replacement value"), including the effect of netting agreements. As of
December 31, 2001 and 2000, the net replacement values of interest rate
contracts were $266,000 and $200,000, respectively. As of December 31, 2001 and
2000, none of the net replacement value exposure was collateralized.
Farmer Mac uses hedge instruments, currently consisting of forward sale
contracts involving GSE debt and mortgage-backed securities and futures
contracts involving U.S. Treasury securities, to reduce its interest-rate risk
exposure related to the purchase of loans and the anticipated issuance of debt.
There were $1.5 million of open futures contracts as of December 31, 2001,
compared to no open futures contracts as of December 31, 2000. The outstanding
balance of forward sale contracts involving GSE debt and mortgage-backed
securities totaled $51.7 million and $8.6 million as of December 31, 2001 and
2000, respectively.
Accounting for Derivatives in 2001
As amended, SFAS 133 became effective as of January 1, 2001. SFAS 133 requires
financial derivatives to be measured and recorded at fair value. The cumulative
effect of this change in accounting principles recognized on January 1, 2001 was
a reduction to net income of $726,000 and a negative adjustment to other
comprehensive income within stockholders' equity of $8.6 million. The
Corporation expects that SFAS 133 will increase volatility in earnings and
accumulated other comprehensive income.
Interest-rate swaps used to hedge corporate debt investments, and forward sale
contracts used to hedge Farmer Mac's loan portfolio, are classified and
accounted for as fair value hedges. Interest-rate swaps and forward sale
contracts used to hedge anticipated debt issuances are classified and accounted
for as cash flow hedges. Other financial derivatives, such as futures and
interest-rate caps, are not assigned an accounting hedge designation. Farmer
Mac's financial derivatives are carried at their fair values. For fair value
hedges, the changes in the fair values of the derivatives, along with the
changes in fair values of the hedged items, are recorded in earnings. For cash
flow hedges, the changes in the fair values of the derivatives are recorded in
other comprehensive income and any hedge ineffectiveness is recorded in
earnings. For financial derivatives not assigned an accounting hedge
designation, the changes in fair value are recorded in earnings.
Net after-tax charges against earnings under SFAS 133 during 2001 totaled $1.2
million, and the net after-tax decrease to other comprehensive income totaled
$15.5 million. Substantially all of this amount represents the estimated fair
values of settled forward sale contracts and the estimated future net interest
payments on interest-rate swap contracts, assuming no change in interest rates.
Farmer Mac estimates that $1.5 million of the December 31, 2001 balance of
accumulated other comprehensive income will be reclassified into earnings over
the next twelve months. The Corporation entered into interest-rate swap
contracts to hedge anticipated debt issuances and derive a lower effective
fixed-rate cost of borrowing for periods of up to 15 years than would otherwise
have been available to the Corporation in the conventional debt market. For the
year ended December 31, 2001, the ineffectiveness of designated hedges included
in Farmer Mac's net income was immaterial.
Accounting for Derivatives in 2000 and 1999
Prior to the implementation of SFAS 133 on January 1, 2001, financial
derivatives were generally accounted for as off-balance sheet items and
disclosed in the consolidated financial statement footnotes. The net
differential received or paid on interest-rate contracts was accrued as an
adjustment to interest income or expense of the associated assets or
liabilities.
Forward sale contracts involving GSE debt and mortgage-backed securities and
futures contracts involving U.S. Treasury securities were monitored for the
change in value of the hedge instrument and the change in value of the hedged
item. When these changes met certain specified criteria, the hedge instruments
qualified for hedge accounting. Under hedge accounting, gains and losses on
terminated or matured hedge instruments were deferred as an adjustment to the
cost basis of the hedged item and amortized to interest expense using the
effective interest method. When the criteria were not met, gains and losses on
hedge instruments were recognized directly to income.
6. NOTES PAYABLE
Farmer Mac borrowings are comprised of discount notes and medium-term notes,
both of which are unsecured general obligations of the Corporation. Discount
notes generally have maturities of less than one year, whereas medium-term notes
have maturities of one to 15 years. The following table sets forth information
related to Farmer Mac's borrowings for 2001 and 2000.
2001 2000
------------------------------------------------------- ------------------------------------------------------
Outstanding as of Average Outstanding Maximum Outstanding as of Average Outstanding Maximum
December 31, 2001 During Year Outstanding at December 31, 2000 During Year Outstanding
------------------- -------------------- at Any ------------------ -------------------- at Any
Amount Rate Amount Rate Month End Amount Rate Amount Rate Month End
--------- ------- ---------- --------- -------------- ----------- ------ ---------- --------- -------------
(dollars in thousands)
Due within one
year:
Discount notes $2,197,427 2.80% $2,175,087 4.39% $2,240,965 $2,013,508 6.37% $1,945,276 6.47% $2,205,885
Current portion
of medium-
term notes 35,840 6.07% 128,040 5.93%
----------- ------- ------------ ------
2,233,267 2.85% 2,141,548 6.34%
Due after one
year:
Medium-term
notes due in:
2002 - - 98,062 2.37%
2003 83,326 5.70% 109,517 5.71%
2004 121,309 5.40% 44,511 6.63%
2005 148,469 6.62% 143,213 6.58%
2006 119,138 5.82% 37,066 6.96%
2007 12,700 7.41% 12,723 7.40%
Thereafter 483,521 6.20% 382,543 6.44%
----------- ------- ------------ ------
968,463 6.09% 827,635 5.92%
----------- ------- ------------ ------
Total $3,201,730 3.83% $2,969,183 5.96%
----------- ------- -------------------
A portion of Farmer Mac's medium-term notes is callable. Callable notes give
Farmer Mac the option to redeem the notes at par value on a specified call date
or at any time on or after a specified call date. The following table summarizes
the maturities, amounts and costs for callable notes by call period as of
December 31, 2001.
-----------------------------------------
Maturity Amount Rate
------------ -------------- ------------
(dollars in thousands)
Callable in:
2002 2004-2016 $ 49,236 6.08%
2003 2004-2006 37,700 5.74%
2004 2011 3,400 5.80%
-------------- ------------
$ 90,336 5.93%
-------------- ------------
The following schedule summarizes the earliest repricing date of total
borrowings outstanding as of December 31, 2001, including callable and
non-callable medium-term notes, assuming callable notes are redeemed at the
initial call date.
Earliest Repricing Date of
Borrowings Outstanding
----------------------------
Amount Rate
-------------- -----------
(dollars in thousands)
Debt repricing in:
2002 $2,282,503 2.93%
2003 121,026 5.71%
2004 100,887 5.56%
2005 143,469 6.63%
2006 81,438 5.81%
2007 2,700 8.07%
Thereafter 469,707 6.17%
-------------- -----------
Total $3,201,730 3.84%
-------------- -----------
During 2001 and 2000, Farmer Mac called $57.7 million and $40.1 million of
callable medium-term notes, respectively.
Authority to Borrow from the Treasury of the United States
Farmer Mac's statutory charter authorizes Farmer Mac to borrow, in extreme
circumstances, up to $1.5 billion from the Secretary of the Treasury, if
necessary, to fulfill its obligations under any guarantee. The debt would bear
interest at a rate determined by the Secretary of the Treasury based on the then
current cost of funds to the United States. The charter requires the debt to be
repaid within a reasonable time. As of December 31, 2001, Farmer Mac had not
utilized this borrowing authority.
7. RESERVE FOR LOSSES
Farmer Mac maintains a reserve to cover potential losses on loans, including
those underlying Farmer Mac I Securities and LTSPCs issued since enactment of
the 1996 Act. No loss reserve has been provided for Farmer Mac I Securities
issued prior to the 1996 Act or for Farmer Mac II Securities. See Note 2(e),
Note 2(i) and Note 11 for more information about Farmer Mac Guaranteed
Securities. The reserve for losses covers interest due on loans that are 90 days
or more delinquent and, in cases in which the loan is not adequately
collateralized, the undercollateralized principal balance. The following is a
summary of the changes in the reserve for losses for the years ended December
31, 2001, 2000 and 1999:
2001 2000 1999
--------- --------- ---------
(in thousands)
Balance, beginning of year 11,323 $ 6,584 $ 3,259
Provision for losses 6,725 4,739 3,672
Net charge-offs (2,164) - (347)
--------- --------- ---------
Balance, end of year $15,884 $11,323 $ 6,584
--------- --------- ---------
A portion of the reserve for losses is specifically allocated to impaired loans
when the fair value of the collateral, less the estimated selling cost, is less
than the cost basis in the loan. The balance of impaired loans, both on- and
off-balance sheet, and the related reserve amount specifically allocated to
those impaired loans as of December 31, 2001 and 2000 are summarized in the
following table:
2001 2000
-------------------------------------- -------------------------------------
Balance Reserve Net Balance Balance Reserve Net Balance
----------- ---------- -------------- ----------- ---------- --------------
(in thousands)
Impaired loans with:
Specific reserve $ 11,174 $ (3,450) $ 7,724 $ 2,710 $ (373) $ 2,337
No specific reserve 47,105 - 47,105 25,677 - 25,677
------------ ------------ ------------ ------------ ----------- -----------
Total $ 58,279 $ (3,450) $ 54,829 $ 28,387 $ (373) $ 28,014
------------ ------------ ------------ ------------ ----------- -----------
During 2001, Farmer Mac purchased 12 defaulted Qualified Loans having a
principal balance of $8.3 million from pools underlying Farmer Mac Guaranteed
Securities held by third parties. During 2000, Farmer Mac made 2 such purchases
for a total of $2.6 million. Farmer Mac recognized interest income on impaired
loans of approximately $1.7 million and $853,000 during the years ended December
31, 2001 and 2000, respectively.
8. STOCKHOLDERS' EQUITY
Common Stock
Farmer Mac has three classes of common stock outstanding. Class A Voting Common
Stock may be held only by banks, insurance companies and other financial
institutions or similar entities that are not institutions of the Farm Credit
System. By statute, no holder of Class A Voting Common Stock may directly or
indirectly be a beneficial owner of more than 33 percent of the outstanding
shares of Class A Voting Common Stock. Class B Voting Common Stock may be held
only by institutions of the Farm Credit System. There are no restrictions on the
maximum holdings of Class B Voting Common Stock. There are no ownership
restrictions on the Class C Non-Voting Common Stock.
Dividends have not been paid to any common stockholders nor does Farmer Mac
expect to pay dividends in the foreseeable future. Farmer Mac's ability to
declare and pay a dividend could be restricted if it failed to comply with
regulatory capital requirements.
Stock Option Plan
In 1992 and 1996, Farmer Mac adopted stock option plans for officers to acquire
shares of Class C Non-Voting Common Stock. Under the 1992 plan, stock options
granted were exercisable immediately, and, if not exercised, will expire 10
years from the date of grant. The exercise price of options under the 1992 plan,
which were granted in 1992 and 1993, is $2.19 per share. The maximum number of
options that could be issued under the 1992 plan was 345,000, 315,000 of which
were issued, net of cancellations. Under the 1996 plan, stock options awarded
under the plan vested in thirds over a three-year period with the last
installment having vested in June 1998; if not exercised, any options granted
under the 1996 plan will expire 10 years from the date of grant. The exercise
price of options granted under the 1996 plan, which were issued in 1996, is
$2.625. The maximum number of options that could be issued under the 1996 plan
was 338,490, all of which were issued. In 1997, Farmer Mac adopted a new stock
option plan for all employees and directors, the terms of which are generally
the same as for the 1996 plan, except that options issued to directors since
June 1, 1998, if not exercised, will expire five years from the date of grant.
Of the 3,750,000 shares authorized to be issued under the 1997 plan, 1,425,869
have been issued, net of cancellations. Options granted during 2001 have
exercise prices ranging from $26.20 to $34.91 per share. As of December 31,
2001, 1,110,255 options were outstanding under the 1997 plan. For all stock
options granted under all three of the Corporation's plans, the exercise price
was equal to the fair market value of the Class C Stock on, or immediately
preceding, the grant date.
The following table summarizes stock option activity for 2001 and 2000:
2001 2000
---------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------- ------------ -------------
Outstanding, beginning of year 1,529,800 $ 13.39 1,354,975 $ 11.81
Granted 278,411 31.17 472,071 15.33
Exercised (382,588) 10.60 (196,991) 3.88
Canceled (33,740) 17.77 (100,255) 19.86
------------- ------------ ------------ ------------
Outstanding, end of year 1,391,883 $ 17.61 1,529,800 $ 13.39
------------- ------------ ------------- ------------
Options exercisable at year end 1,079,052 1,110,484
------------- -------------
The following table summarizes information regarding options outstanding as of
December 31, 2001:
Options
Options Outstanding Exercisable
------------------------------ --------------
Weighted-
Average
Remaining
Exercise Number of Contractual Number of
Price Shares Life Shares
------------- -------------- --------------- --------------
$ 2.19 90,000 1.5 years 90,000
2.63 165,087 4.4 years 165,087
11.83 72,312 5.4 years 72,312
12.67 1,200 6.7 years 1,200
12.92 4,050 5.6 years 4,050
15.13 340,881 8.4 years 227,254
16.38 27,008 8.7 years 18,005
18.13 5,000 8.8 years 3,333
18.25 3,300 5.8 years 3,300
19.38 20,213 7.7 years 20,213
20.00 143,886 6.4 years 143,886
21.19 3,000 8.9 years 1,500
22.08 237,495 7.4 years 237,495
22.38 2,000 8.9 years 1,000
22.94 1,500 7.6 years 1,500
26.20 2,000 9.1 years -
26.92 500 9.3 years -
27.75 3,000 9.0 years -
31.02 4,627 9.4 years 1,542
31.20 8,750 9.7 years 2,917
31.24 253,374 9.4 years 84,458
31.50 1,500 9.4 years -
34.90 1,000 9.7 years -
34.91 200 9.7 years -
-------------- --------------
1,391,883 1,079,052
-------------- --------------
Farmer Mac uses the intrinsic value method of accounting for employee stock
options pursuant to Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense was recognized in 2001, 2000
and 1999 for employee stock option plans. Had Farmer Mac elected to use the fair
value method of accounting for employee stock options, net income and earnings
per share for the years ended December 31, 2001, 2000 and 1999 would have been
reduced to the pro forma amounts indicated in the following table:
2001 2000 1999
------------------------ -------------------------- ------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------- ----------- ------------- ------------ ----------- ------------
(in thousands, except per share amounts)
Net income $16,280 $14,195 $10,437 $ 8,570 $ 6,921 $ 4,132
Earnings per share:
Basic net earnings $ 1.44 $ 1.25 $ 0.94 $ 0.77 $ 0.64 $ 0.38
Diluted net earnings $ 1.38 $ 1.21 $ 0.92 $ 0.76 $ 0.62 $ 0.37
The weighted average fair values of options granted in 2001, 2000 and 1999 were
$11.61, $6.13 and $11.24, respectively. The fair values were estimated using the
Black-Scholes option pricing model based on the following assumptions:
2001 2000 1999
----------- ---------- -----------
Risk-free interest rate 5.4% 6.3% 5.7%
Expected years until exercise 5 years 5 years 5 years
Expected stock volatility 47.1% 42.7% 48.1%
Dividend yield 0.0% 0.0% 0.0%
Restricted Stock
In addition to stock options, the Corporation may issue restricted stock to
employees. Restricted stock entitles participants to all the rights of a
stockholder, except that some of the shares awarded are subject to forfeiture if
the participant is not employed by Farmer Mac at the end of the restriction
period and other shares are not subject to forfeiture but may not be disposed of
by the participant during the restriction period. The vesting or restriction
period is usually one to two years. The value of restricted stock granted to
employees is amortized over the vesting period. During 2001 and 2000, 28,602 and
49,374 shares of restricted stock, respectively, were granted, resulting in
compensation expense of $1.2 million and $750,000 being recognized during the
respective years.
9. INCOME TAXES
The components of the provision for federal income taxes for the years ended
December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
------------ ---------- -----------
(in thousands)
Current $ 10,669 $7,602 $4,860
Deferred (2,250) (1,853) (1,190)
------------ ---------- -----------
$ 8,419 $5,749 $3,670
------------ ---------- -----------
A reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
----------- ----------- ------------
(in thousands)
Tax expense at statutory rate $ 8,899 $ 5,665 $ 3,601
Effect of non-taxable
dividend income (386) - -
Other (94) 84 69
----------- ----------- ------------
Income tax expense $ 8,419 $ 5,749 $ 3,670
----------- ----------- ------------
Statutory tax rate 35.0% 35.0% 34.0%
Effective tax rate 33.1% 35.5% 34.7%
Components of the deferred tax assets and liabilities as of December 31, 2001
and 2000 were as follows:
2001 2000
------------ ------------
(in thousands)
Deferred tax asset:
Reserve for losses on guaranteed securities $ 5,639 $ 4,020
Unrealized loss on financial derivatives
designated as cash flow hedges 8,532 -
Other 848 217
------------ ------------
Total deferred tax asset 15,019 4,237
Deferred tax liability:
Unrealized gain on available-for-sale securities 13,153 17,329
------------ ------------
Total deferred tax liability 13,153 17,329
------------ ------------
Net deferred tax asset/(liability) $ 1,866 $ (13,092)
------------ ------------
A valuation allowance is required to reduce the net deferred tax asset to an
amount that is more likely than not to be realized. No valuation allowance was
considered necessary as of December 31, 2001 and 2000.
10. EMPLOYEE BENEFITS
On December 28, 1989, Farmer Mac adopted a defined contribution retirement plan
for all of its employees. Through 2001, Farmer Mac contributed 13.2 percent of
the lesser of an individual's gross salary or $170,000, plus 5.7 percent of the
difference between (1) the lesser of the gross salary or $170,000 and (2) the
Social Security Taxable Wage Base. The Economic Growth and Tax Relief
Reconciliation Act of 2001 increased the $170,000 to $200,000, adjusted for
inflation, beginning in 2002. Employees in service prior to December 7, 2000 are
fully vested in contributions made to the plan after they have been employed by
Farmer Mac for two years. Employees beginning service after December 7, 2000 are
fully vested after they have been employed for three years. Pension expense for
the years ended December 31, 2001, 2000 and 1999 was $376,000, $327,000 and
$358,000, respectively.
11. OFF-BALANCE SHEET GUARANTEES, COMMITMENTS, CONCENTRATIONS OF CREDIT RISK
AND CONTINGENCIES
Farmer Mac is a party to agreements involving off-balance sheet risk. These
agreements include Farmer Mac guarantees and commitments to purchase and sell
loans. Farmer Mac uses these agreements in the normal course of business to
fulfill its statutory purpose of increasing liquidity for agricultural and rural
residential mortgage lenders.
Farmer Mac Guarantees. As of December 31, 2001 and 2000, the balance of
outstanding guarantees, excluding Farmer Mac Guaranteed Securities held in the
Corporation's portfolio, was as follows:
2001 2000
------------- --------------
(in thousands)
Farmer Mac I:
Post-1996 Act guarantees:
AMBS $ 366,749 $ 542,697
LTSPC 1,884,260 862,804
------------- --------------
Total Post-1996 Act guarantees 2,251,009 1,405,501
Pre-1996 Act guarantees 461 2,324
------------- --------------
Total Farmer Mac I 2,251,470 1,407,825
Farmer Mac II Securities 78,409 90,204
------------- --------------
Total Farmer Mac I and II $2,329,879 $1,498,029
------------- --------------
AMBS represent guaranteed securities issued after the 1996 Act and for which
Farmer Mac assumes 100 percent of the credit risk. An LTSPC is a long-term
guarantee arrangement (similar to a swap transaction) in which the recipient of
the standby commitment segregates a pool of loans in its portfolio and pays
Farmer Mac an annual fee approximating the usual guarantee fee on the
outstanding balance of the loans, in return for Farmer Mac's assumption of the
credit risk on those loans. The credit risk related to LTSPCs is the same as
that of a swap or AMBS. Pre-1996 Act guarantees include securities issued prior
to the 1996 Act. These securities are supported by an unguaranteed subordinated
interest that was equal to 10 percent of the initial balance of the loans
underlying the securities at issuance. Farmer Mac's guarantee on Farmer Mac II
Securities is covered by the "full faith and credit" of the United States by
virtue of the USDA guarantee of the principal and interest on all Guaranteed
Portions. For more information about Farmer Mac's credit risk related to
off-balance sheet guaranteed securities, see Note 2(i) and Note 7.
Commitments. Farmer Mac enters into mandatory and optional delivery commitments
to purchase loans. Most loan purchase commitments entered into by Farmer Mac are
mandatory commitments, which means the Seller must pay a fee to extend or cancel
the commitment. All optional loan purchase commitments are sold forward under
optional loan sale commitments that allow Farmer Mac to cancel the loan sale
commitment without penalty should the Seller fail to deliver under the optional
loan purchase commitment. As of December 31, 2001, commitments to purchase
Farmer Mac I and II loans totaled $21.1 million, of which $4.7 million were
optional commitments. Outstanding loan purchase commitments as of December 31,
2000, totaled $13.5 million, of which $5.4 million were optional commitments.
Farmer Mac is exposed to interest-rate risk from the time it commits to purchase
a loan to the time it either: (a) sells AMBS backed by the loan or (b) issues
debt to retain the loan in its portfolio. There were no commitments to sell AMBS
as of December 31, 2001 and $5.7 million was committed as of December 31, 2000.
Farmer Mac manages the interest-rate risk related to loans not yet sold or
funded as a retained investment through the use of forward sale contracts
involving GSE debt and mortgage-backed securities and futures contracts
involving U.S. Treasury securities. See Note 5 for information regarding
financial derivatives.
Concentrations of Credit Risk
The following table sets forth the geographic and commodity diversification, as
well as the range of loan-to-value ratios, for all Farmer Mac I Qualified Loans
as of December 31, 2001 and 2000:
2001 2000
------------------------------------------ -------------------------------------------
Post-1996 Pre-1996 Post-1996 Pre-1996
Act Act Act Act
Guarantees Guarantees Total Guarantees Guarantees Total
--------------- --------------- ---------- -------------- ---------------- ----------
(in thousands)
By geographic region (1):
Northwest $1,100,423 $ 10,973 $1,111,396 $ 827,456 $ 16,939 $ 844,395
Southwest 1,489,882 23,622 1,513,504 1,017,615 35,877 1,053,492
Mid-North 423,044 9,433 432,477 398,402 13,954 412,356
Mid-South 136,623 5,516 142,139 115,337 12,668 128,005
Northeast 196,267 2,862 199,129 89,583 4,005 93,588
Southeast 163,009 4,001 167,010 84,164 11,291 95,455
--------------- ------------- -------------- --------------- ------------- ------------
Total $3,509,248 $ 56,407 $3,565,655 $2,532,557 $ 94,734 $2,627,291
--------------- ------------- -------------- --------------- ------------- ------------
By commodity:
Crops $1,615,529 $ 33,627 $1,649,156 $1,262,009 $ 58,743 $1,320,752
Livestock 672,364 6,779 679,143 466,226 12,809 479,035
Permanent plantings 1,061,209 16,001 1,077,210 692,863 23,182 716,045
Part-time farms 160,146 - 160,146 111,459 - 111,459
--------------- ------------- -------------- --------------- ------------- ------------
Total $3,509,248 $ 56,407 $3,565,655 $2,532,557 $ 94,734 $2,627,291
--------------- ------------- -------------- --------------- ------------- ------------
By loan-to-value:
0.00% to 40.00% $ 899,226 $ 5,869 $ 905,095 $ 586,299 $ 11,518 $ 597,817
40.01% to 50.00% 753,382 7,771 761,153 544,429 16,211 560,640
50.01% to 60.00% 898,810 22,666 921,476 625,057 30,802 655,859
60.01% to 70.00% 859,084 17,394 876,478 669,737 31,429 701,166
70.01% to 80.00% 84,476 2,707 87,183 95,065 4,774 99,839
80.01% to 90.00% 14,270 14,270 11,970 11,970
--------------- ------------- -------------- --------------- ------------- ------------
Total $3,509,248 $ 56,407 $3,565,655 $2,532,557 $ 94,734 $2,627,291
--------------- ------------- -------------- --------------- ------------- ------------
(1) Geographic regions: Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South (KS,
OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA, RI, TN,
VA, VT, WV); Northwest (ID, MT, ND, NE, OR, SD, WA, WY); Southeast (AL, AR,
FL, GA, LA, MS, SC); Southwest (AZ, CA, CO, HI, NM, NV, UT).
Loan-to-value ratios are based on collateral values at origination of the loan.
Current loan-to-value ratios may be higher or lower than the original
loan-to-value ratios.
12. FAIR VALUE DISCLOSURES
The following table sets forth the estimated fair values and the carrying values
for financial assets and liabilities as of December 31, 2001 and 2000.
Significant estimates, assumptions and present value calculations are used for
the following disclosure, resulting in a high degree of subjectivity in the
indicated fair values. Accordingly, these estimated fair values are not
necessarily indicative of what Farmer Mac would realize in an actual sale or
purchase.
2001 2000
------------------------- -------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
----------- ----------- ------------ ----------
(in thousands)
Financial assets:
Cash and cash equivalents $ 437,831 $ 437,831 $ 537,871 $ 537,871
Investment securities 1,007,691 1,007,954 837,940 836,757
Farmer Mac guaranteed securities 1,724,697 1,690,376 1,699,565 1,679,993
Loans 204,496 201,812 30,555 30,279
Financial derivatives 15 15 - -
Off-balance sheet items in a gain position:
Commitments to purchase loans - - 388 -
Interest-rate contracts - - 554 -
Financial liabilities:
Notes and bonds payable:
Due within one year 2,234,240 2,233,267 2,204,846 2,141,548
Due after one year 1,020,989 968,463 797,983 827,635
Financial derivatives 20,762 20,762 - -
Off-balance sheet items in a loss position:
Commitments to sell GSE debt securities - - 253 -
Interest-rate contracts - - 18,416 -
The estimated fair values for Farmer Mac's financial derivatives are calculated
by generating multiple paths for future interest rates. The estimated fair value
calculations for Farmer Mac Guaranteed Securities, loans, interest-rate
contracts and notes payable use a Monte Carlo simulation model to forecast the
expected interest rates for each respective instrument. These forecasted
interest rates are then used to discount the projected cash flows of each
instrument to derive the estimated fair value. For cash and cash equivalents,
the carrying amount approximates fair value. For investment securities, futures
contracts and commitments to purchase and sell GSE debt and mortgage-backed
securities, fair value is based on quoted market prices.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001 Quarter Ended 2000 Quarter Ended
--------------------------------------------- ---------------------------------------------
Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
--------- ---------- ----------- ------------ --------- ----------- ---------- ------------
(dollars in thousands, except per share amounts)
Interest income $ 39,253 $ 45,160 $ 46,369 $ 50,431 $ 52,567 $ 51,017 $ 46,944 $ 44,892
Interest expense 32,056 37,292 39,947 44,978 48,061 46,685 42,700 40,276
--------- ---------- ----------- ------------ --------- ---------- ---------- ------------
Net interest income 7,197 7,868 6,422 5,453 4,506 4,332 4,244 4,616
Guarantee fee income 4,534 4,177 3,669 3,428 3,368 2,972 2,755 2,582
Gains/(Losses) on derivatives 317 (295) (159) (589) - - - -
Miscellaneous 140 137 116 166 149 78 (10) 182
--------- ---------- ----------- ------------ --------- ---------- ---------- ------------
Total revenues 12,188 11,887 10,048 8,458 8,023 7,382 6,989 7,380
Expenses 4,420 4,504 4,242 3,988 3,564 3,143 3,834 3,725
--------- ---------- ----------- ------------ --------- ---------- ---------- ------------
Income before income taxes 7,768 7,383 5,806 4,470 4,459 4,239 3,155 3,655
Income tax expense 2,287 2,455 2,091 1,588 1,586 1,505 1,362 1,297
Cumulative effect of change
in accounting principles - - - (726) - - - -
--------- ---------- ----------- ------------ --------- ---------- ---------- ------------
Net income $ 5,481 $ 4,928 $ 3,715 $ 2,156 $ 2,873 $ 2,734 $ 1,793 $ 2,358
--------- ---------- ----------- ------------ --------- ---------- ---------- ------------
Earnings Per Share:
Basic net earnings $ 0.48 $ 0.43 $ 0.33 $ 0.19 $ 0.26 $ 0.25 $ 0.22 $ 0.22
Diluted net earnings $ 0.46 $ 0.41 $ 0.32 $ 0.18 $ 0.25 $ 0.24 $ 0.22 $ 0.21
Earnings per share before
cumulative effect of change
in accounting principles:
Basic net earnings $ 0.48 $ 0.43 $ 0.33 $ 0.26 $ 0.26 $ 0.25 $ 0.22 $ 0.22
Diluted net earnings $ 0.46 $ 0.41 $ 0.32 $ 0.25 $ 0.25 $ 0.24 $ 0.22 $ 0.21
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 19, 2002.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 19, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 19, 2002.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Corporation's Proxy Statement to be filed on or about April 19, 2002.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
Refer to Item 8 above.
(2) Financial Statement Schedules.
All schedules are omitted since they are not applicable, not
required or the information required to be set forth therein is included in
the consolidated financial statements or in notes thereto.
(3) Exhibits and Reports on Form 8-K.
(a) Exhibits.
* 3.1 - Title VIII of the Farm Credit Act of 1971, as most recently
amended by the Farm Credit System Reform Act of 1996, P.L.
104-105 (Form 10-K filed March 29, 1996).
* 3.2 - Amended and restated Bylaws of the Registrant (Form 10-Q
filed August 12, 1999).
+* 10.1 - Stock Option Plan (Previously filed as Exhibit 19.1 to Form
10-Q filed November 10, 1992).
+* 10.1.1 - Amendment No. 1 to Stock Option Plan (Previously filed as
Exhibit 10.2 to Form 10-Q filed August 16, 1993).
+* 10.1.2 - 1996 Stock Option Plan (Form 10-Q filed November 10, 1996).
+* 10.1.3 - Amended and Restated 1997 Stock Option Plan (Form 10-Q filed
August 14, 1997).
+* 10.2 - Employment Agreement dated May 5, 1989 between Henry D.
Edelman and the Registrant (Previously filed as Exhibit 10.4
to Form 10-K filed February 14, 1990).
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
+* 10.2.1 - Amendment No. 1 dated as of January 10, 1991 to Employment
Contract between Henry D. Edelman and the Registrant
(Previously filed as Exhibit 10.4 to Form 10-K filed April 1,
1991).
+* 10.2.2 - Amendment to Employment Contract dated as of September 1, 1993
between Henry D. Edelman and the Registrant (Previously filed
as Exhibit 10.5 to Form 10-Q filed November 15, 1993).
+* 10.2.3 - Amendment No. 3 dated as of June 1, 1994 to Employment Contract
between Henry D. Edelman and the Registrant (Previously filed
as Exhibit 10.6 to Form 10-Q filed August 15, 1994).
+* 10.2.4 - Amendment No. 4 dated as of February 8, 1996 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-K
filed March 29, 1996).
+* 10.2.5 - Amendment No. 5 dated as of June 13, 1996 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed August 14, 1996).
+* 10.2.6 - Amendment No. 6 dated as of August 7, 1997 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed November 14, 1997).
+* 10.2.7 - Amendment No. 7 dated as of June 4, 1998 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed August 14, 1998).
+* 10.2.8 - Amendment No. 8 dated as of June 3, 1999 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed August 12, 1999).
+* 10.2.9 - Amendment No. 9 dated as of June 1, 2000 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed August 14, 2000).
+* 10.2.10 - Amendment No. 10 dated as of June 7, 2001 to Employment
Contract between Henry D. Edelman and the Registrant (Form 10-Q
filed August 14, 2001).
+* 10.3 - Employment Agreement dated May 11, 1989 between Nancy E.
Corsiglia and the Registrant (Previously filed as Exhibit 10.5
to Form 10-K filed February 14, 1990).
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
+* 10.3.1 - Amendment dated December 14, 1989 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously filed
as Exhibit 10.5 to Form 10-K filed February 14, 1990).
+* 10.3.2 - Amendment No. 2 dated February 14, 1991 to Employment Agreement
between Nancy E. Corsiglia and the Registrant (Previously filed
as Exhibit 10.7 to Form 10-K filed April 1, 1991).
+* 10.3.3 - Amendment to Employment Contract dated as of June 1, 1993
between Nancy E. Corsiglia and the Registrant (Previously
filed as Exhibit 10.9 to Form 10-Q filed November 15, 1993).
+* 10.3.4 - Amendment No. 4 dated June 1, 1993 to Employment Contract
between Nancy E. Corsiglia and the Registrant (Previously filed
as Exhibit 10.10 to Form 10-K filed March 30, 1994).
+* 10.3.5 - Amendment No. 5 dated as of June 1, 1994 to Employment
Contract between Nancy E. Corsiglia and the Registrant
(Previously filed as Exhibit 10.12 to Form 10-Q filed August
15, 1994).
+* 10.3.6 - Amendment No. 6 dated as of June 1, 1995 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed August 14, 1995).
+* 10.3.7 - Amendment No. 7 dated as of February 8, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-K filed March 29, 1996).
+* 10.3.8 - Amendment No. 8 dated as of June 13, 1996 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed August 14, 1996).
+* 10.3.9 - Amendment No. 9 dated as of August 7, 1997 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed November 14, 1997).
+* 10.3.10- Amendment No. 10 dated as of June 4, 1998 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed August 14, 1998).
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
+* 10.3.11- Amendment No. 11 dated as of June 3, 1999 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed August 12, 1999).
+* 10.3.12- Amendment No. 12 dated as of June 1, 2000 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed August 14, 2000).
+* 10.3.13- Amendment No. 13 dated as of June 7, 2001 to Employment
Contract between Nancy E. Corsiglia and the Registrant (Form
10-Q filed August 14, 2001).
+* 10.4 - Employment Contract dated as of September 1, 1997 between
Tom D. Stenson and the Registrant (Previously filed as
Exhibit 10.8 to Form 10-Q filed November 14, 1997).
+* 10.4.1 - Amendment No. 1 dated as of June 4, 1998 to Employment
Contract between Tom D. Stenson and the Registrant (Previously
filed as Exhibit 10.8.1 to Form 10-Q filed August 14, 1998).
+* 10.4.2 - Amendment No. 2 dated as of June 3, 1999 to Employment
Contract between Tom D. Stenson and the Registrant (Previously
filed as Exhibit 10.5.2 to Form 10-Q filed August 12, 1999).
+* 10.4.3 - Amendment No. 3 dated as of June 1, 2000 to Employment
Contract between Tom D. Stenson and the Registrant (Previously
filed as Exhibit 10.5.3 to Form 10-Q filed August 14, 2000).
+* 10.4.4 - Amendment No. 4 dated as of June 7, 2001 to Employment
Contract between Tom D. Stenson and the Registrant (Previously
filed as Exhibit 10.5.4 to Form 10-Q filed August 14, 2001).
+* 10.5 - Employment Agreement dated February 1, 2000 between Jerome
G. Oslick and the Registrant (Previously filed as Exhibit 10.6
to Form 10-Q filed May 11, 2000).
+* 10.5.1 - Amendment No. 1 dated as of June 1, 2000 to Employment
Contract between Jerome G. Oslick and the Registrant
(Previously filed as Exhibit 10.6.1 to Form 10-Q filed August
14, 2000).
+* 10.5.2 - Amendment No. 2 dated as of June 7, 2001 to Employment
Contract between Jerome G. Oslick and the Registrant
(Previously filed as Exhibit 10.6.2 to Form 10-Q filed August
14, 2001).
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
** 10.10 - Lease Agreement dated June 28, 2001 between EOP-Two Lafayette,
L.L.C. and the Registrant.
21 - Farmer Mac Mortgage Securities Corporation, a Delaware
corporation.
* 99.1 - Map of U. S. Department of Agriculture (Secretary of
Agriculture's) Regions (Previously filed as Exhibit 1.1 to
Form 10-K filed April 1, 1991).
** 99.2 - Letter from the Registrant to the Commission dated March 27,
2002 confirming the receipt of representations from Arthur
Andersen LLP regarding its audit report for the period ending
December 31, 2001.
(b) Reports on Form 8-K.
On October 19, 2001, the Registrant filed a report on Form 8-K that
attached a press release announcing the Registrant's financial results for
third quarter 2001.
* Incorporated by reference to the indicated prior filing.
** Filed herewith.
+ Management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
/s/ Henry D. Edelman March 15, 2002
- ---------------------------------------- -------------------------------------
By: Henry D. Edelman Date
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Charles Eugene Branstool Chairman of the Board and March 15, 2002
- -------------------------------- Director
Charles Eugene Branstool
/s/ Henry D. Edelman President and Chief Executive March 15, 2002
- -------------------------------- Officer (Principal Executive
Henry D. Edelman Officer)
/s/ Nancy E. Corsiglia Vice President - Finance, March 15, 2002
- -------------------------------- Chief Financial Officer
Nancy E. Corsiglia and Treasurer
(Principal Financial and
Accounting Officer)
Name Title Date
/s/ Dennis L. Brack Director March 15, 2002
- ---------------------------------------
Dennis L. Brack
/s/ Paul A. DeBriyn Director March 15, 2002
- ---------------------------------------
Paul A. DeBriyn
/s/ Kenneth E. Graff Director March 15, 2002
- ---------------------------------------
Kenneth E. Graff
/s/ W. David Hemingway Director March 15, 2002
- ---------------------------------------
W. David Hemingway
/s/ Mitchell A. Johnson Director March 15, 2002
- ---------------------------------------
Mitchell A. Johnson
/s/ Lowell L. Junkins Director March 15, 2002
- ---------------------------------------
Lowell L. Junkins
/s/ Charles E. Kruse Director March 15, 2002
- ---------------------------------------
Charles E. Kruse
/s/ James A. McCarthy Director March 15, 2002
- ---------------------------------------
James A. McCarthy
/s/ John G. Nelson Director March 15, 2002
- ---------------------------------------
John G. Nelson
/s/ Peter T. Paul Director March 15, 2002
- ---------------------------------------
Peter T. Paul
/s/ Marilyn Peters Director March 15, 2002
- ---------------------------------------
Marilyn Peters
/s/ John Dan Raines, Jr. Director March 15, 2002
- ---------------------------------------
John Dan Raines, Jr.
/s/ Gordon Clyde Southern Vice Chairman March 15, 2002
- ---------------------------------------
Gordon Clyde Southern and Director
/s/ Clyde A. Wheeler, Jr. Director March 15, 2002
- ---------------------------------------
Clyde A. Wheeler, Jr.
Exhibit Index
10.10 - Lease Agreement dated June 28, 2001 between EOP-Two Lafayette,
L.L.C. and Federal Agricultural Mortgage Corporation.
99.2 - Letter from the Registrant to the Commission dated March 27, 2002
confirming the receipt of representations from Arthur Andersen LLP
regarding its audit report for the period ending December 31, 2001.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-K
FILED BY
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
Exhibit 10.10
TWO LAFAYETTE
WASHINGTON, D.C.
OFFICE LEASE AGREEMENT
BETWEEN
EOP-TWO LAFAYETTE, L.L.C., a Delaware limited liability company
("LANDLORD")
AND
FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally chartered corporation
("TENANT")
i
TABLE OF CONTENTS
I. Basic Lease Information................................................1
II. Lease Grant...........................................................2
III. Adjustment of Commencement Date; Possession..........................3
IV. Rent..................................................................4
V. Compliance with Laws; Use..............................................7
VI. Security Deposit......................................................7
VII. Services to be Furnished by Landlord.................................7
VIII. Leasehold Improvements..............................................8
IX. Repairs and Alterations...............................................8
X. Use of Electrical Services by Tenant...................................9
XI. Entry by Landlord....................................................10
XII. Assignment and Subletting...........................................10
XIII. Liens..............................................................12
XIV. Indemnity and Waiver of Claims......................................12
XV. Insurance............................................................12
XVI. Subrogation.........................................................13
XVII. Casualty Damage....................................................13
XVIII. Condemnation......................................................14
XIX. Events of Default...................................................14
XX. Remedies.............................................................15
XXI. Limitation of Liability.............................................15
XXII. No Waiver..........................................................16
XXIII. Quiet Enjoyment..................................................16
XXIV. Relocation.........................................................16
XXV. Holding Over........................................................16
XXVI. Subordination to Mortgages; Estoppel Certificate...................16
XXVII. Attorneys' Fees...................................................17
XXVIII. Notice...........................................................17
XXIX. Excepted Rights....................................................17
XXX. Surrender of Premises...............................................17
XXXI. Miscellaneous......................................................18
XXXII. Entire Agreement..................................................19
1
OFFICE LEASE AGREEMENT
This Office Lease Agreement (the "Lease") is made and entered into as of
the 28th day of June, 2001, by and between EOP-TWO LAFAYETTE, L.L.C., a Delaware
limited liability company ("Landlord") and FEDERAL AGRICULTURAL MORTGAGE
CORPORATION, a federally chartered corporation ("Tenant").
I. Basic Lease Information.
A. "Building" shall mean the building located at 1133 21st Street, N.W.,
Washington, D.C. 20036, and commonly known as Two Lafayette Centre.
B. "Rentable Square Footage of the Building" is deemed to be 130,704
square feet.
C. "Premises" shall mean the area shown on Exhibit A to this Lease. The
Premises are located on the 6th floor and known as suite number 600.
The "Rentable Square Footage of the Premises" is deemed to be 13,652
square feet. If the Premises include one or more floors in their
entirety, all corridors and restroom facilities located on such full
floor(s) shall be considered part of the Premises. Landlord and Tenant
stipulate and agree that the Rentable Square Footage of the Building
and the Rentable Square Footage of the Premises are correct and shall
not be remeasured.
D. "Base Rent":
Period Annual Rate Annual Monthly
(Months) Per Square Foot Base Rent Base Rent
01 - 12 $38.00 $518,775.96 $43,231.33
13 - 24 $38.95 $531,745.44 $44,312.12
25 - 36 $39.92 $544,987.80 $45,415.65
37 - 48 $40.92 $558,639.84 $46,553.32
49 - 60 $41.94 $572,564.88 $47,713.74
61 - 72 $42.99 $586,899.48 $48,908.29
73 - 84 $44.07 $601,643.64 $50,136.97
85 - 96 $45.17 $616,660.80 $51,388.40
97- 108 $46.30 $632,087.64 $52,673.97
109- 120 $47.46 $647,923.92 $53,993.66
E. "Tenant's Pro Rata Share": 10.4450%.
F. "Base Year" for Taxes: 2002; "Base Year" for Expenses: 2002. -
G. "Term": A period of 120 months. The Term shall commence on December 1,
2001 (the "Commencement Date") and, unless terminated early in
accordance with this Lease, end on November 30, 2011 (the "Termination
Date"). However, if Landlord is required to Substantially Complete
(defined in Section III.A) any Landlord Work (defined in Section I.O.)
prior to the Commencement Date under the terms of a Work Letter
(defined in Section I.O): (1) the date set forth in the prior sentence
as the "Commencement Date" shall instead be defined as the "Target
Commencement Date" by which date Landlord will use reasonable efforts
to Substantially Complete the Landlord Work; and (2) the actual
"Commencement Date" shall be the date on which the Landlord Work is
Substantially Complete, as determined by Section III.A. In such
circumstances, the Termination Date will instead be the last day of
the Term as determined based upon the actual Commencement Date.
Landlord's failure to Substantially Complete the Landlord Work by the
Target Commencement Date shall not be a default by Landlord or
otherwise render Landlord liable for damages. Promptly after the
determination of the Commencement Date, Landlord and Tenant shall
enter into a commencement letter agreement in the form attached as
Exhibit C. Landlord shall use reasonable efforts to provide Tenant
with advance notice (which may be given orally) of the estimated
Commencement Date at least 1 week prior to such estimated Commencement
Date, but Landlord's failure to accurately estimate the Commencement
Date shall in no manner affect the Commencement Date or any other
obligations of Landlord or Tenant hereunder.
H. Tenant allowance(s): an amount not to exceed $225,000.00 as further
described in the attached Exhibit D.
I. "Security Deposit": NONE.
J. "Guarantor(s)": NONE.
K. "Broker(s)": Donohoe Real Estate Services.
L. "Permitted Use": general office use.
M. "Notice Addresses":
Tenant:
On and after the Commencement Date, notices shall be sent to Tenant at the
Premises. Prior to the Commencement Date, notices shall be sent to Tenant
at the following address:
919 Eighteenth Street, NW
Suite 200
Washington, D. C. 20006
Attention: General Counsel
Phone #: 202.872.7700
Fax #: 202.872.7713
Landlord: With a copy to:
EOP-Two Lafayette, L.L.C. Equity Office Properties
-
c/o Equity Office Properties Two North Riverside Plaza
1111 19th Street, N.W., Suite Suite 2100
1120 Chicago, Illinois 60606
Washington, D.C. 20036 Attention: Washington, DC Regional
Attention: Building Manager Counsel
Rent (defined in Section IV.A) is payable to the order of Equity
Office Properties at the following address: P.O. Box 828680,
Philadelphia, Pennsylvania 19182-8680.
N. "Business Day(s)" are Monday through Friday of each week, exclusive of
New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day ("Holidays"). Landlord may
designate additional Holidays, provided that the additional Holidays
are commonly recognized by other office buildings in the area where
the Building is located.
O. "Landlord Work" means the work, if any, that Landlord is obligated to
perform in the Premises pursuant to a separate work letter agreement
(the "Work Letter"), if any, attached as Exhibit D. If a Work Letter
is not attached to this Lease or if an attached Work Letter does not
require Landlord to perform any work, the occurrence of the
Commencement Date shall not be conditioned upon the performance of
work by Landlord and, accordingly, Section III.A. shall not be
applicable to the determination of the Commencement Date.
P. "Law(s)" means all applicable statutes, codes, ordinances, orders,
rules and regulations of any municipal or governmental entity.
Q. "Normal Business Hours" for the Building are 8:00 A.M. to 6:00 P.M. on
Business Days and 8:00 A.M. to 2:00 P.M. on Saturdays.
R. "Property" means the Building and the parcel(s) of land on which it is
located and the Building garage and other improvements serving the
Building, if any, and the parcel(s) of land on which they are located.
II. Lease Grant.
Landlord leases the Premises to Tenant and Tenant leases the Premises from
Landlord, together with the right in common with others to use any portions of
the Property that are designated by Landlord for the common use of tenants and
others, such as sidewalks, unreserved parking areas, common corridors, elevator
foyers, restrooms, vending areas and lobby areas (the "Common Areas").
III. Adjustment of Commencement Date; Possession.
A. The Landlord Work shall be deemed to be "Substantially Complete" on
the later of (i) the date that all Landlord Work has been performed,
other than any details of construction, mechanical adjustment or any
other similar matter, the noncompletion of which does not materially
interfere with Tenant's use of the Premises; and (ii) the date
Landlord receives the temporary or permanent certificate of occupancy
with respect to the Landlord Work performed by Landlord or its
contractors in the Premises. However, if Landlord is delayed in the
performance of the Landlord Work as a result of any Tenant Delay(s)
(defined below), the Landlord Work shall be deemed to be Substantially
Complete on the date that Landlord could reasonably have been expected
to Substantially Complete the Landlord Work absent any Tenant Delay.
"Tenant Delay" means any act or omission of Tenant or its agents,
employees, vendors or contractors that actually delays the Substantial
Completion of the Landlord Work, including, without limitation: (1)
Tenant's failure to furnish information or approvals within any time
period specified in this Lease, including the failure to prepare or
approve preliminary or final plans by any applicable due date; (2)
Tenant's selection of equipment or materials that have long lead times
after first being informed by Landlord in writing that the selection
may result in a delay; (3) changes requested or made by Tenant to
previously approved plans and specifications; (4) performance of work
in the Premises by Tenant or Tenant's contractor(s) during the
performance of the Landlord Work; or (5) if the performance of any
portion of the Landlord Work depends on the prior or simultaneous
performance of work by Tenant, a delay by Tenant or Tenant's
contractor(s) in the completion of such work.
B. Subject to Landlord's obligation to perform Landlord Work and
Landlord's obligations under Section IX.B., the Premises are accepted
by Tenant in "as is" condition and configuration. By taking possession
of the Premises, Tenant agrees that the Premises are in good order and
satisfactory condition, and that there are no representations or
warranties by Landlord regarding the condition of the Premises or the
Building. Notwithstanding the foregoing, Landlord shall be responsible
for latent defects in the Landlord Work of which Tenant notifies
Landlord to the extent that the correction of such defects is covered
under valid and enforceable warranties given Landlord by contractors
or subcontractors performing the Landlord Work. Landlord, at its
option, may pursue such claims directly or assign any such warranties
to Tenant for enforcement. If Landlord is delayed delivering
possession of the Premises or any other space due to the holdover or
unlawful possession of such space by any party, Landlord shall use
reasonable efforts to obtain possession of the space. If Landlord is
required to Substantially Complete Landlord Work before the
Commencement Date, the Commencement Date and Termination Date shall be
determined by Section I.G.
C. If Tenant takes possession of the Premises before the Commencement
Date, such possession shall be subject to the terms and conditions of
this Lease and Tenant shall pay Rent (defined in Section IV.A.) to
Landlord for each day of possession before the Commencement Date.
However, except for the cost of services requested by Tenant (e.g.
freight elevator usage), Tenant shall not be required to pay Rent for
any days of possession before the Commencement Date during which
Tenant, with the reasonable approval of Landlord, is in possession of
the Premises for the sole purpose of performing improvements or
installing furniture, equipment or other personal property.
Landlord shall permit Tenant or its agents or invitees to enter the
Premises at Tenant's sole risk prior to the Commencement Date,
provided that Landlord had legal possession of the Premises, in order
to perform, through Tenants own contractors, such work as Tenant may
desire, at the same time that Landlord's contractors are working in
the Premises. The foregoing license to enter the Premises prior to the
Commencement Date, however, is conditioned upon Tenant's labor not
interfering with Landlord's contractors, the Landlord Work or with any
other tenant or its labor. If at any time such entry shall cause
disharmony, interference or union disputes of any nature whatsoever,
or if Landlord, in Landlord's sole judgment, shall determine that such
entry, work or the continuance thereof shall interfere with, hamper or
prevent Landlord from proceeding with the completion of the Building
or the Landlord Work at the earliest possible date, this license may
be withdrawn by Landlord immediately upon written notice to Tenant.
Such entry shall be deemed to be under and subject to all of the
terms, covenants and conditions of the Lease, and Tenant shall comply
with all of the provisions of this Lease which are the obligations or
covenants of the Tenant, except that the obligation to pay Rent shall
not commence until the earlier of the Commencement Date and the date
Tenant commences to conduct business from the Premises. If Tenant's
agents or invitees incur any charges by, through or from Landlord or
Landlord's contractors, including, but not limited to, charges for use
of construction or hoisting equipment on the Building site, such
charges shall be deemed an obligation of Tenant and shall be
collectible as Rent pursuant to this Lease, and upon default in
payment thereof, Landlord shall have the same remedies as for a
default in payment of Rent pursuant to this Lease.
IV. Rent.
A. Payments. As consideration for this Lease, Tenant shall pay Landlord,
without any setoff or deduction, the total amount of Base Rent and
Additional Rent due for the Term. "Additional Rent" means all sums
(exclusive of Base Rent) that Tenant is required to pay Landlord.
Additional Rent and Base Rent are sometimes collectively referred to
as "Rent". Tenant shall pay and be liable for all rental, sales and
use taxes (but excluding income taxes), if any, imposed upon or
measured by Rent under applicable Law. Base Rent and recurring monthly
charges of Additional Rent shall be due and payable in advance on the
first day of each calendar month without notice or demand, provided
that the installment of Base Rent for the first full calendar month of
the Term shall be payable upon the execution of this Lease by Tenant.
All other items of Rent shall be due and payable by Tenant on or
before 30 days after billing by Landlord. All payments of Rent shall
be by good and sufficient check or by other means (such as automatic
debit or electronic transfer) acceptable to Landlord. If Tenant fails
to pay any item or installment of Rent when due, Tenant shall pay
Landlord an administration fee equal to 5% of the past due Rent,
provided that Tenant shall be entitled to a grace period of 5 days for
the first 2 late payments of Rent in a given calendar year. If the
Term commences on a day other than the first day of a calendar month
or terminates on a day other than the last day of a calendar month,
the monthly Base Rent and Tenant's Pro Rata Share of any Tax Excess
(defined in Section IV.B.) or Expense Excess (defined in Section
IV.B.) for the month shall be prorated based on the number of days in
such calendar month. Landlord's acceptance of less than the correct
amount of Rent shall be considered a payment on account of the
earliest Rent due. No endorsement or statement on a check or letter
accompanying a check or payment shall be considered an accord and
satisfaction, and either party may accept the check or payment without
prejudice to that party's right to recover the balance or pursue other
available remedies. Tenant's covenant to pay Rent is independent of
every other covenant in this Lease.
B. Expense Excess and Tax Excess. Tenant shall pay Tenant's Pro Rata
Share of the amount, if any, by which Expenses (defined in Section
IV.C.) for each calendar year during the Term exceed Expenses for the
Base Year (the "Expense Excess") and also the amount, if any, by which
Taxes (defined in Section IV.D.) for each calendar year during the
Term exceed Taxes for the Base Year (the "Tax Excess"). If Expenses
and/or Taxes in any calendar year decrease below the amount of
Expenses and/or Taxes for the Base Year, Tenant's Pro Rata Share of
Expenses and/or Taxes, as the case may be, for that calendar year
shall be $0. Landlord shall provide Tenant with a good faith estimate
of the Expense Excess and of the Tax Excess for each calendar year
during the Term. On or before the first day of each month, Tenant
shall pay to Landlord a monthly installment equal to one-twelfth of
Tenant's Pro Rata Share of Landlord's estimate of the Expense Excess
and one-twelfth of Tenant's Pro Rata Share of Landlord's estimate of
the Tax Excess. If Landlord determines that its good faith estimate of
the Expense Excess or of the Tax Excess was incorrect by a material
amount, Landlord may provide Tenant with a revised estimate. After its
receipt of the revised estimate, Tenant's monthly payments shall be
based upon the revised estimate. If Landlord does not provide Tenant
with an estimate of the Expense Excess or of the Tax Excess by January
1 of a calendar year, Tenant shall continue to pay monthly
installments based on the previous year's estimate(s) until Landlord
provides Tenant with the new estimate. Upon delivery of the new
estimate, an adjustment shall be made for any month for which Tenant
paid monthly installments based on the previous year's estimate(s).
Tenant shall pay Landlord the amount of any underpayment within 30
days after receipt of the new estimate. Any overpayment shall be
refunded to Tenant within 30 days or credited against the next due
future installment(s) of Additional Rent.
As soon as is practical following the end of each calendar year,
Landlord shall furnish Tenant with a statement of the actual Expenses
and Expense Excess and the actual Taxes and Tax Excess for the prior
calendar year. Landlord shall use reasonable efforts to furnish the
statement of actual Expenses on or before June 1 of the calendar year
immediately following the calendar year to which the statement
applies. If the estimated Expense Excess and/or estimated Tax Excess
for the prior calendar year is more than the actual Expense Excess
and/or actual Tax Excess, as the case may be, for the prior calendar
year, Landlord shall apply any overpayment by Tenant against
Additional Rent due or next becoming due, provided if the Term expires
before the determination of the overpayment, Landlord shall refund any
overpayment to Tenant after first deducting the amount of Rent due. If
the estimated Expense Excess and/or estimated Tax Excess for the prior
calendar year is less than the actual Expense Excess and/or actual Tax
Excess, as the case may be, for such prior year, Tenant shall pay
Landlord, within 30 days after its receipt of the statement of
Expenses and/or Taxes, any underpayment for the prior calendar year.
C. Expenses Defined. "Expenses" means all costs and expenses incurred in
each calendar year in connection with operating, maintaining,
repairing, and managing the Building and the Property, including, but
not limited to:
1. Labor costs, including, wages, salaries, social security and
employment taxes, medical and other types of insurance, uniforms,
training, and retirement and pension plans for personnel at or
below the level of Building manager or Property manager.
2. Management fees, the cost of equipping and maintaining a
management office, accounting and bookkeeping services, legal
fees not attributable to leasing or collection activity, and
other administrative costs. Landlord agrees to act in a
commercially reasonable manner in incurring such management fees,
taking into consideration the Class A nature of the Building.
Landlord, by itself or through an affiliate, shall have the right
to directly perform or provide any services under this Lease
(including management services), provided that the cost of any
such services shall not exceed the cost that would have been
incurred had Landlord entered into an arms-length contract for
such services with an unaffiliated entity of comparable skill and
experience.
3. The cost of services, including amounts paid to service providers
and the rental and purchase cost of parts, supplies, tools and
equipment.
4. Premiums and deductibles paid by Landlord for insurance,
including workers compensation, fire and extended coverage,
earthquake, general liability, rental loss, elevator, boiler and
other insurance customarily carried from time to time by owners
of comparable office buildings.
5. Electrical Costs (defined below) and charges for water, gas,
steam and sewer, but excluding those charges for which Landlord
is reimbursed by tenants. "Electrical Costs" means: (a) charges
paid by Landlord for electricity; (b) costs incurred in
connection with an energy management program for the Property;
and (c) if and to the extent permitted by Law, a fee for the
services provided by Landlord in connection with the selection of
utility companies and the negotiation and administration of
contracts for electricity, provided that such fee shall not
exceed 50% of any savings obtained by Landlord. Electrical Costs
shall be adjusted as follows: (i) amounts received by Landlord as
reimbursement for above standard electrical consumption shall be
deducted from Electrical Costs; (ii) the cost of electricity
incurred to provide overtime HVAC to specific tenants (as
reasonably estimated by Landlord) shall be deducted from
Electrical Costs; and (iii) if Tenant is billed directly for the
cost of building standard electricity to the Premises as a
separate charge in addition to Base Rent, the cost of electricity
to individual tenant spaces in the Building shall be deducted
from Electrical Costs.
6. The amortized cost of capital improvements (as distinguished from
replacement parts or components installed in the ordinary course
of business) made to the Property which are: (a) performed
primarily to reduce operating expense costs or otherwise improve
the operating efficiency of the Property; or (b) required to
comply with any Laws that are enacted, or first interpreted to
apply to the Property, after the date of this Lease. The cost of
capital improvements shall be amortized by Landlord over the
lesser of the Payback Period (defined below) or 5 years. The
amortized cost of capital improvements may, at Landlord's option,
include actual or imputed interest at the rate that Landlord
would reasonably be required to pay to finance the cost of the
capital improvement. "Payback Period" means the reasonably
estimated period of time that it takes for the cost savings
resulting from a capital improvement to equal the total cost of
the capital improvement.
If Landlord incurs Expenses for the Property together with one or
more other buildings or properties, whether pursuant to a
reciprocal easement agreement, common area agreement or
otherwise, the shared costs and expenses shall be equitably
prorated and apportioned between the Property and the other
buildings or properties. Expenses shall not include: the cost of
capital improvements (except as set forth above); depreciation;
interest (except as provided above for the amortization of
capital improvements); principal payments of mortgage and other
non-operating debts of Landlord; the cost of repairs or other
work to the extent Landlord is reimbursed by insurance or
condemnation proceeds; costs in connection with leasing space in
the Building, including brokerage commissions; lease concessions,
including rental abatements and construction allowances, granted
to specific tenants; costs incurred in connection with the sale,
financing or refinancing of the Building; fines, interest and
penalties incurred due to the late payment of Taxes (defined in
Section IV.D) or Expenses; organizational expenses associated
with the creation and operation of the entity which constitutes
Landlord; or any penalties or damages that Landlord pays to
Tenant under this Lease or to other tenants in the Building under
their respective leases. If the Building is not at least 95%
occupied during any calendar year or if Landlord is not supplying
services to at least 95% of the total Rentable Square Footage of
the Building at any time during a calendar year, Expenses shall
be determined as if the Building had been 95% occupied and
Landlord had been supplying services to 95% of the Rentable
Square Footage of the Building during that calendar year. If
Tenant pays for its Pro Rata Share of Expenses based on increases
over a "Base Year" and Expenses for a calendar year are
determined as provided in the prior sentence, Expenses for the
Base Year shall also be determined as if the Building had been
95% occupied and Landlord had been supplying services to 95% of
the Rentable Square Footage of the Building. The extrapolation of
Expenses under this Section shall be performed by appropriately
adjusting the cost of those components of Expenses that are
impacted by changes in the occupancy of the Building.
D. Taxes Defined. "Taxes" shall mean: (1) all real estate taxes and other
assessments on the Building and/or Property, including, but not
limited to, assessments for special improvement districts and building
improvement districts, taxes and assessments levied in substitution or
supplementation in whole or in part of any such taxes and assessments
and the Property's share of any real estate taxes and assessments
under any reciprocal easement agreement, common area agreement or
similar agreement as to the Property; (2) all personal property taxes
for property that is owned by Landlord and used in connection with the
operation, maintenance and repair of the Property; and (3) all costs
and fees incurred in connection with seeking reductions in any tax
liabilities described in (1) and (2), including, without limitation,
any costs incurred by Landlord for compliance, review and appeal of
tax liabilities. Without limitation, Taxes shall not include any
income, capital levy, franchise, capital stock, gift, estate or
inheritance tax. If an assessment is payable in installments, Taxes
for the year shall include the amount of the installment and any
interest due and payable during that year, excepting penalties on past
due amounts unpaid by Landlord. For all other real estate taxes, Taxes
for that year shall, at Landlord's election, include either the amount
accrued, assessed or otherwise imposed for the year or the amount due
and payable for that year, provided that Landlord's election shall be
applied consistently throughout the Term. If a change in Taxes is
obtained for any year of the Term during which Tenant paid Tenant's
Pro Rata Share of any Tax Excess, then Taxes for that year will be
retroactively adjusted and Landlord shall provide Tenant with a
credit, if any, based on the adjustment. Likewise, if a change is
obtained for Taxes for the Base Year, Taxes for the Base Year shall be
restated and the Tax Excess for all subsequent years shall be
recomputed. Tenant shall pay Landlord the amount of Tenant's Pro Rata
Share of any such increase in the Tax Excess within 30 days after
Tenant's receipt of a statement from Landlord.
E. Audit Rights. Tenant may, within 90 days after receiving Landlord's
statement of Expenses, give Landlord written notice ("Review Notice")
that Tenant intends to review Landlord's records of the Expenses for
that calendar year. Within a reasonable time after receipt of the
Review Notice, Landlord shall make all pertinent records available for
inspection that are reasonably necessary for Tenant to conduct its
review. If any records are maintained at a location other than the
office of the Building, Tenant may either inspect the records at such
other location or pay for the reasonable cost of copying and shipping
the records. If Tenant retains an agent to review Landlord's records,
the agent must be with a licensed CPA firm. Tenant shall be solely
responsible for all costs, expenses and fees incurred for the audit.
Within 60 days after the records are made available to Tenant, Tenant
shall have the right to give Landlord written notice (an "Objection
Notice") stating in reasonable detail any objection to Landlord's
statement of Expenses for that year. If Tenant fails to give Landlord
an Objection Notice within the 60 day period or fails to provide
Landlord with a Review Notice within the 90 day period described
above, Tenant shall be deemed to have approved Landlord's statement of
Expenses and shall be barred from raising any claims regarding the
Expenses for that year. If Tenant provides Landlord with a timely
Objection Notice, Landlord and Tenant shall work together in good
faith to resolve any issues raised in Tenant's Objection Notice. If
Landlord and Tenant determine that Expenses for the calendar year are
less than reported, Landlord shall either provide Tenant with a credit
against the next installment of Rent in the amount of the overpayment
by Tenant, or refund the amount to Tenant within 30 days after the
expiration or earlier termination of the Lease. Likewise, if Landlord
and Tenant determine that Expenses for the calendar year are greater
than reported, Tenant shall pay Landlord the amount of any
underpayment within 30 days. The records obtained by Tenant shall be
treated as confidential. In no event shall Tenant be permitted to
examine Landlord's records or to dispute any statement of Expenses
unless Tenant has paid and continues to pay all Rent when due.
V. Compliance with Laws; Use.
The Premises shall be used only for the Permitted Use and for no other use
whatsoever. Tenant shall not use or permit the use of the Premises for any
purpose which is illegal, dangerous to persons or property or which, in
Landlord's reasonable opinion, unreasonably disturbs any other tenants of the
Building or interferes with the operation of the Building. Tenant shall comply
with all Laws, including the Americans with Disabilities Act, regarding the
operation of Tenant's business and the use, condition, configuration and
occupancy of the Premises. Tenant, within 10 days after receipt, shall provide
Landlord with copies of any notices it receives regarding a violation or alleged
violation of any Laws. Tenant shall comply with the rules and regulations of the
Building attached as Exhibit B and such other reasonable rules and regulations
adopted by Landlord from time to time. Tenant shall also cause its agents,
contractors, subcontractors, employees, customers, and subtenants to comply with
all rules and regulations. Landlord shall not knowingly discriminate against
Tenant in Landlord's enforcement of the rules and regulations.
VI. Security Deposit.
INTENTIONALLY OMITTED.
VII. Services to be Furnished by Landlord.
A. Landlord agrees to furnish Tenant with the following services: (1)
Water service for use in the lavatories on each floor on which the
Premises are located; (2) Heat and air conditioning in season during
Normal Business Hours, at such temperatures and in such amounts as are
standard for comparable buildings or as required by governmental
authority. Tenant, upon such advance notice as is reasonably required
by Landlord, shall have the right to receive HVAC service during hours
other than Normal Business Hours. Tenant shall pay Landlord the
standard charge for the additional service as reasonably determined by
Landlord from time to time; (3) Maintenance and repair of the Property
as described in Section IX.B.; (4) Janitor service on Business Days in
accordance with the janitorial specifications attached hereto as
Exhibit H, or such other reasonably comparable specifications
designated by Landlord from time to time. If Tenant's use, floor
covering or other improvements require special services in excess of
the standard services for the Building, Tenant shall pay the
additional cost attributable to the special services; (5) Elevator
service; (6) Electricity to the Premises for general office use, in
accordance with and subject to the terms and conditions in Article X;
and (7) such other services as Landlord reasonably determines are
necessary or appropriate for the Property.
B. Landlord's failure to furnish, or any interruption or termination of,
services due to the application of Laws, the failure of any equipment,
the performance of repairs, improvements or alterations, or the
occurrence of any event or cause beyond the reasonable control of
Landlord (a "Service Failure") shall not render Landlord liable to
Tenant, constitute a constructive eviction of Tenant, give rise to an
abatement of Rent, nor relieve Tenant from the obligation to fulfill
any covenant or agreement. However, if the Premises, or a material
portion of the Premises, is made untenantable for a period in excess
of 3 consecutive Business Days as a result of the Service Failure,
then Tenant, as its sole remedy, shall be entitled to receive an
abatement of Rent payable hereunder during the period beginning on the
4th consecutive Business Day of the Service Failure and ending on the
day the service has been restored. If the entire Premises has not been
rendered untenantable by the Service Failure, the amount of abatement
that Tenant is entitled to receive shall be prorated based upon the
percentage of the Premises rendered untenantable and not used by
Tenant. In no event, however, shall Landlord be liable to Tenant for
any loss or damage, including the theft of Tenant's Property (defined
in Article XV), arising out of or in connection with the failure of
any security services, personnel or equipment.
VIII. Leasehold Improvements.
All improvements to the Premises (collectively, "Leasehold Improvements")
shall be owned by Landlord and shall remain upon the Premises without
compensation to Tenant. However, Landlord, by written notice to Tenant within 30
days prior to the Termination Date, may require Tenant to remove, at Tenant's
expense: (1) Cable (defined in Section IX.A) installed by or for the exclusive
benefit of Tenant and located in the Premises or other portions of the Building;
and (2) any Leasehold Improvements that are performed by or for the benefit of
Tenant and, in Landlord's reasonable judgment, are of a nature that would
require removal and repair costs that are materially in excess of the removal
and repair costs associated with standard office improvements (collectively
referred to as "Required Removables"). Without limitation, it is agreed that
Required Removables include internal stairways, raised floors, personal baths
and showers, vaults, rolling file systems and structural alterations and
modifications of any type. The Required Removables designated by Landlord shall
be removed by Tenant before the Termination Date, provided that upon prior
written notice to Landlord, Tenant may remain in the Premises for up to 5 days
after the Termination Date for the sole purpose of removing the Required
Removables. Tenant's possession of the Premises shall be subject to all of the
terms and conditions of this Lease, including the obligation to pay Rent on a
per diem basis at the rate in effect for the last month of the Term. Tenant
shall repair damage caused by the installation or removal of Required
Removables. If Tenant fails to remove any Required Removables or perform related
repairs in a timely manner, Landlord, at Tenant's expense, may remove and
dispose of the Required Removables and perform the required repairs. Tenant,
within 30 days after receipt of an invoice, shall reimburse Landlord for the
reasonable costs incurred by Landlord. Notwithstanding the foregoing, Tenant, at
the time it requests approval for a proposed Alteration (defined in Section
IX.C), may request in writing that Landlord advise Tenant whether the Alteration
or any portion of the Alteration will be designated as a Required Removable.
Within 10 days after receipt of Tenant's request, Landlord shall advise Tenant
in writing as to which portions of the Alteration, if any, will be considered to
be Required Removables.
IX. Repairs and Alterations.
A. Tenant's Repair Obligations. Tenant shall, at its sole cost and
expense, promptly perform all maintenance and repairs to the Premises
that are not Landlord's express responsibility under this Lease, and
shall keep the Premises in good condition and repair, reasonable wear
and tear and damage by fire or other casualty (subject to the terms of
Article XVII) excepted. Tenant's repair obligations include, without
limitation, repairs to: (1) floor covering; (2) interior partitions;
(3) doors; (4) the interior side of demising walls; (5) electronic,
phone and data cabling and related equipment (collectively, "Cable")
that is installed by or for the exclusive benefit of Tenant and
located in the Premises or other portions of the Building; (6)
supplemental air conditioning units, private showers and kitchens,
including hot water heaters, plumbing, and similar facilities serving
Tenant exclusively; and (7) Alterations performed by contractors
retained by Tenant, including related HVAC balancing. All work shall
be performed in accordance with the rules and procedures described in
Section IX.C. below. If Tenant fails to make any repairs to the
Premises for more than 15 days after notice from Landlord (although
notice shall not be required if there is an emergency), Landlord may
make the repairs, and Tenant shall pay the reasonable cost of the
repairs to Landlord within 30 days after receipt of an invoice,
together with an administrative charge in an amount equal to 10% of
the cost of the repairs.
B. Landlord's Repair Obligations. Landlord shall keep and maintain in
good repair and working order and make repairs to and perform
maintenance upon: (1) structural elements of the Building; (2)
mechanical (including HVAC), electrical, plumbing and fire/life safety
systems serving the Building in general; (3) Common Areas; (4) the
roof of the Building; (5) exterior windows of the Building; and (6)
elevators serving the Building. Landlord shall promptly make repairs
(considering the nature and urgency of the repair) for which Landlord
is responsible.
C. Alterations. Tenant shall not make alterations, additions or
improvements to the Premises or install any Cable in the Premises or
other portions of the Building (collectively referred to as
"Alterations") without first obtaining the written consent of Landlord
in each instance, which consent shall not be unreasonably withheld or
delayed. However, Landlord's consent shall not be required for any
Alteration that satisfies all of the following criteria (a "Cosmetic
Alteration"): (1) is of a cosmetic nature such as painting,
wallpapering, hanging pictures and installing carpeting; (2) is not
visible from the exterior of the Premises or Building; (3) will not
affect the systems or structure of the Building; and (4) does not
require work to be performed inside the walls or above the ceiling of
the Premises. However, even though consent is not required, the
performance of Cosmetic Alterations shall be subject to all the other
provisions of this Section IX.C. Prior to starting work, Tenant shall
furnish Landlord with plans and specifications reasonably acceptable
to Landlord; names of contractors reasonably acceptable to Landlord
(provided that Landlord may designate specific contractors with
respect to Building systems); copies of contracts; necessary permits
and approvals; evidence of contractor's and subcontractor's insurance
in amounts reasonably required by Landlord; and any security for
performance that is reasonably required by Landlord. Changes to the
plans and specifications must also be submitted to Landlord for its
approval. Alterations shall be constructed in a good and workmanlike
manner using materials of a quality that is at least equal to the
quality designated by Landlord as the minimum standard for the
Building. Landlord may designate reasonable rules, regulations and
procedures for the performance of work in the Building and, to the
extent reasonably necessary to avoid disruption to the occupants of
the Building, shall have the right to designate the time when
Alterations may be performed. Tenant shall reimburse Landlord within
30 days after receipt of an invoice for sums paid by Landlord for
third party examination of Tenant's plans for non-Cosmetic
Alterations. In addition, within 30 days after receipt of an invoice
from Landlord, Tenant shall pay Landlord a fee for Landlord's
oversight and coordination of any non-Cosmetic Alterations equal to
10% of the cost of the non-Cosmetic Alterations. Upon completion,
Tenant shall furnish "as-built" plans (except for Cosmetic
Alterations), completion affidavits, full and final waivers of lien
and receipted bills covering all labor and materials. Tenant shall
assure that the Alterations comply with all insurance requirements and
Laws. Landlord's approval of an Alteration shall not be a
representation by Landlord that the Alteration complies with
applicable Laws or will be adequate for Tenant's use.
X. Use of Electrical Services by Tenant.
A. Electricity used by Tenant in the Premises shall be paid for by Tenant
through inclusion in Expenses (except as provided in Section X.B. for
excess usage). Electrical service to the Premises may be furnished by
one or more companies providing electrical generation, transmission
and distribution services, and the cost of electricity may consist of
several different components or separate charges for such services,
such as generation, distribution and stranded cost charges. Landlord
shall have the exclusive right to select any company providing
electrical service to the Premises, to aggregate the electrical
service for the Property and Premises with other buildings, to
purchase electricity through a broker and/or buyers group and to
change the providers and manner of purchasing electricity. Landlord
shall be entitled to receive a reasonable fee (if permitted by Law)
for the selection of utility companies and the negotiation and
administration of contracts for electricity.
B. Tenant's use of electrical service shall not exceed, either in
voltage, rated capacity or overall load 5 watts per rentable square
foot of the Premises, which shall be supplied by or through Landlord
to the Premises. If Tenant requests permission to consume excess
electrical service, Landlord may refuse to consent or may condition
consent upon conditions that Landlord reasonably elects (including,
without limitation, the installation of utility service upgrades,
meters, submeters, air handlers or cooling units), and the additional
usage (to the extent permitted by Law), installation and maintenance
costs shall be paid by Tenant. Landlord shall deliver at least 5 watts
per rentable square foot of the Premises, excluding computer and
communications requirements, to Tenant, which electrical capacity may
be increased by Tenant at Tenant's sole cost and expense, subject to
the electrical capacity available to the Premises, however in no event
more than 5 watts per rentable square foot. Landlord shall have the
right to separately meter electrical usage for the Premises and to
measure electrical usage by survey or other commonly accepted methods.
XI. Entry by Landlord.
Landlord, its agents, contractors and representatives may enter the
Premises to inspect or show the Premises, to clean and make repairs, alterations
or additions to the Premises (provided that Landlord shall only show the
Premises during the last 12 months of the Term or during an uncured default by
Tenant), and to conduct or facilitate repairs, alterations or additions to any
portion of the Building, including other tenants' premises. Except in
emergencies or to provide janitorial and other Building services after Normal
Business Hours, Landlord shall provide Tenant with reasonable prior notice of
entry into the Premises, which may be given orally. If reasonably necessary for
the protection and safety of Tenant and its employees, Landlord shall have the
right to temporarily close all or a portion of the Premises to perform repairs,
alterations and additions. However, except in emergencies, Landlord will not
close the Premises if the work can reasonably be completed on weekends and after
Normal Business Hours. Entry by Landlord shall not constitute constructive
eviction or entitle Tenant to an abatement or reduction of Rent.
XII. Assignment and Subletting.
A. Except in connection with a Permitted Transfer (defined in Section
XII.E. below), Tenant shall not assign, sublease, transfer or encumber
any interest in this Lease or allow any third party to use any portion
of the Premises (collectively or individually, a "Transfer") without
the prior written consent of Landlord, which consent shall not be
unreasonably withheld, conditioned or delayed if Landlord does not
elect to exercise its termination rights under Section XII.B below.
Without limitation, it is agreed that Landlord's consent shall not be
considered unreasonably withheld, conditioned or delayed if: (1) the
proposed transferee's financial condition does not meet the criteria
Landlord uses to select Building tenants having similar leasehold
obligations; (2) the proposed transferee's business is not suitable
for the Building considering the business of the other tenants and the
Building's prestige, or would result in a violation of another
tenant's rights; (3) the proposed transferee is a governmental agency
or occupant of the Building (Notwithstanding the foregoing, Landlord
will not withhold its consent solely because the proposed transferee
is an occupant of the Building if Landlord does not have space
available for lease in the Building that is comparable to the space
Tenant desires to Transfer. For purposes hereof, Landlord shall be
deemed to have comparable space if it has space available on any floor
of the Building that is approximately the same size as the space
Tenant desires to Transfer within 6 months of the proposed
commencement of the proposed Transfer.); (4) Tenant is in default
after the expiration of the notice and cure periods in this Lease; or
(5) any portion of the Building or Premises would likely become
subject to additional or different Laws as a consequence of the
proposed Transfer. Tenant shall not be entitled to receive monetary
damages based upon a claim that Landlord unreasonably withheld its
consent to a proposed Transfer and Tenant's sole remedy shall be an
action to enforce any such provision through specific performance or
declaratory judgment. Any attempted Transfer in violation of this
Article shall, at Landlord's option, be void. Consent by Landlord to
one or more Transfer(s) shall not operate as a waiver of Landlord's
rights to approve any subsequent Transfers. In no event shall any
Transfer or Permitted Transfer release or relieve Tenant from any
obligation under this Lease.
Notwithstanding anything herein to the contrary, at any time during
the Term, Tenant shall have the right to sublet up to an aggregate of
4,000 rentable square feet of the Premises (the "Sublet Premises")
without the prior consent of Landlord (the "Permitted Sublease"),
provided that: (i) on or before the effective date of any such
Permitted Sublease, Tenant and the sublessee under such Permitted
Sublease enter into Landlord's standard consent to sublease agreement
on the form attached hereto as Exhibit G; (ii) the Permitted Sublease
would not result in a violation of an exclusive right granted to
another occupant in the Building; (iii) the sublessee under the
Permitted Sublease will use the Sublet Premises solely for the
Permitted Use and no other use whatsoever; (iv) the sublessee under
the Permitted Sublease is not a government agency or occupant of the
Building (Notwithstanding the foregoing, in such case, Landlord will
not withhold its consent solely because the proposed sublessee is an
occupant of the Building if Landlord does not have space available for
lease in the Building that is comparable to the space Tenant desires
to sublease. For purposes hereof, Landlord shall be deemed to have
comparable space if it has space available on any floor of the
Building that is approximately the same size as the space Tenant
desires to sublease within 6 months of the proposed commencement of
the proposed sublease.); and (v) no portion of the Building or
Premises or Sublet Premises would become subject to additional or
different governmental Laws as a consequence of the Permitted Sublease
and/or the proposed sublessee's use and/or occupancy of the Premises.
Landlord, within a reasonable time after receipt of such request,
shall provide Tenant with a written list of any then current
restrictions or limitations. Notwithstanding anything to the contrary
contained herein, Landlord's right to terminate this Lease with
respect to the Sublet Premises as set forth in Section XII.B below
shall be inapplicable in the event of a Permitted Sublease. Tenant
shall be permitted to install a demising wall separating the Sublet
Premises from the remainder of the Premises in accordance with the
provisions of Section IX.C above.
B. As part of its request for Landlord's consent to a Transfer, Tenant
shall provide Landlord with financial statements for the proposed
transferee, a complete copy of the proposed assignment, sublease and
other contractual documents and such other information as Landlord may
reasonably request. Landlord shall, by written notice to Tenant within
30 days of its receipt of the required information and documentation,
either: (1) consent to the Transfer by the execution of a consent
agreement in a form reasonably designated by Landlord or reasonably
refuse to consent to the Transfer in writing; or (2) exercise its
right to terminate this Lease with respect to the portion of the
Premises that Tenant is proposing to assign or sublet. Any such
termination shall be effective on the proposed effective date of the
Transfer for which Tenant requested consent. Tenant shall pay Landlord
a review fee of $2,000.00 for Landlord's review of any Permitted
Transfer or requested Transfer, provided if Landlord's actual
reasonable costs and expenses (including reasonable attorney's fees)
exceed $2,000.00, Tenant shall reimburse Landlord for its actual
reasonable costs and expenses in lieu of a fixed review fee.
C. Tenant shall pay Landlord 50% of all rent and other consideration
which Tenant receives as a result of a Transfer that is in excess of
the Rent payable to Landlord for the portion of the Premises and Term
covered by the Transfer. Tenant shall pay Landlord for Landlord's
share of any excess within 30 days after Tenant's receipt of such
excess consideration. Tenant may deduct from the excess all reasonable
and customary expenses directly incurred by Tenant attributable to the
Transfer (other than Landlord's review fee), including marketing
costs, brokerage fees, legal fees and construction costs. Tenant may
also deduct from the excess any amount of rent not paid to Tenant
under the Permitted Sublease. If Tenant is in Monetary Default
(defined in Section XIX.A. below), Landlord may require that all
sublease payments be made directly to Landlord, in which case Tenant
shall receive a credit against Rent in the amount of any payments
received (less Landlord's share of any excess).
D. Except as provided below with respect to a Permitted Transfer, if
Tenant is a corporation, limited liability company, partnership, or
similar entity, and if the entity which owns or controls a majority of
the voting shares/rights at any time changes for any reason (including
but not limited to a merger, consolidation or reorganization), such
change of ownership or control shall constitute a Transfer. The
foregoing shall not apply so long as Tenant is an entity whose
outstanding stock is listed on a recognized security exchange, or if
at least 80% of its voting stock is owned by another entity, the
voting stock of which is so listed.
E. Tenant may assign its entire interest under this Lease to a successor
to Tenant by purchase, merger, consolidation or reorganization without
the consent of Landlord, provided that all of the following conditions
are satisfied (a "Permitted Transfer"): (1) Tenant is not in default
under this Lease; (2) Tenant's successor shall own all or a majority
of the assets of Tenant; (3) Tenant's successor shall have a net worth
which is at least equal to the greater of Tenant's net worth at the
date of this Lease or Tenant's net worth as of the day prior to the
proposed purchase, merger, consolidation or reorganization; (4) the
Permitted Use does not allow the Premises to be used for retail
purposes; and (5) Tenant shall give Landlord written notice at least
30 days prior to the effective date of the proposed purchase, merger,
consolidation or reorganization. Tenant's notice to Landlord shall
include information and documentation showing that each of the above
conditions has been satisfied. If requested by Landlord, Tenant's
successor shall sign a commercially reasonable form of assumption
agreement.
XIII. Liens.
Tenant shall not permit mechanic's or other liens to be placed upon the
Property, Premises or Tenant's leasehold interest in connection with any work or
service done or purportedly done by or for benefit of Tenant. If a lien is so
placed, Tenant shall, within 10 days of notice from Landlord of the filing of
the lien, fully discharge the lien by settling the claim which resulted in the
lien or by bonding or insuring over the lien in the manner prescribed by the
applicable lien Law. If Tenant fails to discharge the lien, then, in addition to
any other right or remedy of Landlord, Landlord may bond or insure over the lien
or otherwise discharge the lien. Tenant shall reimburse Landlord for any amount
paid by Landlord to bond or insure over the lien or discharge the lien,
including, without limitation, reasonable attorneys' fees (if and to the extent
permitted by Law) within 30 days after receipt of an invoice from Landlord.
XIV. Indemnity and Waiver of Claims.
A. Except to the extent caused by the negligence or willful misconduct of
Landlord or any Landlord Related Parties (defined below), Tenant shall
indemnify, defend and hold Landlord, its trustees, members,
principals, beneficiaries, partners, officers, directors, employees,
Mortgagee(s) (defined in Article XXVI) and agents ("Landlord Related
Parties") harmless against and from all liabilities, obligations,
damages, penalties, claims, actions, costs, charges and expenses,
including, without limitation, reasonable attorneys' fees and other
professional fees (if and to the extent permitted by Law), which may
be imposed upon, incurred by or asserted against Landlord or any of
the Landlord Related Parties and arising out of or in connection with
any damage or injury occurring in the Premises or any acts or
omissions (including violations of Law) of Tenant, the Tenant Related
Parties (defined below) or any of Tenant's transferees, contractors or
licensees.
B. Except to the extent caused by the negligence or willful misconduct of
Tenant or any Tenant Related Parties (defined below), Landlord shall
indemnify, defend and hold Tenant, its trustees, members, principals,
beneficiaries, partners, officers, directors, employees and agents
("Tenant Related Parties") harmless against and from all liabilities,
obligations, damages, penalties, claims, actions, costs, charges and
expenses, including, without limitation, reasonable attorneys' fees
and other professional fees (if and to the extent permitted by Law),
which may be imposed upon, incurred by or asserted against Tenant or
any of the Tenant Related Parties and arising out of or in connection
with the acts or omissions (including violations of Law) of Landlord,
the Landlord Related Parties or any of Landlord's contractors.
C. Landlord and the Landlord Related Parties shall not be liable for, and
Tenant waives, all claims for loss or damage to Tenant's business or
loss, theft or damage to Tenant's Property or the property of any
person claiming by, through or under Tenant resulting from: (1) wind
or weather; (2) the failure of any sprinkler, heating or
air-conditioning equipment, any electric wiring or any gas, water or
steam pipes; (3) the backing up of any sewer pipe or downspout; (4)
the bursting, leaking or running of any tank, water closet, drain or
other pipe; (5) water, snow or ice upon or coming through the roof,
skylight, stairs, doorways, windows, walks or any other place upon or
near the Building; (6) any act or omission of any party other than
Landlord or Landlord Related Parties; and (7) any causes not
reasonably within the control of Landlord. Tenant shall insure itself
against such losses under Article XV below.
XV. Insurance.
Tenant shall carry and maintain the following insurance ("Tenant's
Insurance"), at its sole cost and expense: (1) Commercial General Liability
Insurance applicable to the Premises and its appurtenances providing, on an
occurrence basis, a minimum combined single limit of $2,000,000.00; (2) All Risk
Property/Business Interruption Insurance, including flood and earthquake,
written at replacement cost value and with a replacement cost endorsement
covering all of Tenant's trade fixtures, equipment, furniture and other personal
property within the Premises ("Tenant's Property"); (3) Workers' Compensation
Insurance as required by the state in which the Premises is located and in
amounts as may be required by applicable statute; and (4) Employers Liability
Coverage of at least $1,000,000.00 per occurrence. Any company writing any of
Tenant's Insurance shall have an A.M. Best rating of not less than A-VIII. All
Commercial General Liability Insurance policies shall name Tenant as a named
insured and Landlord (or any successor), Equity Office Properties Trust, a
Maryland real estate investment trust, EOP Operating Limited Partnership, a
Delaware limited partnership, and their respective members, principals,
beneficiaries, partners, officers, directors, employees, and agents, and other
designees of Landlord as the interest of such designees shall appear, as
additional insureds. All policies of Tenant's Insurance shall contain
endorsements that the insurer(s) shall give Landlord and its designees at least
30 days' advance written notice of any change, cancellation, termination or
lapse of insurance. Tenant shall provide Landlord with a certificate of
insurance evidencing Tenant's Insurance prior to the earlier to occur of the
Commencement Date or the date Tenant is provided with possession of the Premises
for any reason, and upon renewals at least 15 days prior to the expiration of
the insurance coverage. So long as the same is available at commercially
reasonable rates, Landlord shall maintain so called All Risk property insurance
on the Building at replacement cost value, as reasonably estimated by Landlord.
Except as specifically provided to the contrary, the limits of either party's'
insurance shall not limit such party's liability under this Lease.
XVI. Subrogation.
Notwithstanding anything in this Lease to the contrary, Landlord and Tenant
hereby waive and shall cause their respective insurance carriers to waive any
and all rights of recovery, claim, action or causes of action against the other
and their respective trustees, principals, beneficiaries, partners, officers,
directors, agents, and employees, for any loss or damage that may occur to
Landlord or Tenant or any party claiming by, through or under Landlord or
Tenant, as the case may be, with respect to Tenant's Property, the Building, the
Premises, any additions or improvements to the Building or Premises, or any
contents thereof, including all rights of recovery, claims, actions or causes of
action arising out of the negligence of Landlord or any Landlord Related Parties
or the negligence of Tenant or any Tenant Related Parties, which loss or damage
is (or would have been, had the insurance required by this Lease been carried)
covered by insurance.
XVII. Casualty Damage.
A. If all or any part of the Premises is damaged by fire or other
casualty, Tenant shall immediately notify Landlord in writing. During
any period of time that all or a material portion of the Premises is
rendered untenantable as a result of a fire or other casualty, the
Rent shall abate for the portion of the Premises that is untenantable
and not used by Tenant. Landlord shall have the right to terminate
this Lease if: (1) the Building shall be damaged so that, in
Landlord's reasonable judgment, substantial alteration or
reconstruction of the Building shall be required (whether or not the
Premises has been damaged); (2) Landlord is not permitted by Law to
rebuild the Building in substantially the same form as existed before
the fire or casualty; (3) the Premises have been materially damaged
and there is less than 2 years of the Term remaining on the date of
the casualty; or (4) any Mortgagee requires that the insurance
proceeds be applied to the payment of the mortgage debt. Landlord may
exercise its right to terminate this Lease by notifying Tenant in
writing within 90 days after the date of the casualty. If Landlord
does not terminate this Lease, Landlord shall commence and proceed
with reasonable diligence to repair and restore the Building and the
Leasehold Improvements (excluding any Alterations that were performed
by Tenant in violation of this Lease). However, in no event shall
Landlord be required to spend more than the insurance proceeds
received by Landlord. Landlord shall not be liable for any loss or
damage to Tenant's Property or to the business of Tenant resulting in
any way from the fire or other casualty or from the repair and
restoration of the damage. Landlord and Tenant hereby waive the
provisions of any Law relating to the matters addressed in this
Article, and agree that their respective rights for damage to or
destruction of the Premises shall be those specifically provided in
this Lease.
B. If all or any portion of the Premises shall be made untenantable by
fire or other casualty, Landlord shall, with reasonable promptness,
cause an architect or general contractor selected by Landlord to
provide Landlord and Tenant with a written estimate of the amount of
time required to substantially complete the repair and restoration of
the Premises and make the Premises tenantable again, using standard
working methods ("Completion Estimate"). If the Completion Estimate
indicates that the Premises cannot be made tenantable within 180 days
from the date the repair and restoration is started, then regardless
of anything in Section XVII.A above to the contrary, either party
shall have the right to terminate this Lease by giving written notice
to the other of such election within 10 days after receipt of the
Completion Estimate. Tenant, however, shall not have the right to
terminate this Lease if the fire or casualty was caused by the
negligence or intentional misconduct of Tenant, Tenant Related Parties
or any of Tenant's transferees, contractors or licensees.
XVIII. Condemnation.
Either party may terminate this Lease if the whole or any material part of
the Premises shall be taken or condemned for any public or quasi-public use
under Law, by eminent domain or private purchase in lieu thereof (a "Taking").
Landlord shall also have the right to terminate this Lease if there is a Taking
of any portion of the Building or Property which would leave the remainder of
the Building unsuitable for use as an office building in a manner comparable to
the Building's use prior to the Taking. In order to exercise its right to
terminate the Lease, Landlord or Tenant, as the case may be, must provide
written notice of termination to the other within 45 days after the terminating
party first receives notice of the Taking. Any such termination shall be
effective as of the date the physical taking of the Premises or the portion of
the Building or Property occurs. If this Lease is not terminated, the Rentable
Square Footage of the Building, the Rentable Square Footage of the Premises and
Tenant's Pro Rata Share shall, if applicable, be appropriately adjusted. In
addition, Rent for any portion of the Premises taken or condemned shall be
abated during the unexpired Term of this Lease effective when the physical
taking of the portion of the Premises occurs. All compensation awarded for a
Taking, or sale proceeds, shall be the property of Landlord, any right to
receive compensation or proceeds being expressly waived by Tenant. However,
Tenant may file a separate claim at its sole cost and expense for Tenant's
Property and Tenant's reasonable relocation expenses, provided the filing of the
claim does not diminish the award which would otherwise be receivable by
Landlord.
XIX. Events of Default.
Tenant shall be considered to be in default of this Lease upon the
occurrence of any of the following events of default:
A. Tenant's failure to pay when due all or any portion of the Rent, if
the failure continues for 3 days after written notice to Tenant
("Monetary Default").
B. Tenant's failure (other than a Monetary Default) to comply with any
term, provision or covenant of this Lease, if the failure is not cured
within 10 days after written notice to Tenant. However, if Tenant's
failure to comply cannot reasonably be cured within 10 days, Tenant
shall be allowed additional time (not to exceed 60 days) as is
reasonably necessary to cure the failure so long as: (1) Tenant
commences to cure the failure within 10 days, and (2) Tenant
diligently pursues a course of action that will cure the failure and
bring Tenant back into compliance with the Lease. However, if Tenant's
failure to comply creates a hazardous condition, the failure must be
cured immediately upon notice to Tenant. In addition, if Landlord
provides Tenant with notice of Tenant's failure to comply with any
particular term, provision or covenant of the Lease on 3 occasions
during any 12 month period, Tenant's subsequent violation of such
term, provision or covenant shall, at Landlord's option, be an
incurable event of default by Tenant.
C. Tenant or any Guarantor becomes insolvent, makes a transfer in fraud
of creditors or makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its debts when due.
D. The leasehold estate is taken by process or operation of Law.
E. In the case of any ground floor or retail Tenant, Tenant does not take
possession of, or abandons or vacates all or any portion of the
Premises.
F. Tenant is in default beyond any notice and cure period under any other
lease or agreement with Landlord, including, without limitation, any
lease or agreement for parking.
XX. Remedies.
A. Upon any default, Landlord shall have the right without notice or
demand (except as provided in Article XIX) to pursue any of its rights
and remedies at Law or in equity, including any one or more of the
following remedies:
1. Terminate this Lease, in which case Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to surrender
the Premises, Landlord may, in compliance with applicable Law and
without prejudice to any other right or remedy, enter upon and
take possession of the Premises and expel and remove Tenant,
Tenant's Property and any party occupying all or any part of the
Premises. Tenant shall pay Landlord on demand the amount of all
past due Rent and other losses and damages which Landlord may
suffer as a result of Tenant's default, whether by Landlord's
inability to relet the Premises on satisfactory terms or
otherwise, including, without limitation, all Costs of Reletting
(defined below) and any deficiency that may arise from reletting
or the failure to relet the Premises. "Costs of Reletting" shall
include all costs and expenses incurred by Landlord in reletting
or attempting to relet the Premises, including, without
limitation, reasonable legal fees, brokerage commissions, the
cost of alterations and the value of other concessions or
allowances granted to a new tenant.
2. Terminate Tenant's right to possession of the Premises and, in
compliance with applicable Law, expel and remove Tenant, Tenant's
Property and any parties occupying all or any part of the
Premises. Landlord may (but shall not be obligated to) relet all
or any part of the Premises, without notice to Tenant, for a term
that may be greater or less than the balance of the Term and on
such conditions (which may include concessions, free rent and
alterations of the Premises) and for such uses as Landlord in its
absolute discretion shall determine. Landlord may collect and
receive all rents and other income from the reletting. Tenant
shall pay Landlord on demand all past due Rent, all Costs of
Reletting and any deficiency arising from the reletting or
failure to relet the Premises. Landlord shall not be responsible
or liable for the failure to relet all or any part of the
Premises or for the failure to collect any Rent. The re-entry or
taking of possession of the Premises shall not be construed as an
election by Landlord to terminate this Lease unless a written
notice of termination is given to Tenant.
3. In lieu of calculating damages under Sections XX.A.1 or XX.A.2
above, Landlord may elect to receive as damages the sum of (a)
all Rent accrued through the date of termination of this Lease or
Tenant's right to possession, and (b) an amount equal to the
total Rent that Tenant would have been required to pay for the
remainder of the Term discounted to present value at the Prime
Rate (defined in Section XX.B. below) then in effect, minus the
then present fair rental value of the Premises for the remainder
of the Term, similarly discounted, after deducting all
anticipated Costs of Reletting.
B. Unless expressly provided in this Lease, the repossession or
re-entering of all or any part of the Premises shall not relieve
Tenant of its liabilities and obligations under the Lease. No right or
remedy of Landlord shall be exclusive of any other right or remedy.
Each right and remedy shall be cumulative and in addition to any other
right and remedy now or subsequently available to Landlord at Law or
in equity. If Landlord declares Tenant to be in default, Landlord
shall be entitled to receive interest on any unpaid item of Rent at a
rate equal to the Prime Rate plus 4%. For purposes hereof, the "Prime
Rate" shall be the per annum interest rate publicly announced as its
prime or base rate by a federally insured bank selected by Landlord in
the state in which the Building is located. Forbearance by Landlord to
enforce one or more remedies shall not constitute a waiver of any
default.
XXI. Limitation of Liability.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE
LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD) TO TENANT SHALL BE LIMITED
TO THE INTEREST OF LANDLORD IN THE PROPERTY. TENANT SHALL LOOK SOLELY TO
LANDLORD'S INTEREST IN THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT OR AWARD
AGAINST LANDLORD. NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY SHALL BE
PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. BEFORE FILING SUIT FOR AN
ALLEGED DEFAULT BY LANDLORD, TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S)
(DEFINED IN ARTICLE XXVI BELOW) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES
(DEFINED IN ARTICLE XXVI BELOW) ON THE PROPERTY, BUILDING OR PREMISES, NOTICE
AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT.
XXII. No Waiver.
Either party's failure to declare a default immediately upon its
occurrence, or delay in taking action for a default shall not constitute a
waiver of the default, nor shall it constitute an estoppel. Either party's
failure to enforce its rights for a default shall not constitute a waiver of its
rights regarding any subsequent default. Receipt by Landlord of Tenant's keys to
the Premises shall not constitute an acceptance or surrender of the Premises.
XXIII. Quiet Enjoyment.
Tenant shall, and may peacefully have, hold and enjoy the Premises, subject
to the terms of this Lease, provided Tenant pays the Rent and fully performs all
of its covenants and agreements. This covenant and all other covenants of
Landlord shall be binding upon Landlord and its successors only during its or
their respective periods of ownership of the Building, and shall not be a
personal covenant of Landlord or the Landlord Related Parties.
XXIV. Relocation.
Intentionally deleted.
XXV. Holding Over.
Except for any permitted occupancy by Tenant under Article VIII, if Tenant
fails to surrender the Premises at the expiration or earlier termination of this
Lease, occupancy of the Premises after the termination or expiration shall be
that of a tenancy at sufferance. Tenant's occupancy of the Premises during the
holdover shall be subject to all the terms and provisions of this Lease and
Tenant shall pay an amount (on a per month basis without reduction for partial
months during the holdover) equal to 150% of the greater of: (1) the sum of the
Base Rent and Additional Rent due for the period immediately preceding the
holdover; or (2) the fair market gross rental for the Premises as reasonably
determined by Landlord. No holdover by Tenant or payment by Tenant after the
expiration or early termination of this Lease shall be construed to extend the
Term or prevent Landlord from immediate recovery of possession of the Premises
by summary proceedings or otherwise. In addition to the payment of the amounts
provided above, if Landlord is unable to deliver possession of the Premises to a
new tenant, or to perform improvements for a new tenant, as a result of Tenant's
holdover and Tenant fails to vacate the Premises within 15 days after Landlord
notifies Tenant of Landlord's inability to deliver possession, or perform
improvements, Tenant shall be liable to Landlord for all damages that Landlord
suffers from the holdover.
XXVI. Subordination to Mortgages; Estoppel Certificate.
Tenant accepts this Lease subject and subordinate to any mortgage(s),
deed(s) of trust, ground lease(s) or other lien(s) now or subsequently arising
upon the Premises, the Building or the Property, and to renewals, modifications,
refinancings and extensions thereof (collectively referred to as a "Mortgage").
The party having the benefit of a Mortgage or the ground lessor shall be
referred to as a "Mortgagee". This clause shall be self-operative, but upon
request from a Mortgagee, Tenant shall execute a commercially reasonable
subordination agreement in favor of the Mortgagee. In lieu of having the
Mortgage be superior to this Lease, a Mortgagee shall have the right at any time
to subordinate its Mortgage to this Lease. If requested by a
successor-in-interest to all or a part of Landlord's interest in the Lease,
Tenant shall, without charge, attorn to the successor-in-interest. Landlord and
Tenant shall each, within 10 days after receipt of a written request from the
other, execute and deliver an estoppel certificate to those parties as are
reasonably requested by the other (including a Mortgagee or prospective
purchaser). The estoppel certificate shall include a statement certifying that
this Lease is unmodified (except as identified in the estoppel certificate) and
in full force and effect, describing the dates to which Rent and other charges
have been paid, representing that, to such party's actual knowledge, there is no
default (or stating the nature of the alleged default) and indicating other
matters with respect to the Lease that may reasonably be requested.
Notwithstanding the foregoing, upon written request by Tenant, Landlord will use
reasonable efforts to obtain a non-disturbance, subordination and attornment
agreement from Landlord's then current Mortgagee on such Mortgagee's then
current standard form of agreement. "Reasonable efforts" of Landlord shall not
require Landlord to incur any cost, expense or liability to obtain such
agreement, it being agreed that Tenant shall be responsible for any fee or
review costs charged by the Mortgagee. Upon request of Landlord, Tenant will
execute the Mortgagee's form of non-disturbance, subordination and attornment
agreement and return the same to Landlord for execution by the Mortgagee.
Landlord's failure to obtain a non-disturbance, subordination and attornment
agreement for Tenant shall have no effect on the rights, obligations and
liabilities of Landlord and Tenant or be considered to be a Default by Landlord
hereunder.
XXVII. Attorneys' Fees.
If either party institutes a suit against the other for violation of or to
enforce any covenant or condition of this Lease, or if either party intervenes
in any suit in which the other is a party to enforce or protect its interest or
rights, the prevailing party shall be entitled to all of its costs and expenses,
including, without limitation, reasonable attorneys' fees.
XXVIII. Notice.
If a demand, request, approval, consent or notice (collectively referred to
as a "notice") shall or may be given to either party by the other, the notice
shall be in writing and delivered by hand or sent by registered or certified
mail with return receipt requested, or sent by overnight or same day courier
service at the party's respective Notice Address(es) set forth in Article I,
except that if Tenant has vacated the Premises (or if the Notice Address for
Tenant is other than the Premises, and Tenant has vacated such address) without
providing Landlord a new Notice Address, Landlord may serve notice in any manner
described in this Article or in any other manner permitted by Law. Each notice
shall be deemed to have been received or given on the earlier to occur of actual
delivery or the date on which delivery is refused, or, if Tenant has vacated the
Premises or the other Notice Address of Tenant without providing a new Notice
Address, three (3) days after notice is deposited in the U.S. mail or with a
courier service in the manner described above. Either party may, at any time,
change its Notice Address by giving the other party written notice of the new
address in the manner described in this Article.
XXIX. Excepted Rights.
This Lease does not grant any rights to light or air over or about the
Building. Landlord excepts and reserves exclusively to itself the use of: (1)
roofs, (2) telephone, electrical and janitorial closets, (3) equipment rooms,
Building risers or similar areas that are used by Landlord for the provision of
Building services, (4) rights to the land and improvements below the floor of
the Premises, (5) the improvements and air rights above the Premises, (6) the
improvements and air rights outside the demising walls of the Premises, and (7)
the areas within the Premises used for the installation of utility lines and
other installations serving occupants of the Building. Landlord has the right to
change the Building's name or address. Landlord also has the right to make such
other changes to the Property and Building as Landlord deems appropriate,
provided the changes do not materially affect Tenant's ability to use the
Premises for the Permitted Use. Landlord shall also have the right (but not the
obligation) to temporarily close the Building if Landlord reasonably determines
that there is an imminent danger of significant damage to the Building or of
personal injury to Landlord's employees or the occupants of the Building. The
circumstances under which Landlord may temporarily close the Building shall
include, without limitation, electrical interruptions, hurricanes and civil
disturbances. A closure of the Building under such circumstances shall not
constitute a constructive eviction nor entitle Tenant to an abatement or
reduction of Rent.
XXX. Surrender of Premises.
At the expiration or earlier termination of this Lease or Tenant's right of
possession, Tenant shall remove Tenant's Property (defined in Article XV) from
the Premises, and quit and surrender the Premises to Landlord, broom clean, and
in good order, condition and repair, ordinary wear and tear and damage by fire
or other casualty for which Landlord is required to make repairs hereunder
excepted. Tenant shall also be required to remove the Required Removables in
accordance with Article VIII. If Tenant fails to remove any of Tenant's Property
within 5 days after the termination of this Lease or of Tenant's right to
possession, Landlord, at Tenant's sole cost and expense, shall be entitled (but
not obligated) to remove and store Tenant's Property. Landlord shall not be
responsible for the value, preservation or safekeeping of Tenant's Property.
Tenant shall pay Landlord, upon demand, the expenses and storage charges
incurred for Tenant's Property. In addition, if Tenant fails to remove Tenant's
Property from the Premises or storage, as the case may be, within 30 days after
written notice, Landlord may deem all or any part of Tenant's Property to be
abandoned, and title to Tenant's Property shall be deemed to be immediately
vested in Landlord.
XXXI. Miscellaneous.
A. This Lease and the rights and obligations of the parties shall be
interpreted, construed and enforced in accordance with the Laws of the
state in which the Building is located and Landlord and Tenant hereby
irrevocably consent to the jurisdiction and proper venue of such
state. If any term or provision of this Lease shall to any extent be
invalid or unenforceable, the remainder of this Lease shall not be
affected, and each provision of this Lease shall be valid and enforced
to the fullest extent permitted by Law. The headings and titles to the
Articles and Sections of this Lease are for convenience only and shall
have no effect on the interpretation of any part of the Lease.
B. Tenant shall not record this Lease or any memorandum without
Landlord's prior written consent.
C. Landlord and Tenant hereby waive any right to trial by jury in any
proceeding based upon a breach of this Lease.
D. Whenever a period of time is prescribed for the taking of an action by
Landlord or Tenant, the period of time for the performance of such
action shall be extended by the number of days that the performance is
actually delayed due to strikes, acts of God, shortages of labor or
materials, war, civil disturbances and other causes beyond the
reasonable control of the performing party ("Force Majeure"). However,
events of Force Majeure shall not extend any period of time for the
payment of Rent or other sums payable by either party or any period of
time for the written exercise of an option or right by either party.
E. Landlord shall have the right to transfer and assign, in whole or in
part, all of its rights and obligations under this Lease and in the
Building and/or Property referred to herein, and upon such transfer
Landlord shall be released from any further obligations hereunder, and
Tenant agrees to look solely to the successor in interest of Landlord
for the performance of such obligations, provided that, any successor
pursuant to a voluntary, third-party transfer (but not as part of an
involuntary transfer resulting from a foreclosure or deed in lieu
thereof) shall have assumed Landlord's obligations under this Lease
either by contractual obligation, assumption agreement or by operation
of Law.
F. Tenant represents that it has dealt directly with and only with the
Broker as a broker in connection with this Lease. Tenant shall
indemnify and hold Landlord and the Landlord Related Parties harmless
from all claims of any other brokers claiming to have represented
Tenant in connection with this Lease. Landlord agrees to indemnify and
hold Tenant and the Tenant Related Parties harmless from all claims of
any brokers claiming to have represented Landlord in connection with
this Lease.
G. Tenant covenants, warrants and represents that: (1) each individual
executing, attesting and/or delivering this Lease on behalf of Tenant
is authorized to do so on behalf of Tenant; (2) this Lease is binding
upon Tenant; and (3) Tenant is duly organized and legally existing in
the state of its organization and is qualified to do business in the
state in which the Premises are located. If there is more than one
Tenant, or if Tenant is comprised of more than one party or entity,
the obligations imposed upon Tenant shall be joint and several
obligations of all the parties and entities. Notices, payments and
agreements given or made by, with or to any one person or entity shall
be deemed to have been given or made by, with and to all of them.
H. Time is of the essence with respect to Tenant's exercise of any
expansion, renewal or extension rights granted to Tenant. This Lease
shall create only the relationship of landlord and tenant between the
parties, and not a partnership, joint venture or any other
relationship. This Lease and the covenants and conditions in this
Lease shall inure only to the benefit of and be binding only upon
Landlord and Tenant and their permitted successors and assigns.
I. The expiration of the Term, whether by lapse of time or otherwise,
shall not relieve either party of any obligations which accrued prior
to or which may continue to accrue after the expiration or early
termination of this Lease. Without limiting the scope of the prior
sentence, it is agreed that Tenant's obligations under Sections IV.A,
IV.B., VIII, XIV, XX, XXV and XXX shall survive the expiration or
early termination of this Lease.
J. Landlord has delivered a copy of this Lease to Tenant for Tenant's
review only, and the delivery of it does not constitute an offer to
Tenant or an option. This Lease shall not be effective against any
party hereto until an original copy of this Lease has been signed and
properly delivered by such party.
K. All understandings and agreements previously made between the parties
are superseded by this Lease, and neither party is relying upon any
warranty, statement or representation not contained in this Lease.
This Lease may be modified only by a written agreement signed by
Landlord and Tenant.
L. Tenant, within 15 days after request, shall provide Landlord with a
current financial statement as filed with the SEC and such other
information as Landlord may reasonably request. Landlord, however,
shall not require Tenant to provide such information unless Landlord
is requested to produce the information in connection with a proposed
financing or sale of the Building. Upon written request by Tenant,
Landlord shall enter into a commercially reasonable confidentiality
agreement covering any confidential information that is disclosed by
Tenant.
XXXII. Entire Agreement.
This Lease and the following exhibits and attachments constitute the entire
agreement between the parties and supersede all prior agreements and
understandings related to the Premises, including all lease proposals, letters
of intent and other documents: Exhibit A (Outline and Location of Premises),
Exhibit B (Rules and Regulations), Exhibit C (Commencement Letter), Exhibit D
(Work Letter Agreement), Exhibit E (Additional Provisions), Exhibit F (Offering
Space), Exhibit G (Sample Landlord Consent To Sublease), and Exhibit H
(Janitorial Specifications).
Landlord and Tenant have executed this Lease as of the day and year first
above written.
WITNESS/ATTEST: LANDLORD:
EOP-TWO LAFAYETTE, L.L.C., a Delaware limited
liability company
By: EOP Operating Limited Partnership, a
Delaware limited partnership, its sole
member
By: Equity Office Properties Trust, a
Maryland real estate investment trust,
its general partner
- --------------------------
By: __________________________
Name (print): ________________
Name: __________________________
- ---------------------------
Title: __________________________
Name (print): ________________
WITNESS/ATTEST: TENANT:
FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a
federally chartered corporation
___________________________ By: _____________________________
Name (print): ________________ Name: _____________________________
___________________________ Title: _____________________________
Name (print): ________________
EXHIBIT A
PREMISES
This Exhibit is attached to and made a part of the Lease dated as of June
28, 2001, by and between EOP-TWO LAFAYETTE, L.L.C., a Delaware limited liability
company ("Landlord") and FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally
chartered corporation ("Tenant") for space in the Building located at 1133 21st
Street, N.W., Washington, D.C. 20036.
EXHIBIT B
BUILDING RULES AND REGULATIONS
The following rules and regulations shall apply, where applicable, to the
Premises, the Building, the parking garage (if any), the Property and the
appurtenances. Capitalized terms have the same meaning as defined in the Lease.
1. Sidewalks, doorways, vestibules, halls, stairways and other similar
areas shall not be obstructed by Tenant or used by Tenant for any
purpose other than ingress and egress to and from the Premises. No
rubbish, litter, trash, or material shall be placed, emptied, or
thrown in those areas. At no time shall Tenant permit Tenant's
employees to loiter in Common Areas or elsewhere about the Building or
Property.
2. Plumbing fixtures and appliances shall be used only for the purposes
for which designed, and no sweepings, rubbish, rags or other
unsuitable material shall be thrown or placed in the fixtures or
appliances. Damage resulting to fixtures or appliances by Tenant, its
agents, employees or invitees, shall be paid for by Tenant, and
Landlord shall not be responsible for the damage.
3. No signs, advertisements or notices shall be painted or affixed to
windows, doors or other parts of the Building, except those of such
color, size, style and in such places as are first approved in writing
by Landlord. All tenant identification and suite numbers at the
entrance to the Premises shall be installed by Landlord, at Tenant's
cost and expense, using the standard graphics for the Building. Except
in connection with the hanging of lightweight pictures and wall
decorations, no nails, hooks or screws shall be inserted into any part
of the Premises or Building except by the Building maintenance
personnel.
4. Landlord will provide and maintain in the first floor (main lobby) of
the Building an alphabetical directory board or other directory device
listing tenants, and no other directory shall be permitted unless
previously consented to by Landlord in writing.
5. Tenant shall not place any lock(s) on any door in the Premises or
Building without Landlord's prior written consent and Landlord shall
have the right to retain at all times and to use keys to all locks
within and into the Premises. A reasonable number of keys to the locks
on the entry doors in the Premises shall be furnished by Landlord to
Tenant at Tenant's cost, and Tenant shall not make any duplicate keys.
All keys shall be returned to Landlord at the expiration or early
termination of this Lease.
6. All contractors, contractor's representatives and installation
technicians performing work in the Building shall be subject to
Landlord's prior reasonable approval and shall be required to comply
with Landlord's standard rules, regulations, policies and procedures,
which may be revised from time to time.
7. Movement in or out of the Building of furniture or office equipment,
or dispatch or receipt by Tenant of merchandise or materials requiring
the use of elevators, stairways, lobby areas or loading dock areas,
shall be restricted to hours designated by Landlord. Tenant shall
obtain Landlord's prior approval by providing a detailed listing of
the activity. If approved by Landlord, the activity shall be under the
supervision of Landlord and performed in the manner required by
Landlord. Tenant shall assume all risk for damage to articles moved
and injury to any persons resulting from the activity. If equipment,
property, or personnel of Landlord or of any other party is damaged or
injured as a result of or in connection with the activity, Tenant
shall be solely liable for any resulting damage or loss.
8. Landlord shall have the right to approve the weight, size, or location
of heavy equipment or articles in and about the Premises. Damage to
the Building by the installation, maintenance, operation, existence or
removal of property of Tenant shall be repaired at Tenant's sole
expense.
9. Corridor doors, when not in use, shall be kept closed.
10. Tenant shall not: (1) make or permit any improper, objectionable or
unpleasant noises or odors in the Building, or otherwise interfere in
any way with other tenants or persons having business with them; (2)
solicit business or distribute, or cause to be distributed, in any
portion of the Building, handbills, promotional materials or other
advertising; or (3) conduct or permit other activities in the Building
that might, in Landlord's sole opinion, constitute a nuisance.
11. No animals, except those assisting handicapped persons, shall be
brought into the Building or kept in or about the Premises.
12. No inflammable, explosive or dangerous fluids or substances shall be
used or kept by Tenant in the Premises, Building or about the
Property. Tenant shall not, without Landlord's prior written consent,
use, store, install, spill, remove, release or dispose of, within or
about the Premises or any other portion of the Property, any
asbestos-containing materials or any solid, liquid or gaseous material
now or subsequently considered toxic or hazardous under the provisions
of 42 U.S.C. Section 9601 et seq. or any other applicable
environmental Law which may now or later be in effect. Tenant shall
comply with all Laws pertaining to and governing the use of these
materials by Tenant, and shall remain solely liable for the costs of
abatement and removal. Tenant shall be allowed to use office products
that are normally used in the course of Tenant's business, provided
that such products are stored and used by Tenant in commercially
reasonable quantities and that Tenant stores and uses such products in
a safe manner.
13. Tenant shall not use or occupy the Premises in any manner or for any
purpose which might injure the reputation or impair the present or
future value of the Premises or the Building. Tenant shall not use, or
permit any part of the Premises to be used, for lodging, sleeping or
for any illegal purpose.
14. Tenant shall not take any action which would violate Landlord's labor
contracts or which would cause a work stoppage, picketing, labor
disruption or dispute, or interfere with Landlord's or any other
tenant's or occupant's business or with the rights and privileges of
any person lawfully in the Building ("Labor Disruption"). Tenant shall
take the actions necessary to resolve the Labor Disruption, and shall
have pickets removed and, at the request of Landlord, immediately
terminate any work in the Premises that gave rise to the Labor
Disruption, until Landlord gives its written consent for the work to
resume. Tenant shall have no claim for damages against Landlord or any
of the Landlord Related Parties, nor shall the date of the
commencement of the Term be extended as a result of the above actions.
15. Tenant shall not install, operate or maintain in the Premises or in
any other area of the Building, electrical equipment that would
overload the electrical system beyond its capacity for proper,
efficient and safe operation as determined solely by Landlord. Tenant
shall not furnish cooling or heating to the Premises, including,
without limitation, the use of electronic or gas heating devices,
without Landlord's prior written consent.
16. Tenant shall not operate or permit to be operated a coin or token
operated vending machine or similar device (including, without
limitation, telephones, lockers, toilets, scales, amusement devices
and machines for sale of beverages, foods, candy, cigarettes and other
goods), except for machines for the exclusive use of Tenant's
employees, and then only if the operation does not violate the lease
of any other tenant in the Building.
17. Bicycles and other vehicles are not permitted inside the Building or
on the walkways outside the Building, except in areas designated by
Landlord.
18. Landlord may from time to time adopt systems and procedures for the
security and safety of the Building, its occupants, entry, use and
contents. Tenant, its agents, employees, contractors, guests and
invitees shall comply with Landlord's systems and procedures.
19. Landlord shall have the right to prohibit the use of the name of the
Building or any other publicity by Tenant that in Landlord's sole
opinion may impair the reputation of the Building or its desirability.
Upon written notice from Landlord, Tenant shall refrain from and
discontinue such publicity immediately.
20. Tenant shall not canvass, solicit or peddle in or about the Building
or the Property.
21. Neither Tenant nor its agents, employees, contractors, guests or
invitees shall smoke or permit smoking in the Common Areas, unless the
Common Areas have been declared a designated smoking area by Landlord,
nor shall the above parties allow smoke from the Premises to emanate
into the Common Areas or any other part of the Building. Landlord
shall have the right to designate the Building (including the
Premises) as a non-smoking building.
22. Landlord shall have the right to designate and approve standard window
coverings for the Premises and to establish rules to assure that the
Building presents a uniform exterior appearance. Tenant shall ensure,
to the extent reasonably practicable, that window coverings are closed
on windows in the Premises while they are exposed to the direct rays
of the sun.
23. Deliveries to and from the Premises shall be made only at the times,
in the areas and through the entrances and exits designated by
Landlord. Tenant shall not make deliveries to or from the Premises in
a manner that might interfere with the use by any other tenant of its
premises or of the Common Areas, any pedestrian use, or any use which
is inconsistent with good business practice.
24. The work of cleaning personnel shall not be hindered by Tenant after
5:30 P.M., and cleaning work may be done at any time when the offices
are vacant. Windows, doors and fixtures may be cleaned at any time.
Tenant shall provide adequate waste and rubbish receptacles to prevent
unreasonable hardship to the cleaning service.
EXHIBIT C
COMMENCEMENT LETTER
(EXAMPLE)
Date: ________________________
Tenant: FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally chartered
corporation
Address: _______________________________________________________
_______________________________________________________
Re: Commencement Letter with respect to that certain Lease dated as of
_____________ by and between EOP-TWO LAFAYETTE, L.L.C., a Delaware limited
liability company, as Landlord, and FEDERAL AGRICULTURAL MORTGAGE
CORPORATION, a federally chartered corporation, as Tenant, for 13,652
rentable square feet on the 6th floor of the Building located at 1133 21st
Street, N.W., Washington, D.C. 20036.
Dear:________________________:
In accordance with the terms and conditions of the above referenced Lease,
Tenant accepts possession of the Premises and agrees:
1. The Commencement Date of the Lease is__________________;
2. The Termination Date of the Lease is __________________.
Please acknowledge your acceptance of possession and agreement to the terms
set forth above by signing all 3 counterparts of this Commencement Letter in the
space provided and returning 2 fully executed counterparts to my attention.
Sincerely,
- ---------------------------------
Property Manager
Agreed and Accepted:
Tenant: FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally chartered
corporation
By: ________________________________________
Name: ______________________________________
Title: ______________________________________
Date: _______________________________________
EXHIBIT D
WORK LETTER
This Exhibit is attached to and made a part of the Lease and is entered
into as of the 28th day of June, 2001, by and between EOP-TWO LAFAYETTE, L.L.C.,
a Delaware limited liability company ("Landlord") and FEDERAL AGRICULTURAL
MORTGAGE CORPORATION, a federally chartered corporation ("Tenant") for space in
the Building located at 1133 21st Street, N.W., Washington, D.C. 20036.
1. Landlord shall perform improvements to the Premises substantially in
accordance with the plans prepared by A2 Design, dated April 10, 2001
(the "Plans"). The improvements to be performed by Landlord in
accordance with the Plans are hereinafter referred to as the "Landlord
Work." It is agreed that construction of the Landlord Work will be
completed at Landlord's sole cost and expense (subject to the Maximum
Amount and further subject to the terms of Paragraph 4 below) using
Building standard methods, materials and finishes in accordance with
Article III of the Lease in a good and workmanlike manner. Landlord
and Tenant agree that Landlord's obligation to pay for the cost of
Landlord Work (inclusive of the cost of preparing Plans, obtaining
permits, a construction management fee equal to 5% of the total
construction costs, and other related costs) shall be limited to
$225,000.00 (the "Maximum Amount") and that Tenant shall be
responsible for the cost of Landlord Work, plus any applicable state
sales or use tax, if any, to the extent that it exceeds the Maximum
Amount. Landlord shall enter into a direct contract for the Landlord
Work with a general contractor selected by Landlord from a list of at
least 3 general contractors (one of which shall be Marlo
Construction); Landlord shall disclose to Tenant all bids, mark-ups
and invoices received by Landlord from the approved general
contractor. In addition, Landlord shall have the right to select
and/or approve of any subcontractors used in connection with the
Landlord Work. Landlord's supervision or performance of any work for
or on behalf of Tenant shall not be deemed a representation by
Landlord that such Plans or the revisions thereto comply with
applicable insurance requirements, building codes, ordinances, laws or
regulations, or that the improvements constructed in accordance with
the Plans and any revisions thereto will be adequate for Tenant's use,
it being agreed that Tenant shall be responsible for all elements of
the design of Tenant's plans (including, without limitation,
compliance with law, functionality of design, the structural integrity
of the design, the configuration of the premises and the placement of
Tenant's furniture, appliances and equipment).
2. If Landlord's estimate and/or the actual cost of the Landlord Work
shall exceed the Maximum Amount, Landlord, prior to commencing any
construction of Landlord Work, shall submit to Tenant a written
estimate setting forth the anticipated cost of the Landlord Work,
including but not limited to labor and materials, contractor's fees
and permit fees. Within 3 Business Days thereafter, Tenant shall
either notify Landlord in writing of its approval of the cost
estimate, or specify its objections thereto and any desired changes to
the proposed Landlord Work. If Tenant notifies Landlord of such
objections and desired changes, Tenant shall work with Landlord to
reach a mutually acceptable alternative cost estimate.
3. If Landlord's estimate and/or the actual cost of construction shall
exceed the Maximum Amount (such amounts exceeding the Maximum Amount
being herein referred to as the "Excess Costs"), Tenant shall pay to
Landlord such Excess Costs, plus any applicable state sales or use tax
thereon, upon demand. The statements of costs submitted to Landlord by
Landlord's contractors shall be conclusive for purposes of determining
the actual cost of the items described therein. The amounts payable by
Tenant hereunder constitute Rent payable pursuant to the Lease, and
the failure to timely pay same constitutes an event of default under
the Lease.
4. If Tenant shall request any revisions to the Plans, Landlord shall
have such revisions prepared at Tenant's sole cost and expense and
Tenant shall reimburse Landlord for the cost of preparing any such
revisions to the Plans, plus any applicable state sales or use tax
thereon, upon demand. Promptly upon completion of the revisions,
Landlord shall notify Tenant in writing of the increased cost in the
Landlord Work, if any, resulting from such revisions to the Plans.
Tenant, within 3 Business Days, shall notify Landlord in writing
whether it desires to proceed with such revisions. In the absence of
such written authorization, Landlord shall have the option to continue
work on the Premises disregarding the requested revision. Tenant shall
be responsible for any Tenant Delay in completion of the Premises
resulting from any revision to the Plans. If such revisions result in
an increase in the cost of Landlord Work, such increased costs, plus
any applicable state sales or use tax thereon, shall be payable by
Tenant upon demand. Notwithstanding anything herein to the contrary,
all revisions to the Plans shall be subject to the reasonable approval
of Landlord.
5. Any portion of the Maximum Amount which exceeds the cost of the
Landlord Work or is otherwise remaining after the 180th day
immediately following the Commencement Date, shall accrue to the sole
benefit of Landlord, it being agreed that Tenant shall not be entitled
to any credit, offset, abatement or payment with respect thereto.
6. This Exhibit shall not be deemed applicable to any additional space
added to the Premises at any time or from time to time, whether by any
options under the Lease or otherwise, or to any portion of the
original Premises or any additions to the Premises in the event of a
renewal or extension of the original Term of the Lease, whether by any
options under the Lease or otherwise, unless expressly so provided in
the Lease or any amendment or supplement to the Lease.
Landlord and Tenant have executed this exhibit as of the day and year first
above written.
WITNESS/ATTEST: LANDLORD:
EOP-TWO LAFAYETTE, L.L.C., a Delaware limited
liability company
By: EOP Operating Limited Partnership, a
Delaware limited partnership, its sole
member
By: Equity Office Properties Trust, a
Maryland real estate investment trust,
its general partner
- --------------------------
By: __________________________
Name (print): ________________
Name: __________________________
- ---------------------------
Title: __________________________
Name (print): ________________
WITNESS/ATTEST: TENANT:
FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a
federally chartered corporation
___________________________ By: _____________________________
Name (print): ________________ Name: _____________________________
___________________________ Title: _____________________________
Name (print): ________________
1
EXHIBIT E
ADDITIONAL PROVISIONS
This Exhibit is attached to and made a part of the Lease and is entered
into as of the 28th day of June, 2001, by and between EOP-TWO LAFAYETTE, L.L.C.,
a Delaware limited liability company ("Landlord") and FEDERAL AGRICULTURAL
MORTGAGE CORPORATION, a federally chartered corporation ("Tenant") for space in
the Building located at 1133 21st Street, N.W., Washington, D.C. 20036.
I. Renewal Option.
A. Tenant shall have the right to extend the Term (the "Renewal Option")
for one additional period of 5 years commencing on the day following
the Termination Date of the initial Term and ending on the 5th
anniversary of the Termination Date (the "Renewal Term"), if:
1. Landlord receives notice of exercise of the Renewal Option
("Initial Renewal Notice") not less than 12 full calendar months
prior to the expiration of the initial Term and not more than 15
full calendar months prior to the expiration of the initial Term;
and
2. Tenant is not in default under the Lease beyond any applicable
cure periods at the time that Tenant delivers its Initial Renewal
Notice or at the time Tenant delivers its Binding Notice (defined
below); and
3. No part of the Premises is sublet at the time that Tenant
delivers its Initial Renewal Notice or at the time Tenant
delivers its Binding Notice other than in connection with a
Permitted Sublease; and
4. The Lease has not been assigned prior to the date that Tenant
delivers its Initial Renewal Notice or prior to the date Tenant
delivers its Binding Notice other than in connection with a
Permitted Transfer.
B. The initial Base Rent rate per rentable square foot for the Premises
during the Renewal Term shall equal the Prevailing Market (defined
below) rate per rentable square foot for the Premises.
C. Tenant shall pay Additional Rent (i.e., Expense Excess and Tax Excess)
for the Premises during the Renewal Term in accordance with Article IV
of the Lease.
D. Within 30 days after receipt of Tenant's Initial Renewal Notice,
Landlord shall advise Tenant of the applicable Base Rent rate for the
Premises for the Renewal Term. Tenant, within 15 days after the date
on which Landlord advises Tenant of the applicable Base Rent rate for
the Renewal Term, shall either (i) give Landlord final binding written
notice ("Binding Notice") of Tenant's exercise of its option, or (ii)
if Tenant disagrees with Landlord's determination, provide Landlord
with written notice of rejection (the "Rejection Notice"). If Tenant
fails to provide Landlord with either a Binding Notice or Rejection
Notice within such 15 day period, Tenant's Renewal Option shall be
null and void and of no further force and effect. If Tenant provides
Landlord with a Binding Notice, Landlord and Tenant shall enter into
the Renewal Amendment upon the terms and conditions set forth herein.
If Tenant provides Landlord with a Rejection Notice, Landlord and
Tenant shall work together in good faith for a period of 15 days to
agree upon the Prevailing Market Base Rent rate for the Premises
during the Renewal Term. Upon agreement Tenant shall provide Landlord
with Binding Notice and Landlord and Tenant shall enter into the
Renewal Amendment in accordance with the terms and conditions hereof.
If Landlord and Tenant fail to agree upon the Prevailing Market Base
Rent rate within such 15 day period, Tenant, by written notice to
Landlord (the "Arbitration Notice") within 5 days after the expiration
of such 15 day period, shall have the right to have the Prevailing
Market rate determined in accordance with the following procedures. If
Tenant fails to exercise its right to arbitrate, Tenant's Renewal
Option shall be deemed to be null and void and of no further force and
effect. If Tenant provides Landlord with an Arbitration Notice,
Landlord and Tenant, within 10 days after the date of the Arbitration
Notice, shall each simultaneously submit to the other, in a sealed
envelope, its good faith estimate of the Prevailing Market rate
(collectively referred to as the "Estimates"). If the Prevailing
Market rate is not resolved by the exchange of Estimates, Landlord and
Tenant, within 7 days after the exchange of Estimates, shall each
select an appraiser to determine which of the two Estimates most
closely reflects the Prevailing Market rate for the Premises. Each
appraiser so selected shall be certified as an MAI appraiser or as an
ASA appraiser and shall have had at least 5 years experience within
the previous 10 years as a real estate appraiser working in the
central business district of Washington, D.C., with working knowledge
of current rental rates and practices. For purposes of this Lease, an
"MAI" appraiser means an individual who holds an MAI designation
conferred by, and is an independent member of, the American Institute
of Real Estate Appraisers (or its successor organization, or in the
event there is no successor organization, the organization and
designation most similar), and an "ASA" appraiser means an individual
who holds the Senior Member designation conferred by, and is an
independent member of, the American Society of Appraisers (or its
successor organization, or, in the event there is no successor
organization, the organization and designation most similar). Upon
selection, Landlord's and Tenant's appraisers shall work together in
good faith to agree upon which of the two Estimates most closely
reflects the Prevailing Market rate for the Premises. The Estimate
chosen by such appraisers shall be binding on both Landlord and Tenant
as the Base Rent rate for the Premises during the Renewal Term. If
either Landlord or Tenant fails to appoint an appraiser within the
seven day period referred to above, the appraiser appointed by the
other party shall be the sole appraiser for the purposes hereof. If
the two appraisers cannot agree upon which of the two Estimates most
closely reflects the Prevailing Market within the 15 days after their
appointment, then, within 10 days after the expiration of such 15 day
period, the two appraisers shall select a third appraiser meeting the
aforementioned criteria. Once the third appraiser has been selected as
provided for above, then, as soon thereafter as practicable but in any
case within 14 days, the appraiser shall make his determination of
which of the two Estimates most closely reflects the Prevailing Market
rate and such Estimate shall be binding on both Landlord and Tenant as
the Base Rent rate for the Premises during the Renewal Term. If the
arbitrator believes that expert advice would materially assist him, he
may retain one or more qualified persons, to provide such expert
advice. The parties shall share equally in the costs of the arbitrator
and of any experts retained by the arbitrator. Any fees of any
appraiser, counsel or experts engaged directly by Landlord or Tenant,
however, shall be borne by the party retaining such appraiser, counsel
or expert. In the event that the Prevailing Market rate has not been
determined by the commencement date of the Renewal Term, Tenant shall
pay Base Rent upon the terms and conditions in effect for the Premises
during the final month of the initial Term until such time as the
Prevailing Market rate has been determined. Upon such determination,
the Base Rent for the Premises shall be retroactively adjusted to the
commencement of the Renewal Term for the Premises. If such adjustment
results in an underpayment of Base Rent by Tenant, Tenant shall pay
Landlord the amount of such underpayment within 30 days after the
determination thereof. If such adjustment results in an overpayment of
Base Rent by Tenant, Landlord shall credit such overpayment against
the next installment of Rent due under the Lease and, to the extent
necessary, any subsequent installments until the entire amount of such
overpayment has been credited against Rent.
E. If Tenant is entitled to and properly exercises its Renewal Option,
Landlord shall prepare an amendment (the "Renewal Amendment") to
reflect changes in the Base Rent, Term, Termination Date and other
appropriate terms. The Renewal Amendment shall be sent to Tenant
within 30 Business Days after receipt of the Binding Notice.
An otherwise valid exercise of the Renewal Option shall, at Landlord's
option, be fully effective whether or not the Renewal Amendment is executed.
F. For purposes hereof, "Prevailing Market" shall mean the arms length
fair market annual rental rate per rentable square foot under renewal
leases and amendments entered into on or about the date on which the
Prevailing Market is being determined hereunder for space comparable
to the Premises in the Building and office buildings comparable to the
Building in the central business district of Washington, D.C. The
determination of Prevailing Market shall take into account any
material economic differences between the terms of the Lease and any
comparison lease (including, without limitation, the Base Year for the
Renewal Term), such as rent abatements, construction costs and other
concessions and the manner, if any, in which the Landlord under any
such lease is reimbursed for operating expenses and taxes. The
determination of Prevailing Market shall also take into consideration
any reasonably anticipated changes in the Prevailing Market rate from
the time such Prevailing Market rate is being determined and the time
such Prevailing Market rate will become effective under the Lease.
II. Parking.
A. During the Term, Tenant agrees to lease from Landlord and Landlord
agrees to lease to Tenant a total of 8 unreserved parking spaces and 1
reserved space (collectively, the "Spaces") in the Building garage
("Garage") for the use of Tenant and its employees. No deductions or
allowances shall be made for days when Tenant or any of its employees
does not utilize the parking facilities or for Tenant utilizing less
than all of the Spaces. Tenant shall not have the right to lease or
otherwise use more than the number of reserved and unreserved Spaces
set forth above.
B. During the initial Term, Tenant shall pay Landlord, as Additional Rent
in accordance with Article IV of the Lease, the sum of $204.00 per
month, plus applicable tax thereon, if any, for each unreserved Space
leased by Tenant hereunder, and the sum of $408.00 per month, plus
applicable tax thereon, if any, for the reserved Space leased by
Tenant hereunder, as such rates may be adjusted from time-to-time to
reflect the then current rate for parking in the Garage.
C. Except for particular spaces and areas designated by Landlord for
reserved parking, all parking in the Garage and surface parking areas
serving the Building shall be on an unreserved, first-come,
first-served basis.
D. Landlord shall not be responsible for money, jewelry, automobiles or
other personal property lost in or stolen from the Garage or the
surface parking areas regardless of whether such loss or theft occurs
when the Garage or other areas therein are locked or otherwise
secured. Except as caused by the negligence or willful misconduct of
Landlord and without limiting the terms of the preceding sentence,
Landlord shall not be liable for any loss, injury or damage to persons
using the Garage or the surface parking areas or automobiles or other
property therein, it being agreed that, to the fullest extent
permitted by Law, the use of the Spaces shall be at the sole risk of
Tenant and its employees.
E. Landlord shall have the right from time to time to designate the
location of the Spaces and to promulgate reasonable rules and
regulations in a non-discriminatory manner regarding the Garage, the
surface parking areas, if any, the Spaces and the use thereof,
including, but not limited to, rules and regulations controlling the
flow of traffic to and from various parking areas, the angle and
direction of parking and the like. Tenant shall comply with and cause
its employees to comply with all such rules and regulations as well as
all reasonable additions and amendments thereto.
F. Tenant shall not store or permit its employees to store any
automobiles in the Garage or on the surface parking areas without the
prior written consent of Landlord. Except for emergency repairs,
Tenant and its employees shall not perform any work on any automobiles
while located in the Garage or on the Property. If it is necessary for
Tenant or its employees to leave an automobile in the Garage or on the
surface parking areas overnight, Tenant shall provide Landlord with
prior notice thereof designating the license plate number and model of
such automobile.
G. Landlord shall have the right to temporarily close the Garage or
certain areas therein in order to perform necessary repairs,
maintenance and improvements to the Garage or the surface parking
areas, if any.
H. Tenant shall not assign or sublease any of the Spaces without the
consent of Landlord. Landlord shall have the right to terminate this
parking agreement with respect to any Spaces that Tenant desires to
sublet or assign.
I. Landlord may elect to provide parking cards or keys to control access
to the Garage or surface parking areas, if any. In such event, Landlord
shall provide Tenant with one card or key for each Space that Tenant is
leasing hereunder, provided that Landlord shall have the right to
require Tenant or its employees to place a deposit on such access cards
or keys and to pay a fee for any lost or damaged cards or keys.
J. Landlord hereby reserves the right to enter into a management
agreement or lease with an entity for the Garage ("Garage Operator").
In such event, Tenant, upon request of Landlord, shall enter into a
parking agreement with the Garage Operator and pay the Garage Operator
the monthly charge established hereunder, and Landlord shall have no
liability for claims arising through acts or omissions of the Garage
Operator unless caused by Landlord's negligence or willful misconduct.
It is understood and agreed that the identity of the Garage Operator
may change from time to time during the Term. In connection therewith,
any parking lease or agreement entered into between Tenant and a
Garage Operator shall be freely assignable by such Garage Operator or
any successors thereto.
III. Right of First Offer.
A. Tenant shall have the one-time right of first offer (the "Right of
First Offer") with respect to the 3,899 rentable square feet on the
7th floor of the Building shown on the attached Exhibit F (the
"Offering Space"), which Right of First Offer shall be exercised as
follows: at any time after Landlord has determined that the existing
tenant in the Offering Space will not extend or renew the term of its
lease for the Offering Space (but prior to leasing such Offering Space
to a party other than the existing tenant), Landlord shall advise
Tenant no earlier than 15 months before and no later than 12 months
prior to the expiration of the lease term with the existing tenant of
the Offering Space for (the "Advice") of the terms under which
Landlord is prepared to lease the Offering Space to Tenant for the
remainder of the Term, which terms shall reflect the Prevailing Market
Rate (defined below) for such Offering Space as reasonably determined
by Landlord. Tenant may lease such Offering Space in its entirety
only, under such terms, by delivering written notice of exercise to
Landlord ("Notice of Exercise") within 5 days after the date of the
Advice, except that Tenant shall have no such Right of First Offer and
Landlord need not provide Tenant with an Advice, if:
1. Tenant is in default beyond any applicable cure periods under the
Lease at the time Landlord would otherwise deliver the Advice; or
2. the Premises, or any portion thereof, is sublet at the time
Landlord would otherwise deliver the Advice; or
3. the Lease has been assigned prior to the date Landlord would
otherwise deliver the Advice; or
4. Tenant is not occupying the Premises on the date Landlord would
otherwise deliver the Advice; or
5. the Offering Space is not intended for the exclusive use of
Tenant during the remainder of the term of the Lease; or
6. the existing tenant under lease in the Offering Space is
interested in extending or renewing its lease for the Offering
Space or entering into a new lease for the Offering Space; or
7. the Offering Space is subject to Superior Rights (defined below).
B. 1. The term for the Offering Space shall commence upon the
commencement date stated in the Advice (the "Offering Space
Effective Date") and thereupon such Offering Space shall be
considered a part of the Premises, provided that all of the terms
stated in the Advice shall govern Tenant's leasing of the
Offering Space and only to the extent that they do not conflict
with the Advice, the terms and conditions of this Lease shall
apply to the Offering Space.
2. Tenant shall pay Base Rent and Tenant's Pro Rata Share of
Expenses and Taxes for the Offering Space in accordance with the
terms and conditions of the Advice, which terms and conditions
shall reflect the Prevailing Market Rate for the Offering Space,
as determined in Landlord's reasonable judgment.
3. The Offering Space (including improvements and personalty, if
any) shall be accepted by Tenant in its condition and as-built
configuration existing on the earlier of the date Tenant takes
possession of the Offering Space or as of the Offering Space
Effective Date.
C. The rights of Tenant hereunder with respect to the Offering Space
shall terminate on the earlier to occur of: (i) the day immediately
preceding the 8th anniversary of the Commencement Date (or if Tenant
properly exercises its Renewal Option in accordance with Paragraph I
above, the day immediately preceding the 13th anniversary of the
Commencement Date, (ii) Tenant's failure to exercise its Right of
First Offer within the 5 day period provided in paragraph A above, and
(iii) the date Landlord would have provided Tenant an Advice if Tenant
had not been in violation of one or more of the conditions set forth
in Paragraph A above.
D. 1. If Tenant exercises its Right of First Offer, Landlord shall
prepare an amendment (the "Offering Amendment") adding the
Offering Space to the Premises on the terms set forth in the
Advice and reflecting changes in the Base Rent, Rentable Square
Footage of the Premises, Tenant's Pro Rata Share and other
appropriate terms.
2. A copy of the Offering Amendment shall be (i) sent to Tenant
within a reasonable time after receipt of the Notice of Exercise
executed by Tenant, and (ii) executed by Tenant and returned to
Landlord within 10 days thereafter.
E. For purposes hereof,
1. "Prevailing Market Rate" shall mean the annual rental rate per
square foot for space comparable to the Offering Space in the
Building and buildings comparable to the Building in the central
business district of Washington, D.C. under leases and renewal
and expansion amendments being entered into at or about the time
that Prevailing Market is being determined giving appropriate
consideration to tenant concessions, brokerage commissions,
tenant improvement allowances, and the method of allocating
operating expenses and taxes. Notwithstanding the foregoing,
space leased under any of the following circumstances shall not
be considered to be comparable for purposes hereof: (i) the lease
term is for less than the lease term of the offering space, (ii)
the space is encumbered by the option rights of another tenant,
or (iii) the space has a lack of windows and/or an awkward or
unusual shape or configuration. The foregoing is not intended to
be an exclusive list of space that will not be considered to be
comparable.
2. "Superior Rights" shall mean the existing (as of the date hereof)
expansion rights of any tenant in the Building with respect to
the Offering Space, regardless of whether such rights are
designated as a right of first offer, right of first refusal,
expansion option or otherwise.
IV. Roof Space Dish/Antenna.
A. Tenant shall have the right, in consideration for payments of $200.00
per month (the "Dish/Antenna Payments"), to lease space on the roof of
the Building for the purpose of installing (in accordance with Section
IX.C of the Lease), operating and maintaining a 3 meter dish/antenna
or other communication device approved by the Landlord (the
"Dish/Antenna"). The Dish/Antenna Payments shall constitute Additional
Rent under the terms of the Lease and Tenant shall be required to make
these payments in strict compliance with the terms of Section IV of
the Lease. The exact location of the space on the roof to be leased by
Tenant shall be designated by Landlord and shall not exceed 25 square
feet (the "Roof Space"). Landlord reserves the right to relocate the
Roof Space as reasonably necessary during the Term. Landlord's
designation shall take into account Tenant's use of the Dish/Antenna.
Notwithstanding the foregoing, Tenant's right to install the
Dish/Antenna shall be subject to the approval rights of Landlord and
Landlord's architect and/or engineer with respect to the plans and
specifications of the Dish/Antenna, the manner in which the
Dish/Antenna is attached to the roof of the Building and the manner in
which any cables are run to and from the Dish/Antenna. The precise
specifications and a general description of the Dish/Antenna along
with all documents Landlord reasonably requires to review the
installation of the Dish/Antenna (the "Plans and Specifications")
shall be submitted to Landlord for Landlord's written approval no
later than 20 days before Tenant commences to install the
Dish/Antenna. Tenant shall be solely responsible for obtaining all
necessary governmental and regulatory approvals and for the cost of
installing, operating, maintaining and removing the Dish/Antenna.
Tenant shall notify Landlord upon completion of the installation of
the Dish/Antenna. If Landlord determines that the Dish/Antenna
equipment does not comply with the approved Plans and Specifications,
that the Building has been damaged during installation of the
Dish/Antenna or that the installation was defective, Landlord shall
notify Tenant of any noncompliance or detected problems and Tenant
immediately shall cure the defects. If the Tenant fails to immediately
cure the defects, Tenant shall pay to Landlord upon demand the cost,
as reasonably determined by Landlord, of correcting any defects and
repairing any damage to the Building caused by such installation. If
at any time Landlord, in its sole discretion, deems it necessary,
Tenant shall provide and install, at Tenant's sole cost and expense,
appropriate aesthetic screening, reasonably satisfactory to Landlord,
for the Dish/Antenna (the "Aesthetic Screening").
B. Landlord agrees that Tenant, upon reasonable prior written notice to
Landlord, shall have access to the roof of the Building and the Roof
Space for the purpose of installing, maintaining, repairing and
removing the Dish/Antenna, the appurtenances and the Aesthetic
Screening, if any, all of which shall be performed by Tenant or
Tenant's authorized representative or contractors, which shall be
approved by Landlord, at Tenant's sole cost and risk. It is agreed,
however, that only authorized engineers, employees or properly
authorized contractors of Tenant, FCC (defined below) inspectors, or
persons under their direct supervision will be permitted to have
access to the roof of the Building and the Roof Space. Tenant further
agrees to exercise firm control over the people requiring access to
the roof of the Building and the Roof Space in order to keep to a
minimum the number of people having access to the roof of the Building
and the Roof Space and the frequency of their visits.
C. It is further understood and agreed that the installation,
maintenance, operation and removal of the Dish/Antenna, the
appurtenances and the Aesthetic Screening, if any, is not permitted to
damage the Building or the roof thereof, or interfere with the use of
the Building and roof by Landlord. Tenant agrees to be responsible for
any damage caused to the roof or any other part of the Building, which
may be caused by Tenant or any of its agents or representatives.
D. Tenant agrees to install only equipment of types and frequencies which
will not cause unreasonable interference to Landlord or existing
tenants of the Building. In the event Tenant's equipment causes such
interference, Tenant will change the frequency on which it transmits
and/or receives and take any other steps necessary to eliminate the
interference. If said interference cannot be eliminated within a
reasonable period of time, in the judgment of Landlord, then Tenant
agrees to remove the Dish/Antenna from the Roof Space.
E. Tenant shall, at its sole cost and expense, and at its sole risk,
install, operate and maintain the Dish/Antenna in a good and
workmanlike manner, and in compliance with all Building, electric,
communication, and safety codes, ordinances, standards, regulations
and requirements, now in effect or hereafter promulgated, of the
Federal Government, including, without limitation, the Federal
Communications Commission (the "FCC"), the Federal Aviation
Administration ("FAA") or any successor agency of either the FCC or
FAA having jurisdiction over radio or telecommunications, and of the
state, city and county in which the Building is located. Under this
Lease, the Landlord and its agents assume no responsibility for the
licensing, operation and/or maintenance of Tenant's equipment. Tenant
has the responsibility of carrying out the terms of its FCC license in
all respects. The Dish/Antenna shall be connected to Landlord's power
supply in strict compliance with all applicable Building, electrical,
fire and safety codes. Neither Landlord nor its agents shall be liable
to Tenant for any stoppages or shortages of electrical power furnished
to the Dish/Antenna or the Roof Space because of any act, omission or
requirement of the public utility serving the Building, or the act or
omission of any other tenant, invitee or licensee or their respective
agents, employees or contractors, or for any other cause beyond the
reasonable control of Landlord, and Tenant shall not be entitled to
any rental abatement for any such stoppage or shortage of electrical
power. Neither Landlord nor its agents shall have any responsibility
or liability for the conduct or safety of any of Tenant's
representatives, repair, maintenance and engineering personnel while
in or on any part of the Building or the Roof Space.
F. The Dish/Antenna, the appurtenances and the Aesthetic Screening, if
any, shall remain the personal property of Tenant, and shall be
removed by Tenant at its own expense at the expiration or earlier
termination of this Lease or Tenant's right to possession hereunder.
Tenant shall repair any damage caused by such removal, including the
patching of any holes to match, as closely as possible, the color
surrounding the area where the equipment and appurtenances were
attached. Tenant agrees to maintain all of the Tenant's equipment
placed on or about the roof or in any other part of the Building in
proper operating condition and maintain same in satisfactory condition
as to appearance and safety in Landlord's sole discretion. Such
maintenance and operation shall be performed in a manner to avoid any
interference with any other tenants or Landlord. Tenant agrees that at
all times during the Term, it will keep the roof of the Building and
the Roof Space free of all trash or waste materials produced by Tenant
or Tenant's agents, employees or contractors.
G. In light of the specialized nature of the Dish/Antenna, Tenant shall
be permitted to utilize the services of its choice for installation,
operation, removal and repair of the Dish/Antenna, the appurtenances
and the Aesthetic Screening, if any, subject to the reasonable
approval of Landlord. Notwithstanding the foregoing, Tenant must
provide Landlord with prior written notice of any such installation,
removal or repair and coordinate such work with Landlord in order to
avoid voiding or otherwise adversely affecting any warranties granted
to Landlord with respect to the roof. If necessary, Tenant, at its
sole cost and expense, shall retain any contractor having a then
existing warranty in effect on the roof to perform such work (to the
extent that it involves the roof), or, at Tenant's option, to perform
such work in conjunction with Tenant's contractor. In the event the
Landlord contemplates roof repairs that could affect Tenant's
Dish/Antenna, or which may result in an interruption of the Tenant's
telecommunication service, Landlord shall formally notify Tenant at
least 30 days in advance (except in cases of an emergency) prior to
the commencement of such contemplated work in order to allow Tenant to
make other arrangements for such service.
H. Tenant shall not allow any provider of telecommunication, video, data
or related services ("Communication Services") to locate any equipment
on the roof of the Building or in the Roof Space for any purpose
whatsoever, nor may Tenant use the Roof Space and/or Dish/Antenna to
provide Communication Services to an unaffiliated tenant, occupant or
licensee of another building, or to facilitate the provision of
Communication Services on behalf of another Communication Services
provider to an unaffiliated tenant, occupant or licensee of the
Building or any other building.
I. Tenant acknowledges that Landlord may at some time establish a
standard license agreement (the "License Agreement") with respect to
the use of roof space by tenants of the Building. Tenant, upon request
of Landlord, shall enter into such License Agreement with Landlord
provided that such agreement does not materially alter the rights of
Tenant hereunder with respect to the Roof Space.
J. Tenant specifically acknowledges and agrees that the terms and
conditions of Article XIV of the Lease (Indemnity and Waiver of
Claims) shall apply with full force and effect to the Roof Space and
any other portions of the roof accessed or utilized by Tenant, its
representatives, agents, employees or contractors.
K. If Tenant defaults under any of the terms and conditions of this
Section or the Lease, and Tenant fails to cure said default within the
time allowed by Article XIX of the Lease, Landlord shall be permitted
to exercise all remedies provided under the terms of the Lease,
including removing the Dish/Antenna, the appurtenances and the
Aesthetic Screening, if any, and restoring the Building and the Roof
Space to the condition that existed prior to the installation of the
Dish/Antenna, the appurtenances and the Aesthetic Screening, if any.
If Landlord removes the Dish/Antenna, the appurtenances and the
Aesthetic Screening, if any, as a result of an uncured default, Tenant
shall be liable for all costs and expenses Landlord incurs in removing
the Dish/Antenna, the appurtenances and the Aesthetic Screening, if
any, and repairing any damage to the Building, the roof of the
Building and the Roof Space caused by the installation, operation or
maintenance of the Dish/Antenna, the appurtenances, and the Aesthetic
Screening, if any.
V. Contingency. Landlord and Tenant hereby acknowledge that the Premises is
currently leased to Peterson Consulting, LLC ("Peterson") pursuant to the
terms of a lease (the "Peterson Lease") that is currently scheduled to
expire October 31, 2001 (the "Peterson Termination Date"). Landlord is
currently engaged in good faith discussions with Peterson with respect to
an agreement (the "Peterson Agreement") under which the Peterson Lease
would be terminated with respect to the Premises prior to the Peterson
Termination Date. This Lease is contingent upon the execution of the
Peterson Agreement by Landlord and Peterson on or before June 29, 2001. In
the event that Landlord and Peterson fail to enter into the Peterson
Agreement on or before June 29, 2001, Landlord shall have the right to
cancel this Lease by the delivery of written notice to Tenant on or before
the date on which the Peterson Agreement is entered into by Landlord and
Peterson.
IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as of
the day and year first above written.
WITNESS/ATTEST: LANDLORD:
EOP-TWO LAFAYETTE, L.L.C., a Delaware limited
liability company
By: EOP Operating Limited Partnership, a
Delaware limited partnership, its sole
member
By: Equity Office Properties Trust, a
Maryland real estate investment trust,
its general partner
- --------------------------
By: __________________________
Name (print): ________________
Name: __________________________
- ---------------------------
Title: __________________________
Name (print): ________________
WITNESS/ATTEST: TENANT:
FEDERAL AGRICULTURAL MORTGAGE CORPORATION,
a federally chartered corporation
___________________________ By: _____________________________
Name (print): ________________ Name: _____________________________
___________________________ Title: _____________________________
Name (print): ________________
EXHIBIT F
OFFERING SPACE
This Exhibit is attached to and made a part of the Lease dated as of June
28, 2001, by and between EOP-TWO LAFAYETTE, L.L.C., a Delaware limited liability
company ("Landlord") and FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally
chartered corporation ("Tenant") for space in the Building located at 1133 21st
Street, N.W., Washington, D.C. 20036.
EXHIBIT G
SAMPLE LANDLORD CONSENT TO SUBLEASE
This Consent is entered into as of the ____ day of _________, ____ by and
among EOP-TWO LAFAYETTE, L.L.C., a Delaware limited liability company
("Landlord"), FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federally chartered
corporation ("Sublandlord"), and ____________________________, a(n)
_________________ ("Subtenant").
RECITALS:
A. Landlord, as landlord, and Sublandlord, as tenant, are parties to that
certain lease agreement dated __________________, as amended and/or
assigned by instrument(s) dated __________________, __________________, and
_________________ (collectively, the "Lease") pursuant to which Landlord
has leased to Sublandlord certain premises containing approximately 13,652
rentable square feet (the "Premises") known as suite number 600 on the 6th
floor of the building commonly known as Two Lafayette Centre located at
1133 21st Street, N.W., Washington, D.C. 20036 (the "Building").
B. Sublandlord and Subtenant have entered into (or are about to enter into)
that certain sublease agreement dated __________________ attached hereto as
Exhibit A (the "Sublease Agreement") pursuant to which Sublandlord has
agreed to sublease to Subtenant certain premises described as follows:
______________________________, (the "Sublet Premises") constituting all or
a part of the Premises.
C. Sublandlord and Subtenant have requested Landlord's consent to the Sublease
Agreement.
D. Landlord has agreed to give such consent upon the terms and conditions
contained in this Consent.
NOW THEREFORE, in consideration of the foregoing preambles which by this
reference are incorporated herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord hereby
consents to the Sublease Agreement subject to the following terms and
conditions, all of which are hereby acknowledged and agreed to by Sublandlord
and Subtenant:
1. Sublease Agreement. Sublandlord and Subtenant hereby represent that a true
and complete copy of the Sublease Agreement is attached hereto and made a
part hereof as Exhibit A.
2. Representations. Sublandlord hereby represents and warrants that
Sublandlord (i) has full power and authority to sublease the Sublet
Premises to Subtenant, (ii) has not transferred or conveyed its interest in
the Lease to any person or entity collaterally or otherwise, and (iii) has
full power and authority to enter into the Sublease Agreement and this
Consent. Subtenant hereby represents and warrants that Subtenant has full
power and authority to enter into the Sublease Agreement and this Consent.
3. Indemnity and Insurance. Subtenant hereby assumes, with respect to
Landlord, all of the indemnity and insurance obligations of the Sublandlord
under the Lease, provided that the foregoing shall not be construed as
relieving or releasing Sublandlord from any such obligations.
4. No Release. Nothing contained in the Sublease Agreement or this Consent
shall be construed as relieving or releasing Sublandlord from any of its
obligations under the Lease, it being expressly understood and agreed that
Sublandlord shall remain liable for such obligations notwithstanding
anything contained in the Sublease Agreement or this Consent or any
subsequent assignment(s), sublease(s) or transfer(s) of the interest of the
tenant under the Lease. Sublandlord shall be responsible for the collection
of all rent due it from Subtenant, and for the performance of all the other
terms and conditions of the Sublease Agreement, it being understood that
Landlord is not a party to the Sublease Agreement and, notwithstanding
anything to the contrary contained in the Sublease Agreement, is not bound
by any terms, provisions or representations contained in the Sublease
Agreement and is not obligated to Sublandlord or Subtenant for any of the
duties and obligations contained therein.
5. Administrative Fee. Upon Sublandlord's execution and delivery of this
Consent, Sublandlord shall pay to Landlord the sum of $2,000.00 in
consideration for Landlord's review of the Sublease Agreement and the
preparation and delivery of this Consent.
6. No Transfer. Subtenant shall not further sublease the Sublet Premises,
assign its interest as the Subtenant under the Sublease Agreement or
otherwise transfer its interest in the Sublet Premises or the Sublease
Agreement to any person or entity without the written consent of Landlord,
which Landlord may withhold in its sole discretion.
7. Lease. In no event shall the Sublease Agreement or this Consent be
construed as granting or conferring upon the Sublandlord or the Subtenant
any greater rights than those contained in the Lease nor shall there be any
diminution of the rights and privileges of the Landlord under the Lease.
Without limiting the scope of the preceding sentence, any construction or
alterations performed in or to the Sublet Premises shall be performed with
Landlord's prior written approval and in accordance with the terms and
conditions of the Lease.
8. Services. Sublandlord hereby authorizes Subtenant, as agent for
Sublandlord, to obtain services and materials for or related to the Sublet
Premises, and Sublandlord agrees to pay for such services and materials as
additional Rent under the Lease upon written demand from Landlord. However,
as a convenience to Sublandlord, Landlord may bill Subtenant directly for
such services and materials, or any portion thereof, in which event
Subtenant shall pay for the services and materials so billed upon written
demand, provided that such billing shall not relieve Sublandlord from its
primary obligation to pay for such services and materials.
9. Attornment. If the Lease or Sublandlord's right to possession thereunder
terminates for any reason prior to expiration of the Sublease Agreement,
Subtenant agrees, at the election of Landlord, to attorn to Landlord upon
the then executory terms and conditions of the Sublease Agreement for the
remainder of the term of the Sublease Agreement. If Landlord does not so
elect, the Sublease Agreement and all rights of Subtenant in the Sublet
Premises shall terminate upon the date of termination of the Lease or
Sublandlord's right to possession thereunder.
10. Payments Under the Sublease. If at any time Sublandlord is in default under
the terms of the Lease, Landlord shall have the right to contact Subtenant
and require Subtenant to pay all rent due under the Sublease Agreement
directly to Landlord until such time as Sublandlord has cured such default.
Subtenant agrees to pay such sums directly to Landlord if requested by
Landlord, and Sublandlord agrees that any such sums paid by Subtenant shall
be deemed applied against any sums owed by Subtenant under the Sublease
Agreement. Any such sums received by Landlord from Subtenant shall be
received by Landlord on behalf of Sublandlord and shall be applied by
Landlord to any sums past due under the Lease, in such order of priority as
required under the Lease or, if the Lease is silent in such regard, then in
such order of priority as Landlord deems appropriate. The receipt of such
funds by Landlord shall in no manner be deemed to create a direct lease or
sublease between Landlord and Subtenant. If Subtenant fails to deliver its
Sublease payments directly to Landlord as required herein following receipt
of written notice from Landlord as described above, then Landlord shall
have the right to remove any signage of Subtenant, at Subtenant's cost,
located outside the Premises or in the Building lobby or elsewhere in the
Building and to pursue any other rights or remedies available to Landlord
at law or in equity.
11. Sublandlord Notice Address. If Sublandlord is subleasing the entire
Premises or otherwise vacating the Premises, Sublandlord shall provide
Landlord with a new address for notices to Sublandlord under the Lease. If
Sublandlord fails to provide Landlord with written notice of such new
address, then Landlord may continue to send notices to Sublandlord at the
address(es) provided in, and in accordance with the terms of, the Lease.
12. Counterparts. This Consent may be executed in counterparts and shall
constitute an agreement binding on all parties notwithstanding that all
parties are not signatories to the original or the same counterpart
provided that all parties are furnished a copy or copies thereof reflecting
the signature of all parties.
IN WITNESS WHEREOF, Landlord, Sublandlord and Subtenant have executed this
Consent as of the date set forth above.
WITNESS/ATTEST: LANDLORD:
EOP-TWO LAFAYETTE, L.L.C., a Delaware limited
liability company
By: EOP Operating Limited Partnership, a
Delaware limited partnership, its sole
member
By: Equity Office Properties Trust, a
Maryland real estate investment trust,
its general partner
- --------------------------
By: __________________________
Name (print): ________________
Name: __________________________
- ---------------------------
Title: __________________________
Name (print): ________________
WITNESS/ATTEST: SUBLANDLORD:
FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a
federally chartered corporation
___________________________ By: _____________________________
Name (print): ________________ Name: _____________________________
___________________________ Title: _____________________________
Name (print): ________________
WITNESS/ATTEST: SUBTENANT:
___________________________ ________________________________________, a(n)
________________________________________
Name (print): ________________
By: _____________________________
_______________________________
Name: _____________________________
Name (print): ________________
Title: _____________________________
1
EXHIBIT H
JANITORIAL SPECIFICATIONS
Exhibit 99.2
[Farmer Mac Letterhead]
March 27, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Confirmation of Arthur Andersen LLP's Representations
Ladies and Gentlemen:
The Federal Agricultural Mortgage Corporation (the "Corporation") is filing
its Annual Report on Form 10-K today with consolidated financial statements
audited by Arthur Andersen LLP ("Andersen"). In accordance with Temporary Note
3T to Article 3 of Regulation S-X, this letter confirms that the Corporation has
received certain required representations from Andersen in a letter dated March
26, 2002.
Andersen has represented to the Corporation that the audit was subject to
Andersen's quality control system for the U.S. accounting and auditing practice
to provide reasonable assurance that the engagement was conducted in compliance
with professional standards. Andersen further represented that there was
appropriate continuity of Andersen personnel working on the audit and
availability of national office consultation. Andersen represented that the
availability of personnel at foreign affiliates of Andersen was not relevant to
this audit.
Very truly yours,
/s/ Nancy E. Corsiglia
------------------------------
Nancy E. Corsiglia
Vice President - Finance and
Chief Financial Officer