As filed with
the Securities and Exchange Commission on November 8,
2010
Registration No. 333-166815
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
MUNI FUNDING COMPANY OF
AMERICA, LLC
(Exact name of registrant as
specified in its charter)
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Delaware
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6199
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26-0308831
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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Muni Funding Company of America, LLC
2929 Arch Street
17th Floor
Philadelphia, Pennsylvania 19104
(215) 701-9641
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Michael Barnes
Chairman and Chief Executive Officer
Muni Funding Company of America, LLC
c/o Muni
Capital Management, LLC
780 Third Avenue
29th Floor
New York, NY 10017
(212) 758-6201
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Michael R. Littenberg, Esq.
Schulte Roth & Zabel LLP
919 Third Avenue
New York, NY 10022
(212) 756-2000
Fax: (212) 593-5955
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Alan I. Annex, Esq.
Neil Novikoff, Esq.
Greenberg Traurig LLP
200 Park Avenue
New York, NY 10166
(212) 801-9200
Fax: (212) 801-6400
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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Smaller reporting company o
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
NOVEMBER 8, 2010
PROSPECTUS
$25,000,000
MUNI
FUNDING COMPANY OF AMERICA, LLC
Class A Common
Shares Representing Limited Liability Company
Interests
This is the initial public offering of Class A common
shares of Muni Funding Company of America, LLC. We are
selling
Class A common shares representing limited liability
company interests, which we refer to as our Class A
common shares.
Muni Funding Company of America, LLC is a specialty finance
company that focuses on the investment in the debt instruments
of United States non-profit and municipal entities primarily
through direct and indirect acquisition of tax-exempt mortgage
revenue bonds or other obligations (secured primarily by
interests in real estate), assets derived from such bonds or
other assets as described herein. We are externally managed and
advised by Muni Capital Management, LLC.
Following this offering, Muni Funding Company of America, LLC
will have two classes of shares, Class A common shares and
Class B common shares representing limited liability
company interests, which we refer to as our Class B
common shares. The rights of the holders of Class A
common shares and Class B common shares are identical,
except with respect to voting and conversion rights. Each
Class A common share is entitled to one vote per share.
Each Class B common share is entitled to ten votes per
share and is convertible at any time into one Class A
common share. The Class B common shares are not being
offered by this prospectus and there are currently no plans to
list the Class B common shares on any exchange.
Prior to this offering, there has been no public market for our
Class A common shares. The initial public offering price of
the Class A common shares is expected to be between
$ and
$ per share. We intend to apply to
have our Class A common shares listed on The NASDAQ Stock
Market LLC under the symbol MUNF.
The underwriters have an option to purchase a maximum
of
additional Class A common shares from us to cover
over-allotments of Class A common shares.
Investing in our Class A common shares involves risks.
See Risk Factors beginning on page 9. These
risks include the following:
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We are dependent on our manager and may not find a suitable
replacement if we terminate or our manager terminates our
management agreement.
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We may have a conflict of interest with our manager and its
affiliates, which could result in decisions that are not in the
best interests of our shareholders.
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Maintenance of our Investment Company Act of 1940 exemption
imposes limits on our operations, which may adversely affect our
operations.
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We believe we are a partnership for U.S. federal income tax
purposes and are solely relying on an opinion rendered by
Ashurst LLP in making this determination. Partnership status
requires a facts and circumstances determination and if we are
incorrect in our determination, we would be required to pay tax
at corporate rates on any portion of our net income that does
not constitute tax-exempt income, and distributions by us to our
shareholders would be taxable dividends to the extent of our
current and accumulated earnings and profits.
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Underwriting
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Price to
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Discounts and
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Proceeds to
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Public
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Commissions
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Issuer
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Per Share
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$
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$
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$
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Total
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$
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$
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$
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Delivery of the Class A common shares will be made on or
about ,
2010.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Ladenburg Thalmann &
Co. Inc.
The date of this prospectus
is ,
2010
TABLE OF
CONTENTS
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Page
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1
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1
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2
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9
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12
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27
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80
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80
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80
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You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these
securities in any state where the offer is not permitted. You
should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the
front cover page of this prospectus.
ii
SUMMARY
This summary only highlights the more detailed information
appearing elsewhere in this prospectus. As this is a summary, it
does not contain all of the information that you should consider
in making an investment decision. You should read this entire
prospectus carefully, including the information under Risk
Factors and our financial statements and the related notes
included elsewhere in this prospectus, before investing.
References in this prospectus to we, us,
our, or our company or the
company refer to Muni Funding Company of America, LLC, a
Delaware limited liability company; references to Muni
Capital Management or our manager refer to
Muni Capital Management, LLC, a Delaware limited liability
company and our manager; references to Tricadia
Holdings refer to Tricadia Holdings, L.P., a Delaware
limited partnership; references to Tiptree refer to Tiptree
Financial Partners, L.P. a Delaware limited partnership;
references to Tiptree Capital refer to Tiptree
Capital Management, LLC, a Delaware limited liability company;
and references to Tricadia or Tricadia
Capital refer to Tricadia Capital Management, LLC, a
Delaware limited liability company. We refer to our Class A
common shares and Class B common shares collectively as the
common shares.
Overview
We are a specialty finance company that focuses on the
investment in the debt instruments of United States
non-profit and municipal entities primarily through direct and
indirect acquisition of tax-exempt mortgage revenue bonds or
other obligations (secured primarily by interests in real
estate), assets derived from such bonds or other assets as
described herein. We are or expect to be involved in a variety
of businesses, including holding or acquiring tax-exempt
obligations, mortgage-related holdings, interests in structured
credit entities, taxable municipal bonds (including Build
America Bonds, which are described herein), derivative
instruments, equity interests in real estate (such as affordable
housing partnerships), other equity investments, investments in
taxable tails or tax credits and other assets. We
derive our income from interest on the assets held by us and our
subsidiaries and from any gains on the sale or prepayment of
assets. Our assets are, in general, primarily secured by
mortgages on the real estate held by the obligors. We may also
invest in equity interests in entities that primarily hold real
estate interests, particularly in affordable housing.
We expect that a significant portion (but not all) of the
tax-exempt or other obligations underlying our assets or which
we acquire directly will be issued by or on behalf of one of the
following types of non-profit institutions, state authorities or
other organizations:
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Health Care: general and acute care hospitals,
critical access hospitals, behavioral and primary health care
providers, assisted living facilities, clinics, long-term care
facilities and continuing care retirement communities;
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Educational: primary, secondary, technical and
higher education institutions, including private, public,
charter, religious or independent schools;
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Housing: entities whose primary purpose is to
own or capitalize multifamily or single family residential
rental properties, and state housing authorities which issue
tax-exempt bonds in order to finance residential mortgage loans,
including loans for affordable housing projects, in their
states, as well as military housing bonds;
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Infrastructure: institutions related to power
generation, utilities, roads, transportation, water, sewage and
other aspects of public infrastructure;
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Redevelopment/Tax Increment Financing
Bonds: specially-created tax districts that
generate specific tax revenue from a defined area surrounding a
redevelopment project;
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Cultural: museums, aquariums, zoos, botanical
gardens, performing arts venues (such as opera, symphony, dance
and theater) and public television and radio;
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Research: non-degree granting institutions
whose primary purpose is research;
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Philanthropic: institutions whose primary
purpose is to distribute funds to other entities, generally for
humanitarian purposes; and
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Service/advocacy: organizations that provide
community and social services to different constituent groups,
including social service organizations, professional
associations and religious organizations.
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According to The Bond Buyer, an industry publication,
during calendar year 2009, approximately $409.2 billion of
long-term municipal obligations were issued, of which
approximately $324.7 billion were tax-exempt obligations
and $84.5 billion were taxable obligations. Overall, as of
June 30, 2010, there are approximately $2.8 trillion of
municipal obligations outstanding in the market.
As of June 30, 2010, we directly or indirectly owned bonds
having an aggregate fair market value of $125.5 million,
$107.8 million of which were held in Non-Profit Preferred
Funding Trust II, or NPPF II, and $17.7 million of
which were held directly by us and MFCA Funding, Inc. The
obligors of approximately $29.3 million of these bonds at
fair value are educational organizations (23.4% of total),
approximately $26.9 million are health care/acute care
organizations (21.4%), approximately $32.8 million are
health care/behavioral organizations (26.1%), approximately
$7.7 million are social services organizations (6.1%) and
approximately $28.8 million are other non-profit
organizations (23.0%).
Build America Bonds (BABs) are a recent and growing
segment of the municipal bond market. BABs were authorized by
The American Recovery and Reinvestment Tax Act, enacted on
February 17, 2009. BABs are taxable municipal bonds that
are issued as an alternative to tax-exempt bonds. BABs seek to
lower borrowing costs for bond issuers in the taxable market. In
their current structure, BABs provide tax credits which are most
commonly either a 35% credit for interest expense (although the
credit can be up to 45%) paid directly to the borrower from the
federal government or a refundable tax credit paid to the
bondholder. The BAB program is set to expire on
December 31, 2010, after which no further BAB issuances
will be permitted, unless the program is extended by the federal
government. According to The Bond Buyer, since the
initial authorization of the BAB program, approximately
$148.90 billion of BABs have been issued. BABs typically
offer higher yields than tax-exempt obligations. For a further
discussion of BABs, see Business Our Business
Objective and Strategies Taxable Municipal
Bonds.
Our
Manager
We are externally managed and advised by Muni Capital
Management. Muni Capital Management is a wholly-owned subsidiary
of Tricadia Holdings. Prior to March 18, 2009, we were
managed by Cohen Municipal Capital Management, LLC, or the
Former Manager. In February 2009, Tiptree acquired a controlling
interest in us, and caused the assignment of our Management
Agreement from the Former Manager to Muni Capital Management.
Competitive
Strengths
We believe that we have the following competitive advantages
over other entities with business objectives similar to ours:
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an experienced management team with significant tax-exempt,
municipal and structured finance experience;
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a disciplined acquisition process which is based on detailed
credit analyses of obligors and underlying collateral;
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extensive contacts among originators of unrated tax-exempt
obligations, which we believe will provide us with access to
these types of assets; and
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significant ownership interest by our management team and
alignment of our management teams interests and those of
our shareholders.
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2
Organizational
Chart
The organizational structure of our company, after giving effect
to this offering, is set forth below.
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(1) |
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Percentage ownership of the holders of all common shares assumes
that the underwriter does not exercise its option to purchase
additional shares. Class B shareholders other than Tiptree
include officers and employees of Tiptree, our manager and
affiliates of our manager, and our directors, as well as certain
unaffiliated investors. Tiptree and such individuals may also
purchase Class A common shares pursuant to this offering. |
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We may own interests in additional structured tax-exempt
pass-through (STEP) entities as set forth in
Our Strategy. Prior to the consummation
of this offering, we intend to restructure NPPF II into two
separate trusts. See Business Our
Assets STEP and Other Structured Credit Assets. |
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Percentage ownership of Muni Capital Management includes one
performance share. See Description of
Securities Performance Share. |
Corporate
Information
Our executive offices are located at 2929 Arch Street, 17th
Floor, Philadelphia, Pennsylvania 19104 and our telephone number
is
(215) 701-9641.
The executive offices of our manager are located at 780 Third
Avenue, 22nd Floor, New York, New York 10017 and our
managers telephone number is
(212) 891-5025.
3
The
Offering
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Class A common shares offered |
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shares(1) |
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Shares to be outstanding immediately following this offering |
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Recapitalization |
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Immediately prior to this offering, we will effect a
recapitalization to convert all of our outstanding common shares
into newly designated Class B common shares on a one-for-five
basis (rounded up to the next whole share). After giving effect
to the recapitalization, we will have outstanding no Class A
common shares and 7,483,334 shares of our Class B common
shares. All shares to be sold in this offering will be Class A
common shares. |
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Class A common shares |
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shares(1) |
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Class B common shares |
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shares.
Tiptree, which
owns
Class B common shares, may also purchase Class A
common shares pursuant to this offering. |
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Use of proceeds |
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We intend to use the net proceeds of this offering to implement
our business strategy, including, without limitation, by
investing in the debt instruments of non-profit and municipal
entities primarily through direct and indirect acquisitions of
tax-exempt mortgage revenue bonds, taxable municipal bonds or
other obligations, assets derived from such bonds or other
assets as described herein. We expect that a significant portion
of the tax-exempt or other obligations underlying our assets or
which we acquire directly will be issued by or on behalf of one
of the following types of non-profit institutions, state
authorities, or other organizations: |
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redevelopment/tax increment financing bonds;
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See Business Our Business Objective and
Strategies and Use of Proceeds herein. |
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Voting Rights |
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Each Class A common share entitles its holder to one vote
per share, thereby entitling holders of our Class A common
shares
to
votes in the aggregate immediately after this offering,
representing% of our combined voting power immediately after
this offering. Each Class B common share entitles its
holder to 10 votes per share, thereby entitling holders of
Class B common shares to votes,
representing % of our combined
voting power immediately after this offering. Generally, holders
of our Class A and |
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Class B common shares each have the right to vote on all
matters submitted to a vote of our shareholders and vote
together as a single class. Each Class B common share is
convertible at any time into one Class A common share. |
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Economic Rights |
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Pursuant to our limited liability company agreement, our
Class A common shares and Class B common shares are
entitled to equal economic rights. |
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Distribution Policy |
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We intend to periodically make distributions to holders of our
Class A common shares. All distributions from us will be
made at the discretion of our board of directors, and will
depend on a number of factors affecting us, including our
profitability and timing differences between the recognition of
net income and the receipt of cash. See Distribution
Policy. |
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We may adopt a distribution reinvestment plan under which cash
distributions will be reinvested on behalf of holders of our
common shares, unless such holders opt out of the plan. As a
result, if our board of directors authorizes, and we declare, a
cash distribution, then holders of common shares who have not
opted out of our distribution reinvestment plan will have their
cash distribution reinvested in additional common shares of the
same class, rather than receiving the cash distribution. |
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Management Agreement |
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We are externally managed and have no employees, and therefore
are advised by our manager pursuant to a management agreement,
which is described herein. Our manager is responsible for
providing us with senior management, managing our assets,
administering our business activities and managing our
day-to-day
operations. |
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We do not employ personnel and therefore rely on the resources
of our manager to conduct our operations. Our manager uses the
proceeds from a management fee in part to pay compensation to
its officers and employees who, notwithstanding that certain of
them are also our officers, receive no cash compensation
directly from us. The management fee which we pay to the manager
is comprised of a base management fee and a performance share,
which are more fully described herein. |
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See Management herein for further information. |
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Risk Factors |
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See Risk Factors and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in the Class A common
shares. |
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Proposed NASDAQ Stock Market LLC Symbol |
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MUNF. |
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Available Information |
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We have filed with the Securities and Exchange Commission
(SEC) a registration statement on
Form S-1
under the Securities Act of 1933, as amended (the
Securities Act), with respect to the securities we
are offering by this prospectus. This prospectus does not
contain all of the information included in the registration
statement. For further information about us and our securities,
you should refer to the registration statement and the exhibits
and schedules filed with the registration statement. Whenever we
make |
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reference in this prospectus to any of our contracts, agreements
or other documents, the references are materially complete but
may not include a description of all aspects of such contracts,
agreements or other documents, and you should refer to the
exhibits attached to the registration statement for copies of
the actual contract, agreement or other document. |
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Upon completion of this offering, we will be subject to the
information requirements of the Securities Exchange Act of 1934,
as amended (the Exchange Act), and will file annual,
quarterly and current event reports, proxy statements and other
information with the SEC. You can read our SEC filings,
including the registration statement, over the Internet at the
SECs website at www.sec.gov. You may also read and copy
any document we file with the SEC at its public reference
facility at 100 F Street, N.E.,
Washington, D.C. 20549. |
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You may also obtain copies of the documents at prescribed rates
by writing to the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facilities. |
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We maintain a website at www.munifunding.com and
intend to make all of our annual, quarterly and current reports,
proxy statements and other information available, free of
charge, on or through our website. Information on our website is
not incorporated into or part of this prospectus. You may also
obtain such information free of charge by contacting us in
writing at 2929 Arch Street,
17th
Floor, Philadelphia, Pennsylvania 19104, Attention: Investor
Relations. |
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(1) |
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if the underwriters option to purchase additional shares
is exercised in full. |
Unless otherwise indicated, all information in this prospectus
assumes no purchase of Class A common shares by Tiptree in
this offering and the completion of the recapitalization
described above.
6
SUMMARY
FINANCIAL DATA
The following table presents summary consolidated financial
information. The summary consolidated financial information as
of December 31, 2009 and 2008, for the years ended
December 31, 2009 and 2008 and for the period from
June 12, 2007 (commencement of operations) to
December 31, 2007 has been derived from our audited
consolidated financial statements included elsewhere in this
prospectus. The summary consolidated financial information as of
June 30, 2010 and for the six months ended June 30,
2010 and 2009 has been derived from our unaudited consolidated
financial statements included elsewhere in this prospectus, and
have been prepared on a basis consistent with the respective
audited consolidated financial statements and, in the opinion of
management, include all adjustments, including usual recurring
adjustments, necessary for a fair presentation of that
information for such periods. The financial data presented for
the interim periods are not necessarily indicative of the
results for the full year.
Since the information presented below is only a summary and does
not provide all of the information contained in our historical
consolidated financial statements included elsewhere in this
prospectus, including the related notes, you should read it in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
historical consolidated financial statements, including the
related notes, included elsewhere in this prospectus.
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For the Year Ended
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For the Six Months Ended
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June 12 (inception)
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June 30,
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June 30,
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December 31,
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December 31,
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to December 31,
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2010
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2009
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2009
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2008
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2007
|
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income-investments
|
|
$
|
3,808,113
|
|
|
$
|
4,603,671
|
|
|
$
|
8,581,819
|
|
|
$
|
8,106,531
|
|
|
$
|
|
|
Income-total return swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903,623
|
|
|
|
1,150,382
|
|
Income-other
|
|
|
13,571
|
|
|
|
10,190
|
|
|
|
23,345
|
|
|
|
1,225,434
|
|
|
|
3,937,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,821,684
|
|
|
|
4,613,861
|
|
|
|
8,605,164
|
|
|
|
10,235,588
|
|
|
|
5,087,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee (related party)
|
|
|
696,815
|
|
|
|
322,287
|
|
|
|
962,670
|
|
|
|
1,276,477
|
|
|
|
1,111,993
|
|
Amortization of financing costs
|
|
|
|
|
|
|
34,468
|
|
|
|
194,559
|
|
|
|
38,912
|
|
|
|
|
|
Professional fees(1)
|
|
|
189,001
|
|
|
|
878,442
|
|
|
|
1,102,273
|
|
|
|
2,047,694
|
|
|
|
374,727
|
|
Insurance
|
|
|
9,411
|
|
|
|
193,257
|
|
|
|
266,788
|
|
|
|
313,994
|
|
|
|
96,250
|
|
Directors compensation
|
|
|
15,000
|
|
|
|
43,500
|
|
|
|
58,500
|
|
|
|
391,570
|
|
|
|
65,627
|
|
Other general and administrative(1)
|
|
|
39,719
|
|
|
|
22,266
|
|
|
|
61,341
|
|
|
|
268,986
|
|
|
|
90,260
|
|
Interest expense
|
|
|
92,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash incentive compensation (related party)
|
|
|
7,836
|
|
|
|
464,736
|
|
|
|
471,966
|
|
|
|
876,422
|
|
|
|
942,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,050,489
|
|
|
|
1,958,956
|
|
|
|
3,118,097
|
|
|
|
5,214,055
|
|
|
|
2,681,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
2,771,195
|
|
|
|
2,654,905
|
|
|
|
5,487,067
|
|
|
|
5,021,533
|
|
|
|
2,406,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
(474,191
|
)
|
|
|
(18,957,635
|
)
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,829,108
|
)
|
|
|
(2,710,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
|
|
|
|
|
(474,191
|
)
|
|
|
(18,957,635
|
)
|
|
|
(38,829,108
|
)
|
|
|
(2,710,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
1,991,448
|
|
|
|
20,694,588
|
|
|
|
54,464,711
|
|
|
|
(81,112,777
|
)
|
|
|
|
|
Derivatives
|
|
|
(411,023
|
)
|
|
|
|
|
|
|
27,095
|
|
|
|
7,241,926
|
|
|
|
(17,835,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
|
1,580,425
|
|
|
|
20,694,588
|
|
|
|
54,491,806
|
|
|
|
(73,870,851
|
)
|
|
|
(17,835,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
June 12 (inception)
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net increase (decrease) in net assets resulting from
operations before Performance Share Allocation
|
|
|
4,351,620
|
|
|
|
22,875,302
|
|
|
|
41,021,238
|
|
|
|
(107,678,426
|
)
|
|
|
(18,139,052
|
)
|
Performance Share Allocation
|
|
|
|
|
|
|
(3,283,586
|
)
|
|
|
(5,920,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from
operations after Performance Share Allocation
|
|
$
|
4,351,620
|
|
|
$
|
19,591,716
|
|
|
$
|
35,100,790
|
|
|
$
|
(107,678,426
|
)
|
|
$
|
(18,139,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net increase (decrease) in net assets from operations
per share(2)(3)
|
|
$
|
0.12
|
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
|
$
|
(4.39
|
)
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net increase (decrease) in net assets from operations
per share(2)(3)
|
|
$
|
0.12
|
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
|
$
|
(4.39
|
)
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,252,900
|
|
|
$
|
29,367,353
|
|
|
$
|
9,560,219
|
|
|
$
|
128,116,802
|
|
Investments, at fair value
|
|
|
62,579,435
|
|
|
|
57,971,131
|
|
|
|
15,302,902
|
|
|
|
|
|
Total assets
|
|
|
94,214,818
|
|
|
|
90,668,544
|
|
|
|
29,642,139
|
|
|
|
158,550,698
|
|
Due to our manager (related party)
|
|
|
116,925
|
|
|
|
114,756
|
|
|
|
49,662
|
|
|
|
179,850
|
|
Accrued expenses and other liabilities
|
|
|
261,900
|
|
|
|
338,679
|
|
|
|
354,924
|
|
|
|
234,830
|
|
Net assets
|
|
|
93,452,065
|
|
|
|
90,215,109
|
|
|
|
29,237,553
|
|
|
|
140,339,181
|
|
Net asset value per share
|
|
|
2.50
|
|
|
|
2.41
|
|
|
|
1.64
|
|
|
|
7.83
|
|
Common shares outstanding
|
|
|
37,416,669
|
|
|
|
37,416,669
|
|
|
|
17,847,015
|
|
|
|
17,917,100
|
|
|
|
|
(1) |
|
The year ended December 31, 2009 reflects reclassification
of $138,900 of accounting fees from other general and
administrative to professional fees. |
|
|
|
(2) |
|
Calculation excludes performance share allocation. |
|
|
|
(3) |
|
2008 and 2007 have been revised to reflect the impact of the
June 2009 rights offering. |
8
RISK
FACTORS
An investment in our Class A common shares involves a
number of risks. Before making an investment decision, you
should carefully consider the following risk factors, together
with the other information contained in this prospectus. If any
of the risks discussed in this prospectus were to occur, our
business, financial condition, liquidity and results of
operations could be materially and adversely affected. If this
were to happen, the price of our Class A common shares
could decline significantly, and you could lose all or a part of
your investment. In connection with the forward-looking
statements that also appear in this prospectus, you should also
carefully review the cautionary statement referred to under
Cautionary Statement Regarding Forward-Looking
Statements.
Risks
Related to Our Management and Our Relationship with Our
Manager
We are
dependent on our manager and may not find a suitable replacement
if we terminate or our manager terminates our management
agreement.
We are externally managed by our manager, Muni Capital
Management, pursuant to a management agreement, or Management
Agreement. We and our subsidiaries have no employees and no
separate facilities and are completely reliant on our manager,
who has significant discretion as to the implementation and
execution of our business strategies and risk management
practices and provides or arranges for all of our administrative
services. Investors who are not willing to rely on our manager
should not invest in our Class A common shares. The
employees, systems and facilities of our manager are utilized by
other externally managed companies and funds advised by our
manager and its affiliates, and we
and/or our
manager may not have sufficient access to such employees,
systems and facilities in order for our manager to comply with
its obligations under the Management Agreement. In addition, we
are subject to the risk that our manager will terminate the
Management Agreement and that no suitable replacement will be
found.
We may
have a conflict of interest with our manager and its affiliates,
which could result in decisions that are not in the best
interests of our shareholders.
We are subject to potential conflicts of interest arising out of
our relationship with our manager and its affiliates, including
its parent. All of our officers also serve as officers
and/or
directors of other affiliates of our manager. Accordingly, they
will not be exclusively dedicated to our business. Furthermore,
our Management Agreement with our manager is between related
parties, and its terms, including fees payable, may not be as
favorable to us as if it had been negotiated with an
unaffiliated third party. In addition, our manager has no
fiduciary obligation to our shareholders. Our Management
Agreement with our manager does not prevent our manager and its
affiliates from engaging in additional management or investment
opportunities that compete with us. Affiliates of our manager
may also engage in management or investment opportunities where
such affiliates hold positions in securities or other assets
that increase in value when certain assets we hold decrease in
value. Our manager has and may engage in additional management
or investment opportunities that have overlapping objectives
with ours, and will face conflicts in the allocation of
opportunities between us and its other businesses. Such
allocation is at the discretion of our manager, and there is no
guarantee that this allocation will be made in the best
interests of our shareholders. The ability of our manager and
its officers and employees to engage in other business
activities also will reduce the time those individuals spend
managing our company.
In the future, we may enter into additional transactions with
our manager, its parent company, or its or their affiliates with
the approval of our independent directors. Such transactions may
not be as favorable to us as they would be if negotiated with
independent third parties.
For a further discussion of potential conflicts of interest with
our manager and its affiliates, see Management
Conflicts of Interest.
9
Members
of our management team have competing duties to other entities,
which could result in them not devoting enough time to our
affairs.
The employees of our manager and its affiliates will not spend
all of their time managing our business. They will allocate some
of their time, which may be a material portion, to other
businesses and activities of our managers other
affiliates. Our manager is not required to cause its employees
to devote a specific amount of time to our affairs. Accordingly,
they may not devote sufficient time to our affairs.
The
departure of any of the members of senior management of our
manager may adversely affect our ability to achieve our business
objectives and our Management Agreement does not require the
availability to us of any particular individuals.
To the extent that any of the employees of our manager or its
affiliates that are responsible for the management of our
business cease to be employed by our manager or any such
affiliate for any reason, our manager may not be able to secure
a suitable replacement on our behalf on a timely basis or at
all. The departure of any such individual could adversely affect
our ability to achieve our business objectives. In addition, the
Management Agreement does not obligate that any particular
individuals services be made available to us.
Our
manager will make decisions under very broad guidelines approved
by our board of directors and our board of directors will not
approve individual credit or asset acquisition decisions made by
it.
Our manager is authorized to follow very broad guidelines on
behalf of our company and therefore have great latitude in
determining our asset composition. Our board of directors
periodically reviews these guidelines. However, it does not
review all of our proposed or completed asset acquisitions. In
addition, in conducting periodic reviews of selected assets, the
board may rely primarily on information provided to us by our
manager. Therefore, there can be no assurance that our board of
directors would have approved any particular individual
acquisition or specific investment strategy had it been given
the opportunity to do so.
Our
manager and its affiliates collectively own in excess of a
majority of our combined voting power and may vote in a manner
that does not coincide with the interests of other
shareholders.
As of the date of this prospectus, our manager, its officers and
Tiptree, a diversified financial services holding company
managed by an affiliate of our manager, collectively own 78.22%
of the outstanding Class B common shares,
representing % of our combined
voting power. As a result, our manager, its officers and Tiptree
have controlling voting power in any vote by holders of our
common shares. Our manager, its officers and Tiptree may vote in
a manner that does not coincide with the interests of other
holders of common shares.
Our
managers base management fee is payable regardless of
performance.
Under the Management Agreement, our manager is entitled to a
base management fee from us that is based on the amount of our
equity (which is defined in the Management Agreement to mean,
for any month, the sum of (i) the net proceeds from all
issuances of common shares on or prior to such date after
deducting any underwriting or initial purchasers discounts
or commissions, placement fees and other expenses or costs
relating to the issuance, plus (or minus) (ii) our retained
earnings (or deficit) at the end of such month (without taking
into account any non-cash equity compensation expense incurred
in current or prior periods), which amount is reduced by any
amount that we pay for repurchases of common shares; provided
that the foregoing calculation shall be adjusted to exclude
one-time events pursuant to changes in GAAP as well as certain
non-cash charges), regardless of our performance. For example,
we could pay our manager a base management fee for a specific
period even if we experienced a net loss during the same period.
For example, in 2008, we paid our manager a base management fee
of $1,276,477 and we incurred a loss of $107,678,426 (which
includes net realized losses of $38,829,108 and net unrealized
losses of $73,870,851) for the same period. Our obligation to
pay this fee could hurt both our ability to make distributions
to our shareholders and the market price of our Class A
common shares. In addition, the expenses for which our manager
will be reimbursed are not subject to any cap. For a discussion
of the base management fee and any performance
10
share distributions payable to our manager, see
Management The Management
Agreement Base Management Fee and
Performance Share.
Our
managers incentive compensation may induce it to engage in
higher risk activities.
Our managers compensation and incentive structure may
cause it to acquire higher risk assets or take other risks that
it might otherwise not take with respect to the management of
our company. In addition to its management fee, our manager
holds a performance share, or Performance Share, that will
entitle it to an allocation of our profits and cash
distributions only if we exceed a specified performance
threshold. The opportunity to receive distributions on the
Performance Share may lead our manager to place undue emphasis
on the maximization of net income at the expense of other
criteria, such as management of credit risk or market risk, in
order to generate more cash available for distribution. Assets
with higher yield potential are generally riskier or more
speculative. As consideration for the acquisition of the right
to manage the company from the Former Manager, our manager will,
beginning on March 18, 2012 and until March 18, 2022,
remit to the former manager payments equal to 10% of our
managers revenue in excess of $1 million (including
the above-discussed Performance Share, and less certain
adjustments).
The
termination of our Management Agreement by us will not be
possible under some circumstances and would otherwise be
difficult and costly.
We may terminate the Management Agreement for cause at any time.
For the definition of cause under the Management
Agreement, see Management The Management
Agreement Term and Termination. We may not
terminate the Management Agreement, however, without cause
before December 31, 2010, the date on which its initial
term expires. After December 31, 2010, the Management
Agreement will be automatically renewed for a one-year term on
each anniversary date thereafter unless terminated for cause or
as otherwise described in the Management Agreement. Under the
Management Agreement, after December 31, 2010, we may
terminate the Management Agreement annually upon the affirmative
vote of at least two-thirds of our independent directors, or by
a vote of the holders of a majority of our outstanding common
shares, based upon (1) unsatisfactory performance by our
manager that is materially detrimental to us or (2) a
determination that the management fee payable to our manager is
not fair, subject to our managers right to prevent such a
termination under this clause (2) by accepting a mutually
acceptable reduction of the management fee. Therefore, in some
circumstances, we will be unable to terminate our Management
Agreement. Our manager will be provided 180 days
prior notice of any termination and will be paid a termination
fee equal to three times the average annual base management fee
for the two
12-month
periods immediately preceding the date of termination,
calculated as of the end of the most recently completed fiscal
quarter prior to the date of termination. In addition, we will
be required to redeem the Performance Share for a price equal to
three times the average annual allocations and distributions
paid in respect of such Performance Share for the two
12-month
periods immediately preceding the date of termination. In other
circumstances where we do have the right to terminate the
Management Agreement, termination will result in substantial
cost to us. In addition, we may also incur considerable legal
cost resulting from potential litigation that may arise in
connection with the termination of the management agreement. The
costs and adverse effects of terminating the Management
Agreement make it unlikely that we would terminate the
Management Agreement, particularly without cause.
Our
managers liability is limited under the Management
Agreement, and we have agreed to indemnify our manager against
certain liabilities, which may expose us to significant
expense.
Pursuant to the Management Agreement, our manager will not
assume any responsibility other than to render the services
called for thereunder and will not be responsible for any action
of our board of directors in following or declining to follow
our managers advice or recommendations. Our manager and
its members, managers, officers and employees will not be liable
to us, any of our subsidiaries, our directors, our shareholders
or any shareholders of our subsidiaries for acts performed in
accordance with and pursuant to the Management Agreement, except
by reason of acts constituting bad faith, willful misconduct,
gross negligence, or reckless disregard of their duties under
the Management Agreement. We have agreed to indemnify our
11
manager and its members, managers, officers and employees and
each person controlling our manager with respect to all
expenses, losses, damages, liabilities, demands, charges and
claims arising from acts of such indemnified party not
constituting bad faith, willful misconduct, gross negligence, or
reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement.
We may
pay more fees to our manager if it ceases to manage the
structured tax-exempt pass-through entities in which we acquire
interests or if the portfolio base management fees paid to our
manager are reduced.
We expect that our manager will receive fees in its capacity as
portfolio manager of STEP entities, or other structured credit
entities in which we acquire interests. A STEP is a special
purpose entity that is structured as a partnership for
U.S. federal income tax purposes and issues two or more
classes of certificates backed by a portfolio of tax-exempt
obligations. Our Management Agreement provides that the base
management fee otherwise payable by us to our manager for any
fiscal year will be reduced, but not below zero, by our
proportionate share of the amount of any STEP or other
structured credit portfolio base management fees that are paid
to our manager for such year by the STEP or other structured
credit entities in which we acquire interests, based on the
percentage of the most junior class of certificates we hold in
those STEPs or other structured credit entities provided,
however, that our manager reserves its right, to the extent
contractually permitted, to charge its full base management fee
with respect to any STEPs or other structured credit entities
for which it serves as manager. If the STEP or other structured
credit portfolio base management fees paid to our manager are
reduced, or if the portfolio management agreement between our
manager and a STEP or other structured credit entity in which we
acquire interests is terminated, then the amount of portfolio
base management fees that would be offset to our benefit would
be reduced. If this were to occur, we may pay more fees to our
manager.
If our
manager changes, derivative arrangements into which we may enter
may terminate and financial institutions that provide our credit
facilities, if any, may not provide future financing to
us.
The terms of total return swaps and other derivatives that we
may acquire, as well as the terms of future credit facilities
that we may enter into, may require that our current manager
continue to manage our operations as a condition to the
continuation of the swap or other derivative or credit facility,
and such instruments may terminate or our obligations thereunder
may be accelerated if our manager ceases to act in such
capacity. If that were to occur, we may not be able to enter
into replacement instruments on satisfactory terms or at all or
satisfy our obligations under such instruments.
Risks
Related to Our Business and Our Assets
We
have a limited operating history and, accordingly, it is
difficult to evaluate an investment in the Class A common
shares. We may not be able to operate our business successfully
or generate sufficient revenue to make or sustain distributions
to shareholders.
We commenced operations in June 2007 and our existing manager
became our manager during March 2009. We therefore have a
limited operating history. It is difficult to evaluate our
future prospects and an investment in the Class A common
shares due to our limited operating history. We will be subject
to the risks generally associated with any newer business,
including the risk that we will not be able to successfully
execute our business strategy. Our ability to execute our
business strategy will depend on our ability to identify and
acquire assets that meet our criteria and our access to both
debt and equity financing on acceptable terms. There can be no
assurance that we will generate sufficient revenue from
operations to pay our expenses and make or sustain distributions
to holders of the Class A common shares.
We currently operate, and intend to continue to operate, as a
partnership under the Internal Revenue Code of 1986, as amended,
or the Code, which allows us to pass through our income,
including our federally tax-exempt income, and deductions to
shareholders, and are subject to various rules relating to
partnerships. The partnership rules and regulations,
particularly those relating to publicly traded
partnerships, are highly technical and complex and the
failure to comply with those rules and regulations could prevent
us from
12
qualifying as a partnership such that the company may be
subject to Federal and state income and franchise taxes, items
of income and deduction would not pass through to our
shareholders, our shareholders would be treated for
U.S. federal tax purposes as shareholders in a corporation
and distributions by us to our shareholders would constitute
dividend income taxable to such holders to the extent of our
earnings and profits. Our failure to comply with these rules and
regulations could have a material adverse effect on our results
of operations, financial condition and business. See
Tax Risks below.
We may
not realize gains or income from our assets and our assets may
decline in value.
We seek to generate both current income and capital
appreciation. The assets that we acquire may not appreciate in
value, however, and in fact, may decline in value, and the loans
that we or our affiliates make and debt securities that we
acquire may default on interest
and/or
principal payments. Market values of our assets may decline for
a number of reasons, including liquidity issues, changes in
prevailing market rates, increases in defaults, actual or
perceived credit issues involving one or more borrowers,
increases in voluntary prepayments for those assets that we have
that are subject to prepayment risk, widening of credit spreads,
actions by rating agencies, declines in the value of the
collateral supporting debt and difficulty in valuing assets.
Also, a decline in credit quality of assets where there is a
significant risk that there will be a default or imminent
default may force us to sell certain assets at a loss.
Accordingly, we may not be able to realize gains or income from
our assets and our assets may lose value. Any gains that we do
realize may not be sufficient to offset any losses we
experience. Furthermore, any income that we realize may not be
sufficient to offset our expenses. Except for assets held by our
subsidiaries and variable interest entities consolidated on our
balance sheet, we value our assets at fair value, which may
result in significant fluctuations in our asset values.
The
recent downturn in the credit markets has increased the cost of
borrowing and has made the issuance of STEP certificates or
obtaining financing difficult, each of which may have a material
adverse effect on our results and operations.
Recent economic conditions have been unprecedented and
challenging, and we believe tight credit conditions and slow
growth may continue throughout 2010 and 2011. Beginning with the
third quarter of 2007, and throughout 2008, 2009 and 2010,
continued concerns about the systemic impact of unemployment,
inflation, energy costs, geopolitical issues, the availability
and cost of credit, the U.S., European and other international
mortgage markets, declining residential and commercial real
estate markets, as well as several significant bankruptcies and
government interventions in credit markets, have led to
increased uncertainty and instability in global capital and
credit markets.
As a result of these conditions and interest rate volatility,
the cost and availability of credit has been, and may continue
to be, adversely affected in all markets in which we operate.
Concern about the stability of the markets generally and the
strength of counterparties specifically has led many lenders and
institutional investors to reduce, and in some cases, cease, to
provide funding to borrowers. Continued turbulence in the U.S.,
European and other international markets and economies may
adversely affect our liquidity and financial condition. If these
market and economic conditions continue, they may limit our
ability to issue new or modified senior STEP certificates,
replace or renew maturing liabilities, acquire additional
liabilities or STEP certificates or access the capital markets
to meet liquidity requirements on a timely basis. Any of these
factors could produce adverse effects on our financial condition
and results of operations.
A
significant portion of our assets are illiquid or have limited
liquidity, which may limit our ability to sell those assets at
favorable prices or at all.
Our assets generally are expected to be illiquid or have limited
liquidity. As of June 30, 2010, based on fair value,
substantially all of our credit assets consisted of tax-exempt
bonds and interests in structured transactions that have limited
liquidity. It may be difficult for us to dispose of assets with
limited liquidity rapidly, or at all, or at favorable prices.
Historically, the trading volume in the tax-exempt bond market
has been limited relative to other markets. For example, certain
transfers of our assets are limited to specific types of
investors. In addition, assets with limited liquidity may be
more difficult to value and may trade at a substantial discount
or experience more volatility than more liquid assets.
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We are not limited in the amount of capital used to support, or
the exposure to, any individual asset or any group of assets
with similar characteristics or risks. As a result, our
portfolio may be concentrated in a small number of assets or may
be otherwise undiversified, increasing the risk of loss and the
magnitude of potential losses to us and our shareholders if one
or more of these assets perform poorly.
We may
change our business strategy without shareholder consent, which
may result in a determination to pursue riskier business
activities.
We may change our business strategy at any time without
shareholder consent, which could result in our acquiring assets
or pursuing a business strategy different from, and possibly
riskier than, those contemplated by this prospectus. A change in
our business strategy may increase our exposure to market
fluctuations or certain other risks.
In addition, while we anticipate that the majority of our assets
will consist of tax-exempt bonds, taxable municipal bonds,
structured credit entities and derivatives, we may own other
credit or non-credit assets. These assets may have additional or
different risks from those described herein, including the
possibility that such assets may result in taxable income to
shareholders.
The
declaration of distributions to our shareholders and the amount
of such distributions are at the discretion of our board of
directors and will depend upon certain factors affecting our
operating results, some of which are beyond our
control.
The declaration of distributions to our shareholders and the
amount of such distributions are at the discretion of our board
of directors. Our ability to make and sustain cash distributions
is based on many factors, including our ability to successfully
acquire assets in accordance with our business strategy, our
ability to access additional capital on attractive terms to
finance our assets, the return on our assets, operating expense
levels and certain restrictions imposed by law. Some of these
factors are beyond our control and a change in any such factor
could affect our ability to make distributions. See
Distribution Policy in this prospectus.
We
expect that a significant portion of the municipal obligations
that we own will be unrated or rated below investment grade.
Non-investment grade assets are higher risk assets that may be
more likely to default than investment grade
assets.
We expect that a significant portion of the municipal
obligations that we own will not have public ratings, or will be
rated below investment grade by one or more nationally
recognized statistical rating organizations (Ba1 or lower by
Moodys or BB+ or lower by Fitch or Standard &
Poors). Although these assets generally pay higher rates
of interest than investment grade assets, they generally are
higher risk and may be more likely to default. Other risks
associated with non-investment grade assets include:
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greater vulnerability to adverse changes in the borrowers
business, industry
and/or to
general economic conditions:
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call or redemption features that permit a borrower to prepay the
security before it matures, which may result in the loss of
expected income:
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non-investment grade obligations are often subject to extreme
price fluctuations and negative economic developments may have a
greater impact on these obligations than on other higher-rated
fixed income obligations; and
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non-investment grade obligations may be less liquid and subject
to greater variability in pricing than higher-rated fixed income
obligations even under normal economic conditions.
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As of November 2010, two bonds owned by NPPF II, with an
aggregate par value of $11.50 million in the aggregate have
public ratings as follows: Yampa Valley Medical Center bonds
($7.5 million) are rated BBB by Standard &
Poors only; and Madison Center bonds ($4.0 million)
are rated CCC by Standard & Poors only. The
remainder of our tax-exempt obligations do not have public
ratings. For more information regarding these bonds, see
Business Portfolio Overview.
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Valuations
of some of our assets are inherently uncertain, may be based on
estimates, may fluctuate over short periods of time and/or may
differ from the values that would have been used if a ready
market for these assets existed.
The values of some of the assets in our portfolio are not
readily determinable. We use two independent, third-party
valuation services to value these assets daily at market value,
and changes in the market value of our assets directly impact
our net income. Because such valuations are inherently
uncertain, may fluctuate over short periods of time and may be
based on estimates, such determinations of value may differ from
the values that would have been used if a ready market for these
assets existed or from the prices at which trades occur.
Furthermore, while we believe the third-party valuation services
we have retained are experienced, capable and credentialed, we
do not manage the processes at such services nor have any
control over the values they deliver. As such, we cannot
necessarily or definitively verify the accuracy of such values
generated by such services. The determination of market value
has a material impact on our net earnings through recording
unrealized appreciation or depreciation of assets. The value of
our common shares could be adversely affected if the
determinations of market value of these obligations are
materially higher than the values that we ultimately realize
upon their disposition.
Valuations of certain assets are often difficult to obtain or
are unreliable. In general, dealers and valuation services
heavily disclaim their valuations. Additionally, dealers may
claim to furnish valuations only as an accommodation and without
special compensation, and so they may disclaim any and all
liability for any direct, incidental or consequential damages
arising out of any inaccuracy or incompleteness in valuations,
including any act of negligence or breach of any warranty.
Depending on the complexity and illiquidity of an asset,
valuations of the same asset can vary substantially from one
dealer or pricing service to another. The valuation process has
been particularly difficult recently as market events have made
valuations of certain assets more difficult and unpredictable
and the disparity of valuations provided by third-party dealers
has widened.
The
municipal obligations in which we directly or indirectly hold
interests present certain risks related to the special nature of
such assets.
States, municipalities or public authorities issue tax-exempt
(or, in certain cases, taxable) obligations to obtain funds for
various public purposes. The two principal classifications of
municipal obligations are general obligation and revenue bonds.
General obligation bonds are secured by the issuers pledge
of its faith, credit and specified taxing power for the payment
of principal and interest, whether it be unlimited or limited.
The taxing power of any governmental entity may be limited,
however, by provisions of its state constitution or laws, and a
governmental entitys creditworthiness will depend on many
factors, including:
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global, national, regional
and/or local
macro-economic factors, including the continuing credit crisis
and the overall rate of growth of the U.S. economy;
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unemployment levels within the obligors tax base;
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the size of the obligors tax base, its potential erosion
due to population declines, and its ability to increase taxes
without eroding the tax base;
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natural disasters;
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declines in the obligors industrial base or inability to
attract new industries;
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legislative proposals
and/or voter
initiatives to limit ad valorem real property taxes and the
extent to which the entity relies on federal or state aid;
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access to capital markets; and
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other factors beyond the obligors control.
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Revenue bonds are payable only from the designated revenues
derived from a particular project or, in some cases, from the
proceeds of a special excise tax or other specific revenue
sources such as payments from the user of the project being
financed. Accordingly, the timely payment of interest and the
repayment of principal in accordance with the terms of the
revenue or special obligation bond is dependent upon the
financial performance of the project or the obligor.
Our tax-exempt assets may also include moral
obligation bonds, which typically are issued by special
purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of the
bonds becomes a moral, but not a legal, obligation of the state
or municipality in question.
In addition, our tax-exempt obligations may include Certificates
of Participation, or COPs, issued by government authorities or
entities to finance the acquisition of equipment, land
and/or
facilities or the construction of facilities. COPs represent
participation interests in a lease, an installment purchase
contract or a conditional sales contract relating to the assets
being financed. COPs generally are not backed by the
obligors unlimited taxing power. Instead, payment is
subject to annual appropriation by the obligor, and if
insufficient funds are allocated to the obligation, we may not
receive scheduled distributions of principal and interest in
full. Furthermore, certain COPs are secured by property that
serves the basic functions of government, and therefore
foreclosing on such property could be difficult.
The
municipal obligations in which we directly or indirectly hold
interests will be subject to credit risk, market risk, interest
rate risk, credit spread risk, selection risk, call and
redemption risk and tax risk, and the occurrence of any one of
these risks may materially and adversely affect the value of our
assets or our results of operations.
The municipal obligations in which we directly or indirectly
hold interests will be subject to credit risk, market risk,
interest rate risk, credit spread risk, selection risk, call and
redemption risk and tax risk.
Credit risk is the risk that the obligor will be unable to repay
principal or pay interest when due. In this regard, investing in
non-investment grade obligations is riskier than investing in
higher quality instruments. In addition, market value
fluctuations may be larger and more frequent. Changes in the
underlying obligors credit rating or the markets
perception of its creditworthiness will affect the market value
of our credit assets of that obligor. The degree of credit risk
depends on the terms of the obligation as well as on the
financial condition of the obligor in respect thereof.
Market risk is the risk that one or more markets to which our
assets relate will decline in value, including the possibility
that such markets will deteriorate sharply and unpredictably,
which decline will likely impair the market value of the related
obligations.
With respect to fixed-rate obligations, interest rate risk is
the risk that the market value of these obligations will change
in response to changes in the interest rate environment or other
developments that may affect the municipal bond market
generally. When market interest rates go up, the market value of
existing fixed rate obligations goes down and obligations with
longer maturities are typically affected more by changes in
interest rates than obligations with shorter maturities. Because
market interest rates continue to be at or near their lowest
levels in many years, there is a greater risk that prevailing
interest rates increase in the future and, as a result, that
these obligations will decline in market value. With respect to
floating-rate obligations, interest rate risk is the risk that
defaults on these obligations will increase during periods of
rising interest rates and, during periods of declining interest
rates, that obligors may exercise their option to prepay
principal earlier than scheduled.
Credit spread risk is the risk that the market value of these
obligations will change in response to changes in perceived or
actual credit risk beyond changes that would be attributable to
changes, if any, in interest rates.
Selection risk is the risk that our manager may select assets
that underperform the municipal bond market.
16
Call and redemption risk is the risk that the obligor of a
municipal obligation will exercise its right to call the
obligation for redemption before it matures. If this happens, we
may lose expected income and our shareholders would be exposed
to reinvestment risk.
Tax risk is the risk that (i) interest on a bond expected
to be tax-exempt is taxable either from issuance or starting at
a later date, which may be caused by events occurring after the
date of issuance of a tax-exempt obligation and (ii) we, a
subsidiary or an investment vehicle which we expect to be
characterized as a partnership for tax purposes, will be
characterized as a corporation. See Tax
Risks below.
The amount of public information available about the tax-exempt
assets we expect to directly or indirectly hold is generally
less than that for corporate equities or corporate bonds, and
our results of operations may, therefore, be more dependent on
the analytical abilities of our manager than if we held
interests in other types of assets.
The
structured credit entities in which we may acquire interests and
the counterparties under derivative arrangements to which we are
party may not be able to acquire attractive eligible tax-exempt
bonds.
We may acquire interests in STEPs and other types of structured
credit entities backed by tax-exempt bonds and total return
swaps and other derivative arrangements relating to tax-exempt
bonds. We would therefore be subject to the risk that a
structured credit entity or a derivative counterparty may not be
able to acquire or identify a sufficient amount of eligible
tax-exempt bonds to maximize the efficiency of a STEP issuance,
other structured credit transaction or derivative arrangement.
In addition, disruptions in the capital markets generally, or in
the structured credit or derivatives markets specifically, may
make the issuance of a STEP or another structured credit
transaction or a derivative transaction less attractive or even
impossible. A market environment in which we are unable to
finance the acquisition of tax-exempt bonds on a long-term
basis, issue long-term STEP certificates or invest in derivative
arrangements relating to tax-exempt bonds, or if doing so is not
economical, may adversely affect the value of our assets and our
net income, or our results from operations.
Increases
in interest rates could negatively affect the value of our
assets.
Changes in the general level of interest rates may affect our
net income to the extent there is a difference between the
income earned on our assets in structured credit entities owning
and derivative arrangements, if any, related to municipal bonds,
on the one hand, and the distributions to other holders of
certificates issued by such structured credit vehicles and
payments to our derivative counterparties, on the other. Changes
in the level of interest rates also can affect, among other
things, our ability to successfully implement our strategy and
the value of our assets.
Due to the prolonged economic crisis and recession,
U.S. interest rates have recently been at or near historic
lows. However, it is anticipated that once the overall
U.S. economy displays consistent and pronounced signs of
recovery, U.S. interest rates will increase. In the event
of a significant rising interest rate environment or economic
downturn, our assets may decrease in value
and/or
defaults on our assets may increase and result in losses that
would adversely affect our liquidity and operating results.
Interest rates are highly sensitive to many factors, including
governmental monetary and tax policies, domestic and
international economic and political conditions, and other
factors beyond our control.
In certain cases, our operating results may depend in large part
on differences between the income earned on our assets, net of
credit losses, and our operating expenses. Under certain
circumstances, the income from municipal bonds underlying our
structured credit assets and derivative arrangements, if any,
may respond more slowly to interest rate fluctuations than will
the amount of the distributions to other holders of certificates
issued by such structured credit entities and payments to our
derivative counterparties. Consequently, in such cases, changes
in interest rates, particularly short-term interest rates, may
significantly influence our net income. Increases in these rates
will tend to decrease our net income and the market value of our
assets. Interest rate fluctuations resulting in structured
credit vehicle distributions and derivative payments exceeding
the income on our assets would result in operating losses for us.
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The NPPF II Class A certificates bear interest at a fixed
rate of 3% per annum until the first quarter of 2011, at which
time such certificates may be extended at the same interest
rate, or may possibly be reissued at a different rate. Prior to
the consummation of this offering, we intend to restructure NPPF
II into two separate trusts. See Business Our
Assets STEP and Other Structured Credit Assets.
Most
of our assets will be directly or indirectly subject to risks
particular to real property.
Credit assets that are directly or indirectly secured by a lien
on real property (or the equity interests in an entity that owns
real property) may, upon the occurrence of a default on the
loan, result in the foreclosure of the property. Investments in
real property or real property-related assets are subject to
varying degrees of risk. The value of each property is affected
significantly by its ability to generate cash flow and net
income, which in turn depends on the amount of income that can
be generated net of expenses required to be incurred with
respect to the property. The income from these properties may be
adversely affected by a number of risks, including:
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acts of God, including hurricanes, earthquakes, floods and other
natural disasters, which may result in uninsured losses;
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acts of war or terrorism, including the consequences of
terrorist attacks;
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adverse changes in national and local economic and real estate
conditions (including business layoffs or downsizing, industry
slowdowns and changing demographics);
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an oversupply of (or a reduction in demand for) space in
properties in geographic areas where our assets are concentrated
and the attractiveness of particular properties to prospective
tenants;
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changes in governmental laws and regulations, fiscal policies
and zoning ordinances and the related costs of compliance
therewith and the potential for liability under applicable
laws; and
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costs of remediation and liabilities associated with
environmental conditions such as indoor mold, and the potential
for uninsured or underinsured property losses.
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Many expenditures associated with properties (such as operating
expenses and capital expenditures) cannot be reduced when there
is a reduction in income from the properties. Adverse changes in
these factors may have a material adverse effect on the ability
of our borrowers to pay their loans, as well as on the value
that we can realize from properties we own or acquire, and may
reduce or eliminate our ability to make distributions to
shareholders.
In addition, we frequently estimate the values of real estate
collateral securing real property or real property-related
assets. These estimates are based only on our internal models
and the experience and judgment of our management team. We
typically do not obtain appraisals or other-party evaluation of
real property or real-property related assets. Therefore, our
estimates of the value of such collateral may not be accurate
and may expose us to a greater risk of loss in the event of a
default relating to such properties.
Insurance
on the real estate underlying our credit assets may not cover
all losses.
There are certain types of losses, generally of a catastrophic
nature, such as earthquakes, floods, hurricanes, terrorism or
acts of war, that may be uninsurable or not economically
insurable. Inflation, changes in building codes and ordinances,
environmental considerations and other factors, including
terrorism or acts of war, also might make the insurance proceeds
insufficient to repair or replace a property if it is damaged or
destroyed. Under such circumstances, the insurance proceeds
received might not be adequate to restore our economic position
with respect to the affected real property. Any uninsured loss
could result in both loss of cash flow and a reduction in asset
value.
We may
be exposed to environmental liabilities with respect to
properties to which we take title.
In the course of our business, we may take title to real estate,
and, if we do take title, we could be subject to environmental
liabilities with respect to these properties. In such a
circumstance, we may be held liable to a
18
governmental entity or to third parties for property damage,
personal injury, investigation and
clean-up
costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up
hazardous or toxic substances or chemical releases at a
property. The costs associated with investigation or remediation
activities could be substantial. In addition, the presence of
hazardous substances may adversely affect an owners
ability to sell real estate or borrow using real estate as
collateral. To the extent that an owner of an underlying
property becomes liable for removal costs, the ability of the
owner to make debt payments may be reduced, which in turn may
materially adversely affect the value of the relevant
mortgage-related assets held by us.
We may
not be able to acquire structured credit assets.
As part of our strategy, we expect to acquire interests in STEPs
and other structured credit entities that hold municipal
obligations. Our ability to generate gains and income partly
depends on our ability to acquire interests in such entities. If
market or other factors limit the ability of such entities to
use leverage, they may not be an attractive acquisition
opportunity for us and we may not be able to make acquisitions
or other investments that provide attractive returns.
A
significant portion of our structured credit assets could
consist of junior and residual interests that will be
subordinate in right of payment and in liquidation to the more
senior interests issued by the structured credit
entities.
We expect that a significant portion of any structured credit
assets that we acquire will consist of junior and residual
certificates issued by the structured credit entities, including
junior STEP certificates. These junior and residual certificates
will be subordinated in right of payment and in liquidation to
the other, more senior certificates and will not be secured by
specific assets. Portfolio losses impact the tranches in reverse
seniority order, starting with the most junior tranches. There
can be no assurance that these vehicles will generate sufficient
income from their underlying portfolios of municipal bonds to
pay distributions to us or that they would have sufficient
assets to pay any distributions to which we would otherwise be
entitled in the event of liquidation. As a result, we may not
recover some or all of our investments in these junior and
residual certificates.
The
acquisition of STEP or other structured credit transactions with
collateralization requirements may have a negative impact on our
cash flow and may trigger certain termination provisions in the
related structured transaction documents.
We expect that the terms of certain of our STEP or other
structured credit transactions will generally provide that the
face amount of the related certificates issued by the STEP or
other structured vehicle exceed the principal amount of the
underlying municipal bonds by a certain amount. We anticipate
that the certificates terms will provide that, if certain
delinquencies
and/or
losses exceed the specified levels based on the analysis by the
rating agencies (or any financial guaranty insurer) of the
characteristics of the municipal bonds underlying the
certificates, the required level of collateralization may be
increased or may be prevented from decreasing as would otherwise
be permitted if losses or delinquencies did not exceed those
levels. Other tests, based on delinquency levels or other
criteria, may restrict our ability, as the likely holder of the
most junior certificates, to receive cash distributions from
municipal bonds underlying the certificates. The performance
tests may not be satisfied. If we fail to obtain favorable terms
with respect to delinquency tests, collateralization
requirements, cash flow release mechanisms or other significant
factors set forth in a STEP or other structured credit
transaction regarding the calculation of net income to us, our
earnings may be materially and adversely affected. Furthermore,
if the tax-exempt bonds held in STEPs or other structured credit
vehicles fail to perform as anticipated, our earnings may be
adversely affected and our expenses related to collateralization
requirements or other credit enhancement expenses associated
with our STEPs or other structured holdings will increase.
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A
significant portion of any future STEP entities may be backed by
tax-exempt bonds issued by or on behalf of non-profit
institutions in the health care, educational, housing,
infrastructure, redevelopment/tax increment financing bonds,
cultural, research, philanthropic and service/advocacy sectors
and any adverse trends that affect these sectors may adversely
affect our STEPs and other structured credit entities in
general.
A significant portion of our future STEP issuances and other
structured credit transactions may be backed by municipal bonds
issued by or on behalf of non-profit institutions and state
authorities in the health care, educational, housing,
infrastructure, redevelopment/tax increment financing bonds,
cultural, research, philanthropic and service/advocacy sectors.
Any adverse trends that affect these sectors or the value of
these municipal bonds will adversely impact the value of our
interests in our STEPs and other structured credit entities.
Prepayment
rates on municipal bonds could negatively affect the value of
our assets, which could result in reduced earnings or losses and
negatively affect the cash available for distribution to our
shareholders.
The value of our structured credit assets and derivative
arrangements, if any, related to municipal bonds may be
adversely affected by prepayment rates of the underlying bonds.
For example, higher than expected prepayment rates will likely
reduce the cash flows to the most junior certificates.
Prepayment rates are influenced by changes in current interest
rates and a variety of economic, political, geographic and other
factors beyond our control. Consequently, our earnings may be
materially and adversely affected if the underlying obligors
prepay the municipal bonds at
higher-than-expected
rates.
Borrowers tend to prepay their debt when interest rates fall
below the interest rate at which their debt bears interest. In
these circumstances, the money received from the prepayments may
be reinvested at lower prevailing interest rates. Conversely,
borrowers tend not to prepay their financings when interest
rates increase. Consequently, money that would have otherwise
been received from prepayments would be unable to be reinvested
at the higher prevailing interest rates. This volatility in
prepayment rates may result in reduced earnings or losses for us
and negatively affect the cash available for distribution to our
shareholders.
Interest
rate risk and attempts to mitigate this risk, if any, may cause
greater volatility in our earnings.
We are currently party to an interest rate swap agreement with
Tiptree, the holder of the majority of our outstanding common
shares and an affiliate of our manager, further described in
Business Our Assets Derivative
Assets. Furthermore, the STEPs and other structured credit
entities in which we acquire interests and the counterparties
under derivative arrangements to which we are a party, if any,
may engage in certain hedging transactions in an effort to limit
their exposure to changes in interest rates, which may expose
our assets to risks associated with these transactions. They may
utilize instruments such as forward contracts and interest rate
swaps, caps, collars and floors to seek to hedge against
fluctuations in the relative values of the municipal bonds that
underlie our assets from changes in market interest rates.
Hedging against a decline in the values of these municipal bonds
does not eliminate the possibility of fluctuations in the values
of these bonds or prevent losses if the values of these bonds
decline. However, hedging can establish other positions designed
to gain from those same developments, thereby offsetting the
decline in the value of these bonds. Hedging transactions may
also limit the opportunity for gain if the value of the bonds
increases. Moreover, these entities and counterparties may not
be able to hedge against an interest rate fluctuation that is
generally anticipated at an acceptable price.
The success of these risk mitigation transactions will depend on
the entities and counterparties ability to structure
and execute effective hedges for the underlying municipal bonds,
based on changes to interest rates, credit spreads and other
financial market changes. Therefore, while these entities and
counterparties may enter into these transactions to seek to
reduce interest rate risks, unanticipated changes in interest
rates may result in poorer overall performance for our assets
than if they had not engaged in any hedging transactions. In
addition, the degree of correlation between price movements of
the instruments used in a hedging strategy and price movements
in the underlying municipal bonds being hedged may vary.
Moreover, for a variety of reasons, these entities and
counterparties may not establish a perfect correlation between
such hedging
20
instruments and the bonds being hedged. Any such imperfect
correlation may prevent these entities and counterparties from
achieving the intended hedge and expose our investments to risk
of loss.
Accounting for hedges under generally accepted accounting
principles in the United States, or U.S. GAAP, is extremely
complicated. We may inadvertently fail to account for hedges
properly in accordance with U.S. GAAP on our financial
statements or may fail to qualify for hedge accounting, either
of which could have a material adverse effect on our earnings.
Risk
mitigation arrangements may adversely affect the returns from
our assets and may cause volatility in our earnings, which could
adversely affect cash available for distribution to our
shareholders, and may also result in taxable gains or taxable
income to our shareholders.
The risk mitigation activities of the STEPs and other structured
credit entities in which we acquire interests and the
counterparties under derivative arrangements to which we are a
party will vary in scope based on the level and volatility of
interest rates, the type of underlying municipal bonds held and
other changing market conditions. Interest rate hedging may fail
to protect or could adversely affect us because, among other
things:
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interest rate hedging can be expensive, particularly during
periods of rising and volatile interest rates;
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available interest rate hedging may not correspond directly with
the interest rate risk for which protection is sought;
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the duration of the hedge may not match the duration of the
related asset;
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the credit quality of the party owing money on the hedge may be
downgraded to such an extent that it impairs our structured
credit entities or our derivative counter-partys
ability to sell or assign its side of the hedging
transaction; and
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the party owing money in the hedging transaction may default on
its obligation to pay.
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Such risk mitigation activities may adversely affect the returns
from our assets and may cause volatility in our earnings, which
could adversely affect cash available for distribution to our
shareholders. In addition, such hedging activities may also
result in taxable gains or taxable income to our shareholders.
The
competitive pressures we face as a result of operating in a
highly competitive market could adversely affect
us.
We are subject to significant competition. A substantial number
of entities (including entities managed by our manager and its
other affiliates) compete with us, including specialty finance
companies, banks, insurance companies, mutual funds, hedge
funds, institutional investors, individual investors, lenders
and other entities seeking to invest in municipal bonds. Many of
our competitors are substantially larger than we are and have
considerably greater financial, technical and marketing
resources than we have. Some competitors may have a lower cost
of funds, enhanced operating efficiencies and access to funding
sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety
of opportunities and establish more relationships than we can.
The competitive pressures we face may have a material adverse
effect on us.
Competition may limit the number of suitable opportunities
available to us. It may also result in higher prices, lower
yields and a narrower spread of yields over our borrowing costs,
making it more difficult for us to acquire assets on attractive
terms. In addition, competition for desirable assets could delay
the deployment of the proceeds from this offering, which may in
turn reduce our earnings per share and negatively affect our
ability to maintain our distributions to our shareholders.
21
To the
extent we utilize warehouse credit facilities, secured lines of
credit and other short term financing arrangements in the
future, we may be subject to certain related
risks.
To the extent we utilize warehouse credit facilities, secured
lines of credit and other short term financing arrangements in
the future, we may be subject to certain risks relating to such
financing arrangements, including:
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these financing arrangements may subject us to an increased risk
of loss, adversely affecting our returns and reducing cash
available for distribution to our shareholders;
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interest expense on such arrangements will not be deductible by
us;
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an increase in our borrowing costs of these financing
arrangements relative to the income we receive on our assets may
adversely affect our profitability, which may negatively affect
cash available for distribution to our shareholders;
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these financing arrangements may contain covenants that restrict
our operations, and any default under these arrangements would
inhibit our ability to grow our business and increase
revenues; and
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we could suffer losses beyond our committed capital under
warehouse facilities, which could adversely affect us.
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Furthermore, any future indebtedness that we incur may contain
restrictive covenants that impose operating and other
restrictions on us or one or more of our subsidiaries, including
restrictions on our ability to make distributions to
shareholders. These covenants may limit our ability, or the
ability of one or more of our subsidiaries, to:
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incur or guarantee additional debt;
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create or incur liens;
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engage in mergers and sales of substantially all of our assets;
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make loans, acquisitions or investments;
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make distributions on our shares unless we maintain specified
financial covenants;
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engage in transactions with affiliates; and
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otherwise engage in operations as currently contemplated or as
may be contemplated in the future.
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We
rely, in part, on analytical models and other data to analyze
potential asset acquisition and disposition opportunities and to
manage our portfolio. Such models and other data may be
incorrect, misleading or incomplete, which could cause us to
purchase assets that do not meet our expectations or to make
asset management decisions that are not consistent with our
strategy.
Our manager relies on analytical models (both proprietary and
third-party models), and information and data supplied by third
parties. These models and data may be used to value assets or
potential asset acquisitions and dispositions and are also used
in connection with our asset management activities. If these
models and data prove to be incorrect, misleading or incomplete,
any decisions made in reliance thereon could expose us to
potential risks. For example, data may be incorrect, incomplete
or misleading, may be modeled based on simplifying assumptions
that lead to errors, may be incorrectly reported or subject to
interpretation or may be outdated. Our managers reliance
on these models and data may induce it to purchase certain
assets at prices that are too high, to sell certain other assets
at prices that are too low, or to miss favorable opportunities.
Similarly, any hedging activities, such as total return swaps,
that are based on faulty models and data may prove to be
unsuccessful.
Some models may be predictive in nature. The use of predictive
models has inherent risks. For example, such models may
incorrectly forecast future behavior, leading to potential
losses. In addition, the predictive models used by our manager
may differ substantially from those models used by other market
participants, with the result that valuations based on these
predictive models may be substantially higher or lower for
22
certain assets than actual market prices. Furthermore, because
predictive models are usually construed based on historical data
supplied by third parties, the success of relying on such models
may depend heavily on the accuracy and reliability of the
supplied historical data, and, in the case of predicting
performance in scenarios with little or no historical precedent
(such as extreme broad-based declines in home prices or deep
economic recessions), such models may have little or no
predictive value.
All valuation models rely on correct market data inputs. If
incorrect market data is entered into even a well-founded
valuation model, the resulting valuations will be incorrect.
However, even if market data is inputted correctly, model
prices will often differ substantially from market prices,
especially for securities with complex characteristics or whose
values are particularly sensitive to various factors. If our
market data inputs are incorrect or our model prices differ
substantially from market prices, we may be adversely effected.
Accounting
rules for certain of our transactions are highly complex and
involve significant judgment and assumptions. Changes in
accounting rules, interpretations or assumptions could adversely
impact our financial statements.
Accounting rules for transfers of financial assets, structured
credit transactions, consolidation of variable interest
entities, and other aspects of our anticipated operations are
highly complex and involve significant judgment and assumptions.
These complexities could lead to delay in preparation of
financial information. Changes in accounting rules,
interpretations or assumptions could impact our financial
statements, possibly materially.
We may
acquire total return swaps and other derivative arrangements
that could expose us to contingent liabilities in the
future.
Part of our strategy may involve entering into total return
swaps and other derivative arrangements that could require us to
fund cash payments in certain circumstances such as the early
termination of the swap or other derivative caused by an event
of default or other early termination event, or the decision by
a counterparty to request margin securities we are contractually
owed under the terms of the swap or other derivative. The amount
due would be equal to the unrealized loss of the open swap
positions with the respective counterparty and could also
include other fees and charges. These economic losses would be
reflected in our results of operations and our ability to fund
these obligations would depend on the liquidity of our assets
and access to capital at the time. The need to fund these
obligations could adversely impact our financial condition.
Our
investments in total return swaps, if any, may subject us to
certain additional risks. Furthermore, we may not be able to
renew any total return swaps that we may enter into, which could
adversely impact our investment strategy.
The total rate of return of a portfolio of municipal bonds on
which a swap is based may exhibit substantial volatility and may
be positive or negative in any given period. In the event that
the total rate of return is negative and we are receiving the
total rate of return of that portfolio of municipal bonds in our
part of a swap agreement, we would be required to make a payment
to the counterparty in addition to that required on the other,
generally floating rate, part of the swap agreement. Also,
unusual market conditions affecting the portfolio of municipal
bonds on which the swap is based may prevent the total rate of
return from being calculated, in which case other provisions in
the swap agreement may be invoked which could cause us to lose
some of the anticipated benefit from the swap or otherwise
reduce our return.
In addition, we will not be treated as the owner of the
underlying portfolio of municipal bonds subject to the total
return swaps in which we may invest for tax or financial
reporting purposes, and any income earned by us from any total
return swap will be taxable to us. Moreover, the terms of any
swap agreement will not contractually obligate the swap
counterparty to own the municipal bonds in the reference
portfolio or, in the event such counterparty does own such
reference bonds, to sell such bonds to us or a STEP and the
counterparty could sell the municipal bonds in the secondary
market or retain them.
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Moreover, in response to recent market conditions, federal and
state legislators have discussed the proposal and enactment of
certain regulatory reforms that may affect the derivatives
market. If applicable laws and regulations are passed that
affect total return swaps or other derivative instruments that
may be within our strategy, our rate of return on such assets,
or our ability to enter into swaps could be adversely affected.
Furthermore, we may wish to renew the total return swaps, which
are for specified terms, as they mature. However, there is a
limited number of providers of such swaps, and there is no
assurance the initial swap providers will choose to renew the
swaps, and, if they do not renew, that we would be able to
obtain suitable replacement providers.
We may invest, through our wholly-owned subsidiary, in a limited
number of total return swaps and our business and our financial
performance may be materially harmed if those resources are not
available to us.
We
have in the past invested, and may in the future invest, in the
residual certificates issued by tender option bond trusts and
may be subject to risks relating to our ownership of residual
certificates issued by such tender option bond
trusts.
In a typical tender option bond program, municipal bonds
identified by a dealer are deposited in a special purpose
vehicle, usually a trust. The tender option bond trust issues
two classes of securities: (i) floating rate certificates,
with an aggregate face value approximately equal to the market
value of the underlying municipal bonds, entitling the holders
to a variable interest rate based on prevailing short-term
tax-exempt rates, which is reset periodically by a remarketing
agent based on changes in short-term interest rates, and
(ii) a residual certificate, which establishes an
economically leveraged position in the underlying municipal
bonds.
As a holder of residual certificates issued by tender option
bond trusts, we could incur significant costs in connection with
the optional or mandatory tender of floating rate certificates
when such floating rate certificates are subject to redemption
at a purchase price of 100% of their face amount plus accrued
and unpaid interest.
Each holder of floating rate certificates has the right to
exercise a tender option, which entitles such holder upon proper
notice to tender its certificates for redemption at a purchase
price of 100% of the face amount thereof plus accrued and unpaid
interest. If the remarketing agent is unable to remarket such
tendered certificates to another holder on or before the
required redemption date, the tender agent purchases such
certificates with the proceeds of a draw on a liquidity facility
arranged in advance by the dealer. The holder of the residual
certificate typically has an obligation to reimburse the
liquidity provider for any such draws on the liquidity facility.
There are also a number of circumstances under which the
floating rate certificates are subject to mandatory redemption.
These events typically include, among others:
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the designated termination date (typically, 80% of the expected
life of the underlying municipal bonds, determined either to
maturity or first par call, if such bonds are deposited in the
trust at a premium);
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the scheduled expiration date of the liquidity facility, unless
earlier renewed or replaced with a substitute liquidity facility;
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a change in the interest rate mode applicable to the floating
rate certificates, subject to the right of the holders of the
floating rate certificates to elect to retain their
certificates, notwithstanding such change;
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the business day immediately preceding the date of effectiveness
of a substitute liquidity facility, subject to a similar
election to retain;
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an event of default under the liquidity facility;
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a withdrawal, suspension or downgrade of the rating of the
underlying municipal bonds below a designated ratings threshold;
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reasonable grounds for the belief that the registration of the
trust is required under the Investment Company Act of 1940, as
amended (the Investment Company Act) or that
certificates have been sold in violation of the Securities Act;
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reasonable grounds for the belief that the trust may be subject
to material tax liabilities;
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a determination that the interest on any underlying municipal
bonds that are tax-exempt bonds, as applicable, is includable in
the gross income of the owners thereof, whether or not such
determination is final or appealable under applicable procedural
law; and
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the bankruptcy of the liquidity provider.
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Except in cases where an election to retain has been exercised
by a holder of floating rate certificates, the occurrence of any
of the foregoing mandatory tender events triggers a sale of the
underlying municipal bonds. Whether or not the proceeds of any
such sale of bonds are sufficient to redeem the tendered
floating rate certificates in full, at a price equal to 100% of
their face amount plus accrued and unpaid interest, the holder
of the residual certificate typically has an obligation to
reimburse the liquidity provider for any draw on the liquidity
facility made in connection with such mandatory tender of
floating rate certificates. In addition, upon redemption of our
residual certificate, we may be unable to reinvest the
redemption proceeds in other assets within a reasonable period
of time.
There are also a number of circumstances under which the right
of the holders of floating rate certificates to exercise the
tender option terminates, triggering the redemption of the
floating rate certificates (and related residual certificate)
and the sale or distribution in kind of the underlying municipal
bonds. These events typically include:
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the bankruptcy of the issuer or obligor of the underlying
municipal bonds and, if applicable, any other specified
principal credit source;
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an uncured failure by the issuer (and, if applicable, such other
principal credit source) to pay interest in respect of the
underlying municipal bonds;
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a withdrawal, suspension or downgrade of the rating of the
underlying municipal bonds (and, if applicable, such other
principal credit source) below investment grade; and
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a determination that the interest on the underlying municipal
bonds is includable in the gross income of the owners thereof
that is final and nonappealable under applicable procedural law.
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The occurrence of any of the foregoing tender option termination
events triggers a sale of the underlying municipal bonds. If the
proceeds of any such sale of bonds are not expected to be
sufficient to redeem the tendered floating rate certificates
(and the related residual certificate) in full, the affected
bonds are distributed in kind to the holders of certificates, in
redemption thereof, pro rata based on the respective face
amounts of their floating rate or residual certificates. Under
such circumstances, the value of the municipal bonds distributed
to us in kind will likely be less than the original cost of the
redeemed residual certificate. In addition, even if our residual
certificate has been redeemed in full, we may be unable to
reinvest the redemption proceeds in other assets within a
reasonable period of time.
In addition, our investments in the residual certificates issued
by tender option bond trusts may make us subject to certain
collateral requirements and asset tests related to our
obligations under the related liquidity reimbursement
agreements, hedge agreements or other synthetic instruments. Our
failure to meet these collateral requirements or asset tests may
constitute a default under the related agreements and could
result in substantial payments or losses by us, depending on
market conditions at the time of default. Our failure to meet
these collateral requirements or asset tests may constitute a
default under the related agreements and could result in
substantial payments or losses by us, depending on market
conditions at the time of default. In addition, some of the
residual certificates are callable by the tender option bond
trust upon the occurrence of certain events. These events
typically include bankruptcy of the tender option bond trust,
non-payment of any of the underlying tax-exempt bonds, a
downgrading of the rating of the underlying tax-exempt bonds and
a change in the tax treatment of the underlying tax-exempt
bonds. If any residual certificates are redeemed, the
25
redemption price may be less than the original cost of the
redeemed residual certificates. Also, upon redemption of a
residual certificate in which we have an interest, we may be
unable to invest in other assets within a reasonable period of
time.
Actual
default rates on the categories of credit assets held by us may
be higher than historical default rates.
The historical performance of the types of assets that we hold
or may hold is not necessarily indicative of their future
performance. Should increases in default rates or decreases in
recovery rates occur with respect to the types of assets that we
hold, the actual default rates with respect to the assets in our
portfolio may be significantly greater than, or the actual
recovery rates with respect to the assets in our portfolio may
be significantly less than, the hypothetical default rates and
recovery rates that we used in purchasing these assets. If this
were to occur, any debt issued by special purpose vehicles or
alternative instruments used to finance these assets may be
impaired and any subordinated debt and equity interests that we
hold in any such vehicles may not receive distributions.
The
credit ratings of the rated assets we hold are only opinions and
not guarantees of future performance or market
value.
Some, but not all, of the assets we may hold may have public
credit ratings. Credit ratings of assets and securities that we
may hold represent the rating agencies opinions regarding
the credit quality of those assets and are not a guarantee of
future performance. Rating agencies attempt to evaluate the
safety of principal and interest payments and do not evaluate
the risks of fluctuations in market value; therefore, ratings
may not accurately reflect the true risks of holding an asset.
In addition, rating agencies may fail to make timely changes in
credit ratings in response to subsequent events, so that an
obligors current financial condition may be better or
worse than a rating indicates. The credit ratings of the rated
assets we purchase also may change over time.
We may
acquire Build America Bonds, a form of taxable municipal bonds,
which have certain risks.
We may seek to acquire Build America Bonds, which are a recent
and growing segment of the municipal bond market. Build America
Bonds provide a tax credit for interest expense which is most
commonly a 35% credit (though the credit can be up to 45%)
either paid directly to the borrower from the federal government
or in the form of a refundable tax credit paid to the
bondholder. If paid directly, the borrower must apply for the
tax credit each year and failure to do so could result in
non-payment of the tax credit. In addition, in certain
circumstances the federal government may offset the subsidy
payment to satisfy other obligations due to the federal
government (such as tax obligations), increasing the interest
cost to the obligor, reducing the obligors cash flow to
make payments on the obligation. In addition, a bond must meet
certain requirements set forth in the Internal Revenue Code in
order to qualify as a Build America Bond. There can be no
assurance that the IRS will not seek to disqualify any
particular Bond as a Build America Bond. Furthermore, the BAB
program is set to expire on December 31, 2010, after which
no further BAB issuances will be permitted, unless the program
is extended by the federal government. There can be no assurance
that the BAB program will be extended.
Our
due diligence may not reveal all of an entitys liabilities
and may not reveal other weaknesses in their
operations.
Before we make an investment, we will rely on our manager to
assess the potential acquisition. There can be no assurance that
our manager will conduct any specific level of due diligence, or
that, among other things, our managers due diligence
processes will uncover all relevant facts or that any purchase
will be successful, which could result in losses on these
assets, which, in turn, could adversely affect our business,
financial condition and results of operations and our ability to
make distributions to our shareholders.
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We are
highly dependent on information systems provided by third
parties.
Our business is highly dependent on communications and
information systems that are supplied
and/or
managed by third parties. Any failure or interruption of our
systems could cause delays or other problems in our activities,
which could have a material adverse effect on our operating
results and negatively affect the market price of our
Class A common shares and our ability to pay distributions.
All of
our back office operations are outsourced.
We rely on our manager and its affiliates to perform
substantially all of our back office operations. A portion of
these services are in turn provided to them (or their
affiliates) by Mariner Investment Group, LLC, or Mariner,
pursuant to a services agreement that may be terminated without
our consent. If our manager ceases to act in that capacity, we
would be required to make alternative arrangements for the
performance of these services. In addition, if the services
agreement between Mariner and our affiliate is terminated, we
may not be able to obtain these services at reasonable rates or
at all. We do not have a written contract with Mariner with
respect to the services that it provides to us directly, so it
may cease providing services to us at any time without cost or
penalty.
Regulatory
and Legal Risks of Our Business
Maintenance
of our Investment Company Act exemption imposes limits on our
operations, which may adversely affect our
operations.
We intend to continue to conduct our operations so that we are
not required to register as an investment company under the
Investment Company Act. We expect many of our subsidiaries to
rely on the exemptions from registration under:
(i) Section 3(c)(5)(C) of the Investment Company Act
available to companies primarily engaged in purchasing or
otherwise acquiring mortgages and other liens on, and interests
in, real estate; or (ii) Sections 3 (c)(5)(A) or
(B) of the Investment Company Act available to companies
primarily engaged in sales financing, factoring or making loans
to manufacturers or retailers for purchases of specified
merchandise or services (together, with companies relying on
Section 3(c)(5(C), 3(c)(5) Businesses). In
turn, we intend to conduct our operations so that we qualify for
the exception from the definition of investment company provided
for under Section 3(c)(6) of the Investment Company Act
with respect to diversified holding companies primarily engaged
in 3(c)(5) Businesses and other businesses that are exempted
from regulation under the Investment Company Act. Because the
SEC staff has issued little interpretive guidance with respect
to Section 3(c)(6), there can be no assurance that the SEC
or its staff will not change its view on the interpretation of
Section 3(c)(6) or that they would otherwise agree with our
analysis, which, in either case, could cause us to adjust our
investment strategy. Any such adjustment to our investment
strategy would have a material adverse effect on us. In
addition, certain of our subsidiaries, including certain STEP
issuers, may also seek to rely on the Investment Company Act
exemption under
Rule 3a-7
provided to certain structured finance vehicles that pool
income-producing assets and issue securities backed by those
assets. Such structured vehicles may not engage in portfolio
management practices resembling those employed by mutual funds.
As a result of these restrictions, certain of our STEP
subsidiaries may suffer losses on their assets and we may suffer
losses on our investments in those STEP subsidiaries.
If we are required to register under the Investment Company Act,
we would become subject to substantial regulation with respect
to our capital structure (including our ability to use
leverage), management, operations, transactions with affiliated
persons (as defined in the Investment Company Act), and
portfolio composition, including restrictions with respect to
diversification and industry concentration and other matters.
Registration under the Investment Company Act would likely limit
our ability to follow our current investment and financing
strategies, impair our ability to make distributions to our
common shareholders and, as a result, cause a decline in the
price of our common shares. See Business
Regulatory Environment.
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Investors
will not have the protections associated with ownership of
shares in an investment company registered under the Investment
Company Act.
We are not registered as an investment company under the
Investment Company Act. Consequently, investors in the Company
will not have the regulatory protections provided to investors
in investment companies.
Tax
Risks
We
believe we are a partnership for U.S. federal income tax
purposes and are solely relying on an opinion rendered by
Ashurst LLP in making this determination. Partnership status
requires a facts and circumstances determination and if we are
incorrect in our determination, we would be required to pay tax
at corporate rates on any portion of our net income that does
not constitute tax-exempt income, and distributions by us to our
shareholders would be taxable dividends to the extent of our
current and accumulated earnings and profits.
We currently classify ourselves as a partnership for
U.S. federal income tax purposes. So long as we qualify as
a partnership we will be able to pass through our income,
including our federally tax-exempt income, and deductions to our
shareholders. Our qualification as a partnership for
U.S. federal income tax purposes involves the application
of numerous technical provisions under which there is a lack of
direct authority. In general, if a partnership is publicly
traded (as defined in the Code) it will be treated as a
corporation for U.S. federal income tax purposes. We expect
to be treated as a publicly traded partnership. A publicly
traded partnership will, however, be taxed as a partnership, and
not as a corporation for U.S. federal income tax purposes,
so long as 90% or more of its gross income for each taxable year
constitutes qualifying income within the meaning of
Section 7704(d) of the Code and the partnership is not
registered under the Investment Company Act. We refer to this
exception as the qualifying income exception.
Qualifying income generally includes rents, dividends, interest
and capital gains from the sale or other disposition of stocks,
bonds and real property. In addition, qualifying income
generally also includes income from a notional principal
contract (which may include certain derivatives like a total
return swap) if the income from the reference obligation would
be qualifying income. In determining whether interest is treated
as qualifying income for purposes of these rules, interest
income derived from a financial business and income
and gains derived by a dealer in securities are not
treated as qualifying income. We believe that we have and will
continue to act as an investor with respect to our investments
and that we have not and will not engage in a financial
business, although there is no clear guidance on what
constitutes a financial business under the tax law. We have
taken the position that for purposes of determining whether we
are in a financial business, portfolio investing activities that
we engage in have not and will not cause us to be engaged in a
financial business or to be considered a dealer in
securities and that the activities of our taxable subsidiaries
have not been (and will not be) attributable to us. Prospective
investors should carefully note that we could be treated as if
we were engaged in a financial business if the activities of our
taxable subsidiaries, such as MFCA Funding, Inc., were
attributed to us. It should be noted that such subsidiaries are
taxable C corporations subject to income tax on their net
income, and such subsidiaries are intended to engage in
significant transactions with third parties in the operation of
their businesses. Contrary to our belief, the IRS could assert
that our activities constitute a financial business. If our
activities constitute a financial business or cause us to be
treated as a dealer, there is a substantial risk that more than
10% of our gross income would not constitute qualifying income.
If less than 90% of our gross income constitutes qualifying
income, for any reason (including as a result of a taxable
subsidiarys financing business being attributed to us),
other than a failure that is determined to be inadvertent and
that is cured within a reasonable time after discovery, or if we
were registered under the Investment Company Act, our items of
income and deduction would not pass through to our shareholders
and our shareholders would be treated for U.S. federal
income tax purposes as stockholders in a corporation. We would
be required to pay income tax at corporate rates on any portion
of our net income that did not constitute tax-exempt income. In
addition, a portion of our federally tax-exempt income may be
included in determining our alternative minimum tax liability.
Distributions by us to our shareholders would constitute
dividend income taxable to such holders to the extent of our
current and accumulated earnings and profits, which would
include
28
tax-exempt income as well as any taxable income we might have,
and the payment of these distributions would not be deductible
by us. These consequences would have a significant adverse
effect on us, our shareholders and the value of our shares.
Prospective investors should consult their own tax advisors
regarding these potential material adverse tax consequences.
Our
ability to allocate and distribute to our shareholders income
that is exempt from U.S. federal income tax will depend on the
exclusion from gross income of the interest income that we
receive on the bonds in which we invest. A portion of the
interest income we earn will likely be taxable in many states
and localities and may be includable in our shareholders
calculation of AMT.
Prospective investors should be aware that while most tax-exempt
bonds are issued in reliance on an opinion of nationally
recognized bond counsel that interest on such securities will be
exempt from regular U.S. federal income taxation, in some
cases, we may invest in bonds we believe are tax-exempt but do
not benefit from any such tax opinion. In addition, we have not
and in most cases will not directly or indirectly acquire a
tax-exempt bond unless the bond receives, or there has been
issued previously, an opinion of nationally recognized bond
counsel which was delivered on the date of issuance of that
security that interest on such security will be exempt from
regular U.S. federal income taxation. We have assumed the
continuing correctness of, the opinions of bond counsel relating
to the exclusion of interest income from gross income for
U.S. federal income tax purposes and have not relied on any
other external advisors in determining such exclusion from gross
income.
Events occurring after the date of issuance of a tax-exempt
bond, however, may cause the interest on such tax-exempt bond to
be includable in gross income for U.S. federal income tax
purposes. For example, the IRS establishes certain requirements,
such as restrictions on the investment of the proceeds of the
bond issue, limitations on the use of proceeds of such issue and
the property financed by such proceeds, and the payment of
certain excess earnings to the federal government, that must be
met after the issuance of a tax-exempt bond for interest on such
tax-exempt bond to remain excludible from gross income for
U.S. federal income tax purposes. The issuers and the
underlying obligors of the tax-exempt bonds generally covenant
to comply with such requirements and the opinion of bond counsel
generally assumes continuing compliance with such requirements.
In addition, for tax-exempt bonds the proceeds of which are
loaned to a charitable organization described in
section 501(c)(3) of the Code, the continued exclusion of
interest from gross income for U.S. federal income tax
purposes depends on the continuing exempt status of the
charitable organization borrower. Failure to comply with these
continuing requirements, however, may cause the interest on a
tax-exempt bond to be includable in gross income for
U.S. federal income tax purposes retroactive to its date of
issue regardless of when such noncompliance occurs.
In addition, the IRS has an ongoing enforcement program that
involves the audit of tax-exempt bonds to determine whether an
issue of bonds satisfies all of the requirements that must be
met for the interest on such bonds to be excludible from gross
income for U.S. federal income tax purposes. From time to
time, some of the tax-exempt bonds we own directly or indirectly
may become the subject of such an audit by the IRS, and the IRS
may determine that the interest on such securities is includable
in gross income for U.S. federal income tax purposes either
because the IRS has taken a legal position adverse to the
conclusion reached by bond counsel in its opinion pertaining to
the bond issue or as a result of an action taken or not taken
after the date of the bond issue.
Interest on a bond, other than a bond the proceeds of which are
loaned to a charitable organization described in
Section 501(c)(3) of the Code, will not be excluded from
gross income during any period in which we are a
substantial user of the underlying property or a
person related to a substantial user. We
or one of our affiliates, as applicable, will be a related
person of a substantial user for this purpose if, among other
things, we directly, or indirectly by attribution, own more than
a specified percentage of the capital or profits interest in the
substantial user. The attribution rules under U.S. federal
income tax law are complex and the preceding sentence is not
intended to be a complete summary of their application. We do
not expect to be a substantial user of the
properties financed with the proceeds of the mortgage revenue
bonds or person related to a substantial
user. There can be no assurance, however, that the IRS
would not challenge such a conclusion. If such challenge were
successful, the interest received on any bond for which we were
treated as
29
a substantial user or a related party
thereto would be includable in federally taxable gross income,
including retroactively.
If interest paid on any tax-exempt bond in which we invest
directly or indirectly is determined to be taxable subsequent to
our acquisition of such interests or bond, the IRS may demand
that our shareholders pay U.S. federal income tax on the
interest income allocated to them, thereby adversely reducing
our shareholders yield.
A determination that interest on a tax-exempt bond we own
directly or indirectly is includable in gross income for
U.S. federal income tax purposes retroactively to its date
of issue may cause a portion of prior years interest
allocations received by our shareholders to be taxable to those
shareholders in the year of allocation. Even if the interest
income we earn is exempt from U.S. federal income tax, such
income will likely be taxable in many states and localities. In
addition, interest on tax-exempt bonds generally is an item of
tax preference for purposes of the AMT, however interest on
tax-exempt 501(c)(3) bonds is generally only includable in the
determination of AMT for our corporate shareholders.
We
will have to pay some taxes and may be subject to others, which
may reduce the cash available for distribution to our
shareholders.
We are currently treated as a partnership for U.S. federal
income tax purposes. However, our taxable subsidiaries organized
as C corporations, such as MFCA Funding, Inc., will be required
to pay some U.S. federal, state and local taxes on their
income and property. In addition, to the extent such taxable
subsidiaries earn tax-exempt interest income, such income will
be a preference item and will be includable in the determination
of the subsidiaries AMT liability. To the extent our
taxable subsidiaries are required to pay U.S. federal,
state or local taxes, or AMT, we will have less cash available
for distributions to our shareholders.
We may
generate taxable income which will be allocated to our
shareholders, and depending upon the nature of our operations,
such income could be substantial.
Shareholders generally will be taxed on income allocable to them
where such income does not constitute tax-exempt interest
income. It should be noted that we intend to invest in taxable
bonds as well as financial products that do not produce
tax-exempt interest income. Accordingly, depending upon the
nature of our activities, taxable income allocated to our
shareholders could be substantial. We will receive dividend
income from our taxable subsidiaries, such as MFCA Funding, Inc.
Such income will be taxable as ordinary portfolio income to our
shareholders. We will also generate capital gains upon our or
our structured credit vehicles sale of our tax-exempt
bonds, which will be allocated to our shareholders and taxable
as capital gain. In addition, to the extent that we purchase
tax-exempt bonds with market discount (generally,
where we purchase such bond at less than the price at which it
was issued) we will be taxed on any accrued market discount at
the time we receive principal payments on such tax-exempt bonds
or upon the sale or redemption of such bonds.
Thus, a shareholder may have to pay taxes regardless of the
amount of cash we distribute to shareholders. In addition, a
shareholder will likely have a significant amount of
phantom income under any distribution reinvestment
plan we establish, unless such shareholder opts out of such plan.
Income that is exempt from federal income taxation will
generally be subject to state and local income and franchise
taxation.
Certain
interest and other expenses allocated by us to holders of our
shares will not be deductible for U.S. federal income tax
purposes.
We will likely incur interest expense in connection with our
investment activities. U.S. federal income tax law
generally disallows any deduction for interest paid by a
taxpayer on indebtedness incurred or continued for the purpose
of purchasing or carrying a tax-exempt obligation.
U.S. federal income tax law also generally disallows, for
non-corporate taxpayers, a deduction for other expenses relating
to the ownership of tax exempt bonds, including any hedging
expenses and management fees. A purpose to carry tax-exempt
obligations will
30
be inferred whenever a taxpayer owns tax-exempt obligations and
has outstanding indebtedness which is neither directly connected
with personal expenditures nor incurred in connection with the
active conduct of a trade or business. The IRS may take the
position that a shareholders allocable portion of any
interest that we pay on our borrowings
and/or any
interest paid by a shareholder on indebtedness incurred to
purchase our shares should be viewed in whole or in part as
incurred to enable such shareholder to continue carrying
tax-exempt obligations and, therefore, the deduction of any such
interest by any shareholder and other expenses by non-corporate
shareholders should be disallowed in whole or in part.
Complying
with certain tax-related requirements may cause us to forego
otherwise attractive business or investment opportunities or
enter into borrowings or financings we may not have otherwise
entered into.
In order for us to remain treated as a partnership for
U.S. federal income tax purposes, and not as an association
or publicly traded partnership taxable as a corporation, at
least 90% of our gross income each taxable year must consist of
interest, dividends, capital gains and other types of
qualifying income. In order to comply with these
requirements, we (and our subsidiaries) may be required to
invest through corporations
and/or
forego attractive business or investment opportunities.
Furthermore, to avoid being deemed to be engaged in a financial
business for U.S. federal income tax purposes, we will be
precluded from directly engaging in loan origination activities.
Thus, compliance with these requirements may adversely affect
our ability to operate solely to maximize profits.
Our
structure involves complex provisions of U.S. federal income tax
law for which no clear precedent or authority is available, and
which is subject to potential change, possibly on a retroactive
basis. Any such change could result in adverse consequences to
the holders of Class A common shares.
The U.S. federal tax treatment of holders of our
Class A common shares depends in some instances on
determinations of fact and interpretations of complex provisions
of U.S. federal income tax law for which no clear precedent
or authority are available. Holders of Class A common
shares also should be aware that the U.S. federal income
tax rules are constantly under review by Congress and the IRS,
possibly resulting in unfavorable precedent or authority on
issues for which there was previously no clear precedent or
authority as well as revised interpretations of established
concepts. The IRS pays close attention to the proper application
of tax laws to partnerships and investments in tax-exempt
securities. The present U.S. federal income tax treatment
of an investment in our Class A common shares may be
modified by administrative, legislative or judicial
interpretation at any time, and any such action may affect
investments made by us. As an example, in the event variable
rate certificates issued by tender option bond trusts were
characterized as loans bearing taxable interest rather than as
partnership interests, we would likely be unable to facilitate
the creation of these trusts, which could have an adverse impact
on our ability to generate revenue. We and holders of our
Class A common shares could be adversely affected by this
or any other such change in, or any new, tax law, regulation or
interpretation. In addition, The Class A Common Shares are
likely not to be suitable investments for
non-U.S. persons.
We may
be subject to adverse legislative or regulatory tax changes that
could reduce the market price of our Class A common
shares.
At any time, the U.S. federal income tax laws or
regulations governing partnerships (or our investments) or the
administrative interpretations of those laws or regulations may
be amended. In addition, any new U.S. federal income tax
law, regulation or administrative interpretation, or any
amendment to any existing U.S. federal income tax law,
regulation or administrative interpretation may take effect
retroactively. We and our shareholders could be adversely
affected by any change in, or any new, U.S. federal income
tax law, regulation or administrative interpretation, that
alters the laws, regulations or interpretations that are
currently applicable to us.
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We
currently receive certain tax relief as a qualified
business under the State of Pennsylvania Keystone
Opportunity Zone, Keystone Opportunity Expansion Zone and
Keystone Opportunity Improvement Zone Act. There is no assurance
that we would continue to receive such tax relief under such
act, and, as such, we may be subject to certain penalties and/or
recapture under such act.
The State of Pennsylvania enacted the Keystone Opportunity Zone,
Keystone Opportunity Expansion Zone and Keystone Opportunity
Improvement Zone Act by providing qualified businesses certain
tax benefits in order to revive economically distressed urban
and rural communities. Currently, we are a qualified
business under such Act, and receive tax relief
thereunder. However, in order to receive tax relief, a company
must apply for such relief on an annual basis. There can be no
assurance that we would continue to qualify under such Act. If
we cease to qualify, such as by relocating our executive office
from its current location, which is situated in an
opportunity zone, we may be subject to certain tax
penalties
and/or
recapture under the Act.
Risks
Related to This Offering
There
currently is no public market for our Class A common
shares, an active trading market may never develop and the
market price of the shares may be volatile.
There currently is no public market for our shares and there can
be no assurance that an active trading market for our shares
will develop. We expect that the Class A common shares will
be listed on the NASDAQ Stock Market LLC under the symbol
MUNF. Even if an active trading market develops, the
market price of our Class A common shares may be highly
volatile and could be subject to wide fluctuations. Some of the
factors that could negatively affect our share price include:
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general market and economic conditions, including disruptions,
downgrades, credit events and perceived problems in the credit
markets;
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actual or anticipated variations in our quarterly operating
results or distributions;
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changes in our asset composition or business strategy;
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write-downs or perceived credit or liquidity issues affecting
our assets;
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market perception of our company, our business and our assets;
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our level of indebtedness
and/or
adverse market reaction to any indebtedness we incur in the
future;
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additions or departures of our managers key personnel;
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changes in market valuations of similar companies; and
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speculation in the press or investment community.
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To the
extent a market for our Class A common shares develops,
shares eligible for future sale may have adverse effects on our
share price.
Tiptree owns in the aggregate approximately 27,617,687 of our
Class B common shares or 73.81% of the outstanding
Class B common shares. Each Class B common share is
convertible at any time into one Class A common share.
Tiptree may also purchase Class A common shares pursuant to
this offering. Future sales of shares, whether by us, Tiptree or
other shareholders, or the availability of shares for future
sale, may adversely affect the prevailing market price for our
Class A common shares generally. We also may issue from
time to time additional Class A common shares and we may
grant demand or piggyback registration rights in connection with
such issuances. Sales of substantial amounts of Class A
common shares or the perception that such sales could occur may
adversely affect the prevailing market price for our
Class A common shares.
32
Certain
provisions of our operating agreement and bylaws could hinder,
delay or prevent a change of control of our
company.
Our operating agreement and bylaws contain provisions that:
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entitle holders of Class B common shares to 10 votes per
share on all matters to be voted on by the shareholders in
general;
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permit us to issue, without any further vote or action by our
shareholders, preferred shares in one or more series and, with
respect to each series, to fix the number of shares, the
relative powers, preferences and rights, and the qualifications,
limitations or restrictions applicable to such shares;
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limit our shareholders ability to call special meetings;
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limit our shareholders ability to remove directors;
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provide exclusive authority to the board of directors to
establish the number of directorships and fill vacancies on our
board of directors;
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set forth advance notice procedures for shareholders
nominations of directors and proposals for consideration at
meetings of shareholders;
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make Section 203 of Delaware General Corporation Law
applicable to business combinations with interested shareholders
under certain circumstances; and
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provide exclusive authority to our board of directors to amend
our bylaws.
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For more information, see Description of Securities.
Because
our voting control is concentrated among the holders of
Class B common shares, the market price of Class A
common shares may be adversely affected by disparate voting
rights.
The holders of Class A common shares and Class B
common shares have identical rights, except that holders of
Class A common shares are entitled to one vote per share,
while holders of Class B common shares are entitled to 10
votes per share on all matters to be voted on by shareholders in
general. This differential in the voting rights could adversely
affect the market price of our Class A common shares.
Tiptree holds a significant majority of our combined voting
power through its ownership of Class B common shares and,
by virtue of our dual class structure, will continue to do so
even if it owns substantially less than a majority of our
outstanding common shares. Furthermore, we would not be able to
engage in actions that require a consent of a majority of our
shareholders, including the election of directors, amendment of
our operating agreement, and any sale of all or substantially
all of our assets, merger or other change of control
transaction, without the consent of Tiptree. Tiptrees
interests may conflict with the interests of holders of other
shares, and it has no duty to act in accordance with the
interests of any other shareholders. Tiptree may also purchase
Class A common shares pursuant to this offering.
We are
a controlled company within the meaning of the
NASDAQ Stock Market LLC rules and, as a result, will qualify
for, and intend to rely on, exemptions from certain corporate
governance requirements. You will not have the same protections
afforded to shareholders of companies that are subject to such
requirements.
After completion of this offering, Tiptree will control a
majority of the combined voting power of our outstanding common
shares. As a result, we are a controlled company
within the meaning of the NASDAQ Stock Market LLC corporate
governance standards. Under these rules, if more than 50% of the
voting power of a listed company is held by an individual, group
or another company, the listed company is a controlled
company and may elect not to comply with certain corporate
governance requirements, including:
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the requirement that a majority of the board of directors
consist of independent directors;
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the requirement that we have a nominating/corporate governance
committee that is composed entirely of independent
directors; and
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the requirement that we have a compensation committee that is
composed entirely of independent directors.
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Following this offering, we intend to utilize the exemption from
the requirement that a majority of the Board of Directors
consist of independent directors. Accordingly, you will not have
the same protections afforded to shareholders of companies that
are subject to all of the corporate governance requirements of
the NASDAQ Stock Market LLC.
Our
failure to maintain effective internal controls could have a
material adverse effect on our business in the future, our
access to capital markets and the price of our common
shares.
Pursuant to the Sarbanes-Oxley Act of 2002, beginning with our
annual report filed with the SEC for the year ending
December 31, 2011, management will be required to deliver a
report that assesses the effectiveness of our internal control
over financial reporting and our independent registered public
accounting firm will be required to deliver an attestation
report on managements assessment of, and the operating
effectiveness of, our internal control over financial reporting
in conjunction with their opinion on our audited financial
statements. Any failure to maintain adequate internal control
over financial reporting or to implement required, new or
improved controls, or difficulties encountered in their
implementation, could cause us to report material weaknesses or
other deficiencies in our internal control over financial
reporting and could result in a more than remote possibility of
errors or misstatements in our consolidated financial statements
that would be material. If we or our independent registered
public accounting firm were to conclude that our internal
control over financial reporting were not effective, investors
could lose confidence in our reported financial information and
the price of our Class A common shares could decline. Our
failure to achieve and maintain effective internal controls
could have a material adverse effect on our business in the
future, our access to the capital markets and investors
perception of us. In addition, material weaknesses in our
internal controls could require significant expense and
management time to remediate.
We may
issue common shares, options and other share-based awards under
our 2007 Equity Incentive Plan or equity incentive plans we may
establish in the future, which may dilute shareholder value and
cause the price of our Class A common shares to
decline.
We may offer shares, options and other share-based awards under
our 2007 Equity Incentive Plan, or other equity incentive plans
we may establish in the future, to our executive officers and
directors. If the options that we issue are exercised, or the
restricted shares or other shares-based compensation that we
issue vest, and those shares are sold into the public market,
the market price of our Class A common shares may decline.
In addition, the availability of common shares for award under
our 2007 Equity Incentive Plan, or the grant of shares, options,
restricted shares or other forms of shares-based compensation,
may adversely affect the market price of our Class A common
shares.
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus that are not purely
historical are forward-looking statements. Our forward-looking
statements include, but are not limited to, statements regarding
our or our managements expectations, hopes, beliefs,
intentions or strategies regarding the future. In addition, any
statements that refer to projections, forecasts or other
characterizations of future events or circumstances, including
any underlying assumptions, are forward-looking statements. The
words anticipates, believe,
continue, could, estimate,
expect, intends, may,
might, plan, possible,
potential, predicts,
project, should, would and
similar expressions may identify forward-looking statements, but
the absence of these words does not mean that a statement is not
forward-looking. Forward-looking statements in this prospectus
may include, for example, statements about:
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our dependence on Muni Capital Management and inability to find
a suitable replacement if Muni Capital Management were to
terminate its Management Agreement with us;
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the existence of conflicts of interest in our relationship with
Muni Capital Management
and/or its
affiliates, which could result in decisions that are not in the
best interest of holders of common shares;
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our business strategy;
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our ability to compete in the marketplace;
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our ability to acquire assets and realize gains or income from
such assets;
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market trends;
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our ability to obtain future financing arrangements;
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changes in interest rates and credit spreads;
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our ability to make future distributions;
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limitations imposed on our business by our exemption under the
Investment Company Act;
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the lack of a trading market for the Class A common shares;
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general volatility of the securities markets;
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our ability to maintain effective internal controls; and
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changes in governmental regulations, tax laws and tax rates and
other similar matters which may affect us and holders of the
Class A common shares.
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The forward-looking statements contained in this prospectus are
based on our current expectations and beliefs concerning future
developments and their potential effects on us. There can be no
assurance that future developments affecting us will be those
that we have anticipated. These forward-looking statements
involve a number of risks, uncertainties (some of which are
beyond our control) or other assumptions that may cause actual
results or performance to be materially different from those
expressed or implied by these forward-looking statements. These
risks and uncertainties include, but are not limited to, those
factors described under the heading Risk Factors.
Should one or more of these risks or uncertainties materialize,
or should any of our assumptions prove incorrect, actual results
may vary in material respects from those projected in these
forward-looking statements. We undertake no obligation to update
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as may be
required under applicable securities laws.
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USE OF
PROCEEDS
The net proceeds we will receive from the sale
of
Class A common shares in this offering will be
approximately $ million (or
approximately $ million if
the underwriters fully exercise their option to purchase
additional shares), after deducting the underwriters
discount of approximately
$ million (or approximately
$ million if the underwriters
fully exercises its option to purchase additional shares).
We intend to use the net proceeds of this offering to implement
our business strategy, including, without limitation, by
investing in the debt instruments of non-profit and municipal
entities primarily through direct and indirect acquisition of
tax-exempt mortgage revenue bonds or other obligations (secured
primarily by interests in real estate), assets derived from such
bonds or other assets as described herein. As of the date of
this prospectus, our manager is evaluating several acquisition
opportunities, including the purchase of a portfolio of taxable
municipal bonds, the purchase of a portfolio of tax exempt
municipal bonds
and/or the
purchase of general partnership equity interests in affordable
housing partnerships. We have not committed to any of these
investments and our manager may reject all of them. We expect
that a significant portion of the tax-exempt or other
obligations underlying our assets or which we acquire directly
will be issued by or on behalf of one of the following types of
non-profit institutions, state authorities, or other
organizations:
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redevelopment/tax increment financing bonds;
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See Business Our Business Objective and
Strategies. Until used in the growth of our business and
the implementation of our business strategy, we intend to invest
the net proceeds of this offering in readily marketable
interest-bearing securities or may hold such proceeds in the
form of cash. We have no specific timeframe for the deployment
of the net proceeds of this offering.
DISTRIBUTION
POLICY
We intend to periodically make distributions to holders of our
Class A common shares. Holders of Class A common
shares and Class B common shares will share ratably (based
on the number of common shares held) in any dividend declared by
our board of directors out of funds legally available therefor,
subject to any statutory or contractual restrictions on the
payment of dividends, the dividend rights of the Performance
Share and to any restrictions on the payment of dividends
imposed by the terms of any preferred shares we may issue in the
future. All distributions from us will be made at the discretion
of our board of directors, and will depend on a number of
factors affecting us, including:
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our financial condition;
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general business conditions;
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actual results of operations;
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the timing of the deployment of our capital;
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our debt service requirements;
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availability of cash distributions from our subsidiaries;
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36
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our operating expenses;
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|
any contractual, legal and regulatory restrictions on the
payment of distributions by us to holders of the common shares
or by our subsidiaries to us; and
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|
other factors our board of directors in its discretion deem
relevant.
|
We may adopt a distribution reinvestment plan under which cash
distributions will be reinvested on behalf of holders of our
common shares, unless such holders opt out of the plan. As a
result, if our board of directors authorizes, and we declare, a
cash distribution, then holders of common shares who have not
opted out of our distribution reinvestment plan will have their
cash distribution reinvested in additional common shares of the
same class, rather than receiving the cash distribution.
Our ability to make distributions (such as a cash dividend) is
subject to certain restrictions under the Delaware Limited
Liability Company Act, or Delaware LLC Act. Under the Delaware
LLC Act, a limited liability company generally is not permitted
to make a distribution if, after giving effect to the
distribution, the liabilities of the company will exceed the
value of the companys assets. In addition, it is possible
that some of our future financing arrangements could contain
provisions restricting our ability to make distributions.
Holders of common shares generally will be subject to
U.S. federal income tax (and any applicable state and local
taxes) on their respective allocable shares of our net taxable
income regardless of the timing or amount of distributions we
make to the holders of our common shares.
We made distributions to the holders of our common shares of
$0.06 per share for the period from January 1, 2010 through
August 31, 2010. We did not make any distributions to
holders of our common shares for the year ended
December 31, 2009. We made distributions to the holders of
our common shares of $0.24 per share for the year ended
December 31, 2008 and $0.08 per share for the period from
June 12, 2007 (commencement of operations) through
December 31, 2007, which we paid to the then holders of our
common shares.
37
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2010:
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on an actual basis; and
|
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|
on an as adjusted basis to give effect to the consummation of
this offering (assuming an aggregate
of
Class A common shares are purchased) and the application of
proceeds therefrom, after deducting estimated expenses of
$ .
|
You should read the information above and below in connection
with Use of Proceeds and our consolidated financial
statements and related notes and other financial information
included in this prospectus.
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|
|
|
|
|
|
|
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June 30, 2010
|
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Actual
|
|
|
As adjusted
|
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|
|
(Unaudited)
|
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Cash and cash equivalents
|
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$
|
28,252,900
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$
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|
|
Membership interests:
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|
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Common shares, no par value per share; unlimited shares
authorized, 37,416,669
and shares
outstanding, respectively
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186,661,837
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Unvested restricted common shares, no par value per share;
60,000 shares authorized, 20,000 and 20,000 shares
outstanding, respectively
|
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|
10,786
|
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|
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|
Earnings/(deficit)
|
|
|
(80,444,618
|
)
|
|
|
|
|
Performance share allocation
|
|
|
(5,920,448
|
)
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|
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|
Distributions
|
|
|
(6,855,492
|
)
|
|
|
(5,732,992
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)
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|
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|
|
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|
Net Assets
|
|
$
|
93,452,065
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|
$
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|
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|
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38
SELECTED
FINANCIAL DATA
The following table presents selected consolidated financial
information. The selected consolidated financial information as
of December 31, 2009 and 2008, for the years ended
December 31, 2009 and 2008 and for the period from
June 12, 2007 (commencement of operations) to
December 31, 2007 has been derived from our audited
consolidated financial statements included elsewhere in this
prospectus. The summary consolidated financial information as of
June 30, 2010 and for the six months ended June 30,
2010 and 2009 has been derived from our unaudited consolidated
financial statements included elsewhere in this prospectus, and
has been prepared on a basis consistent with the respective
audited consolidated financial statements and, in the opinion of
management, include all adjustments, including usual recurring
adjustments, necessary for a fair presentation of that
information for such periods. The financial data presented for
the interim periods are not necessarily indicative of the
results for the full year.
Since the information presented below is only a summary and does
not provide all of the information contained in our historical
consolidated financial statements included elsewhere in this
prospectus, including the related notes, you should read it in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
historical consolidated financial statements, including the
related notes, included elsewhere in this prospectus.
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|
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|
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For the Year Ended
|
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|
|
|
|
|
|
|
|
|
|
June 12
|
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|
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For the Six Months Ended
|
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|
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(inception) to
|
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|
|
June 30,
|
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|
June 30,
|
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|
December 31,
|
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|
December 31,
|
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|
December 31,
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|
|
2010
|
|
|
2009
|
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|
2009
|
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|
2008
|
|
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2007
|
|
|
Revenue
|
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|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
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Income-investments
|
|
$
|
3,808,113
|
|
|
$
|
4,603,671
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|
|
$
|
8,581,819
|
|
|
$
|
8,106,531
|
|
|
$
|
|
|
Income-total return swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903,623
|
|
|
|
1,150,382
|
|
Income-other
|
|
|
13,571
|
|
|
|
10,190
|
|
|
|
23,345
|
|
|
|
1,225,434
|
|
|
|
3,937,071
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Total revenue
|
|
|
3,821,684
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|
|
|
4,613,861
|
|
|
|
8,605,164
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|
|
|
10,235,588
|
|
|
|
5,087,453
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Management fee (related party)
|
|
|
696,815
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|
|
|
322,287
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|
|
|
962,670
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|
|
|
1,276,477
|
|
|
|
1,111,993
|
|
Amortization of financing costs
|
|
|
|
|
|
|
34,468
|
|
|
|
194,559
|
|
|
|
38,912
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|
|
|
|
|
Professional fees(1)
|
|
|
189,001
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|
|
|
878,442
|
|
|
|
1,102,273
|
|
|
|
2,047,694
|
|
|
|
374,727
|
|
Insurance
|
|
|
9,411
|
|
|
|
193,257
|
|
|
|
266,788
|
|
|
|
313,994
|
|
|
|
96,250
|
|
Directors compensation
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|
|
15,000
|
|
|
|
43,500
|
|
|
|
58,500
|
|
|
|
391,570
|
|
|
|
65,627
|
|
Other general and administrative(1)
|
|
|
39,719
|
|
|
|
22,266
|
|
|
|
61,341
|
|
|
|
268,986
|
|
|
|
90,260
|
|
Interest expense
|
|
|
92,707
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash incentive compensation (related party)
|
|
|
7,836
|
|
|
|
464,736
|
|
|
|
471,966
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|
|
|
876,422
|
|
|
|
942,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,050,489
|
|
|
|
1,958,956
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|
|
|
3,118,097
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|
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|
5,214,055
|
|
|
|
2,681,089
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
2,771,195
|
|
|
|
2,654,905
|
|
|
|
5,487,067
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|
|
|
5,021,533
|
|
|
|
2,406,364
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
(474,191
|
)
|
|
|
(18,957,635
|
)
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,829,108
|
)
|
|
|
(2,710,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
|
|
|
|
|
(474,191
|
)
|
|
|
(18,957,635
|
)
|
|
|
(38,829,108
|
)
|
|
|
(2,710,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
1,991,448
|
|
|
|
20,694,588
|
|
|
|
54,464,711
|
|
|
|
(81,112,777
|
)
|
|
|
|
|
Derivatives
|
|
|
(411,023
|
)
|
|
|
|
|
|
|
27,095
|
|
|
|
7,241,926
|
|
|
|
(17,835,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
|
1,580,425
|
|
|
|
20,694,588
|
|
|
|
54,491,806
|
|
|
|
(73,870,851
|
)
|
|
|
(17,835,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from
operations before Performance Share Allocation
|
|
|
4,351,620
|
|
|
|
22,875,302
|
|
|
|
41,021,238
|
|
|
|
(107,678,426
|
)
|
|
|
(18,139,052
|
)
|
Performance Share Allocation
|
|
|
|
|
|
|
(3,283,586
|
)
|
|
|
(5,920,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from
operations after Performance Share Allocation
|
|
$
|
4,351,620
|
|
|
$
|
19,591,716
|
|
|
$
|
35,100,790
|
|
|
$
|
(107,678,426
|
)
|
|
$
|
(18,139,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net increase (decrease) in net assets from operations
per share(2)(3)
|
|
$
|
0.12
|
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
|
$
|
(4.39
|
)
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net increase (decrease) in net assets from operations
per share(2)(3)
|
|
$
|
0.12
|
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
|
$
|
(4.39
|
)
|
|
$
|
(0.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,252,900
|
|
|
$
|
29,367,353
|
|
|
$
|
9,560,219
|
|
|
$
|
128,116,802
|
|
Investments, at fair value
|
|
|
62,579,435
|
|
|
|
57,971,131
|
|
|
|
15,302,902
|
|
|
|
|
|
Total assets
|
|
|
94,214,818
|
|
|
|
90,668,544
|
|
|
|
29,642,139
|
|
|
|
158,550,698
|
|
Due to our manager (related party)
|
|
|
116,925
|
|
|
|
114,756
|
|
|
|
49,662
|
|
|
|
179,850
|
|
Accrued expenses and other liabilities
|
|
|
261,900
|
|
|
|
338,679
|
|
|
|
354,924
|
|
|
|
234,830
|
|
Net assets
|
|
|
93,452,065
|
|
|
|
90,215,109
|
|
|
|
29,237,553
|
|
|
|
140,339,181
|
|
Net asset value per share
|
|
|
2.50
|
|
|
|
2.41
|
|
|
|
1.64
|
|
|
|
7.83
|
|
Number of outstanding shares
|
|
|
37,416.669
|
|
|
|
37,416,669
|
|
|
|
17,847,015
|
|
|
|
17,917,100
|
|
|
|
|
(1) |
|
The year ended December 31, 2009 reflects reclassification
of $138,900 of accounting fees from other general and
administrative to professional fees. |
|
|
|
(2) |
|
Calculation excludes performance share allocation. |
|
|
|
(3) |
|
2008 and 2007 have been revised to reflect the impact of the
June 2009 rights offering. |
40
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a specialty finance company that focuses on the
investment in the debt instruments of United States non-profit
and municipal entities primarily through direct and indirect
acquisition of tax-exempt mortgage revenue bonds or other
obligations (secured primarily by interests in real estate),
assets derived from such bonds or other assets as described
herein. Our objective is to generate attractive risk-adjusted
returns and predictable cash distributions. We seek to achieve
this objective by:
|
|
|
|
|
acquiring interests in structured credit entities which own debt
obligations, the interest on which is exempt from
U.S. federal income taxation;
|
|
|
|
|
|
investing in total return swaps and other derivative
arrangements relating to tax exempt securities; and
|
|
|
|
|
|
making direct investments in municipal securities.
|
We may also invest in securities that are subject to federal,
state, local and other income tax. We derive our income from
interest on the assets held by us and our subsidiaries and from
any gains on the sale or prepayment of assets. Our assets are,
in general, primarily secured by mortgages on the real estate
held by the obligors.
We are or expect to be involved in a variety of businesses,
including holding or acquiring tax-exempt obligations,
mortgage-related holdings, interests in structured credit
entities, taxable municipal bonds (including Build America
Bonds, which are described herein), derivative instruments,
equity interests in real estate (such as affordable housing
partnerships), other equity investments, investments in
taxable tails or tax credits and other assets. We
may also invest in equity interests in entities that primarily
hold real estate interests, particularly in affordable housing.
We were organized as a Delaware limited liability company on
April 27, 2007. We began operations on June 12, 2007
upon the completion of an offering of common shares of limited
liability interests in a private offering to qualified
institutional buyers in accordance with Rule 144A under the
Securities Act.
Changes in the financial performance of a borrower depend upon
many factors and are related to, among other things, the type of
borrower, location, demographics and economic characteristics of
the borrowers service area. For example, the performance
of a health care facility is dependent upon the level of
utilization and the source of payment, such as Medicare or
Medicaid. The performance of a private school is dependent on
the demand and the ability of enrolled students to pay the
tuition. The performance of a charter school is dependent upon
the renewal of the schools charter, the number of students
that choose to attend and the quality of the schools
management. Certain sectors and borrowers, including Global
Country of World Peace and Project CURE (Benevolent Health Care
Foundation), are reliant upon donations and contributions as
major or sole sources of revenue. These organizations tend to be
more prone to fluctuations in the local and national economy. In
addition, the recent passage of national healthcare reform will
bring changes to the way certain healthcare companies conduct
their business; it is expected that virtually all of our
healthcare obligors will be affected by healthcare reform in
some way. These organizations will need to adapt to new rules
and regulations and in some cases make certain upgrades,
including to their information technology infrastructure. If a
borrower experiences financial difficulties, the value of the
bonds secured by such borrowers obligations is likely to
decline due to the increased uncertainty of payment, in the
absence of any other factors.
We are externally managed and advised by Muni Capital
Management. Muni Capital Management is a wholly-owned subsidiary
of Tricadia Holdings. Prior to March 18, 2009, we were
managed by Cohen Municipal Capital Management, LLC (the
Former Manager), a subsidiary of Cohen Brothers,
LLC. In February 2009, Tiptree, a private partnership currently
managed by Tiptree Capital, acquired a controlling interest in
us, and caused the assignment of our Management Agreement from
the Former Manager to Muni Capital Management. Currently,
Tiptree owns approximately 73.81% of our outstanding
Class B common
41
shares representing % of our
combined voting power immediately after this offering, and may
also purchase Class A common shares pursuant to this
offering.
Critical
Accounting Policies and Estimates
Our consolidated financial statements have been prepared by
management in accordance with U.S. GAAP. Our significant
accounting policies are fundamental to understanding our
financial condition and results of operations because some of
these policies require that we make significant estimates and
assumptions that may affect the value of our assets or
liabilities and our financial results. The following critical
accounting policies have been identified because they have the
potential to have a material impact on our financial statements,
and because they are based on assumptions which are used in the
accounting records to reflect, at a specific point in time,
events whose ultimate outcome will not be known until a later
date. Actual results could differ from these estimates.
Although we conduct our operations so that we are not required
to register as an investment company under the Investment
Company Act, for financial reporting purposes we are an
investment company and we follow the AICPA Audit and Accounting
Guide for Investment Companies, or Audit Guide. Accordingly,
investments are carried at fair value with changes in fair value
reflected in the consolidated statements of operations.
Principles
of Consolidation
Our consolidated financial statements include the accounts of
our company and our wholly owned subsidiary MFCA Funding, Inc.
All intercompany transactions have been eliminated.
We review each investment that we make under a control based
framework in accordance with ASC Topic 810. If we determine that
we control the investee and the investee itself meets the
definition of an investment company under the Audit Guide, we
consolidate the investee. Otherwise, we will report our equity
investment at fair value as required by the Audit Guide.
Fair
Value of Financial Instruments
Fair value is used to measure our financial instruments. The
fair value of a financial instrument is the amount that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date, also known as the exit price.
We have adopted ASC Topic 820 (formerly SFAS No. 157,
Fair Value Measurements). ASC Topic 820 establishes a
fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy are
described below:
Level 1 Financial assets and liabilities whose
values are based on unadjusted quoted prices in active markets
that are accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level 2 Financial assets and liabilities whose
values are based on one or more of the following:
(a) Quoted prices for similar assets or liabilities in
active markets;
(b) Quoted prices for identical or similar assets or
liabilities in nonactive markets;
(c) Pricing models whose inputs are observable for
substantially the full term of the asset or liability; and
(d) Pricing models whose inputs are derived principally
from or corroborated by observable market data through
correlation or other means for substantially the full term of
the asset or liability.
Level 3 Financial assets and liabilities whose
values are based on prices or valuation techniques that require
inputs that are both significant to the fair value measurement
and unobservable. These inputs reflect managements own
assumptions about the assumptions a market participant would use
in pricing the asset or liability.
42
A financial instruments level within the fair value
hierarchy is based on the lowest level of input that is
significant to the fair value measurement.
Following is a description of the valuation methodologies used
for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation
hierarchy.
Investments
We invest in debt obligations, the interest on some of which is
exempt from U.S. federal income taxation, but may also be
taxable. In some cases we purchase the investments directly and
in other cases we invest in a special purpose trust which holds
the assets. From time to time, we may also invest in certain
derivative contracts. We record all of our investments at fair
value.
Direct
Investment in Municipal Securities
We obtain quotations from independent pricing services as part
of our methodology for determining fair value. In most cases,
quotes are obtained from two pricing services and the average of
the quotes is used. The independent pricing services determine
their quotes using observable inputs such as current interest
rates, specific issuer information and other market data for
such securities. Therefore, our estimate of fair value is
subject to a high degree of variability based upon market
conditions, the availability of specific issuer information and
the assumptions made. Due to the inherent uncertainty of
valuation, these estimated fair values may differ from the
actual price obtained through sales. The valuation inputs used
to arrive at fair value for such debt obligations are generally
classified within Level 2 or Level 3 of the valuation
hierarchy. The difference between the cost basis in the
investment and the fair value is included in the unrealized
gains/(losses) investments.
Investment
in Trusts
We may invest in a trust in order to acquire municipal
securities. The trust will acquire the bonds and finance the
purchase by issuing junior and senior certificates. In general,
we will purchase at least a majority of the junior certificates
and third party investors will purchase the senior certificates.
In valuing our investment in junior certificates we will
generally use one of two techniques:
Asset
Based Valuation
We use the asset based valuation methodology to measure the fair
value of our investments in junior certificates. We believe the
asset based valuation is a reasonable methodology as it results
in an amount that is consistent with the cash flows that would
be available to certificate holders if the trust was liquidated
at the reporting date. The valuation methodology utilizes the
fair value of the underlying assets of the trust and the fair
value of the senior certificates as well as any other assets and
liabilities of the trust, if any, to determine the value
attributable to the junior certificates.
In September 2008, due to a combination of: (i) increased
market volatility, (ii) increased credit spread volatility,
and (iii) decreased market liquidity, we were concerned
that the valuations provided by the independent pricing services
might not accurately reflect the fair value of certain bonds
held by the trusts. After a detailed review of each position in
the portfolio, we determined that the independent prices for
certain bonds were too high, and an alternative lower valuation
would result in a more reasonable fair value. Therefore, we
reviewed broker evaluations for these particular bonds and
trades of similar bonds. Based on this analysis, we determined a
credit spread (the spread over the AAA municipal market rates)
would be a better measure of the fair value for these bonds.
Since September 2008, we have used the following methodology to
value the portfolio: the lower of 1) the average price from
two independent pricing services, and 2) the price that
would be determined by applying the credit spread described
above to the AAA municipal market rate.
On December 31, 2009, only five positions in our portfolio
were priced using the credit spread methodology; all other
positions were priced by using the average of the independent
pricing sources. As of
43
December, 31, 2009, if the entire portfolio was priced
exclusively by the independent pricing sources the total fair
value would have been $60,867,047. Using the credit spread
pricing methodology described above, the total fair value was
$57,971,131, a reduction of $2,895,916, or 9 cents per share.
As of June 30, 2010, if the entire portfolio was priced
exclusively by the independent pricing sources the total market
value would have been $67,184,189. Similarly, as of
June 30, 2010, the credit spread methodology generated a
total fair value of $62,579,435, a reduction of $4,604,754, or
12 cents per share.
Once the portfolio value is determined, we deduct the fair value
of the senior certificates of the trust (as described below) to
determine the residual value that accrues to the junior
certificate holder. All other net assets and liabilities of the
trust also accrue to the junior certificate holder. These
balances are immaterial in nature and are included in the
accrued interest receivables balance of the consolidated
statements of assets and liabilities.
The fair value of our senior certificates is the lower of the
par value of the senior certificates and the fair value of the
portfolio, plus a pro-rata share of 20% of the
appreciation of the financial assets owned by the trust over an
agreed upon threshold amount (Gain Share) due to the
senior certificates based upon the value of individual bonds in
the portfolio, determined in accordance with the Internal
Revenue Code.
Depending on the source of the asset valuations described above,
the junior certificate will generally be classified as either a
Level 2 or Level 3 financial instrument in the
valuation hierarchy. Any change in fair value of the junior
certificates will be recorded as a component of unrealized
gains/(losses) investments in the consolidated
statements of operations.
As of June 30, 2010, the fair value of the tax-exempt bonds
owned by NPPF II was greater than the par value of the principal
outstanding on the senior certificates and the Company valued
the junior certificates at $44.9 million. As of
December 31, 2009, the fair value of the tax-exempt bonds
owned by NPPF II was greater than the par value of the principal
outstanding on the senior certificates and the Company valued
the junior certificates at $40.7 million. There was no Gain
Share due to the senior certificates at June 30, 2010 and
December 31, 2009.
As of December 31, 2008, the fair value of the tax-exempt
bonds owned by NPPF II was less than the par value of the
principal of the senior certificates and the Company valued the
junior certificates at $0. There was no Gain Share due to the
senior certificates at December 31, 2008.When the asset
based valuation yields a result close to zero (or negative) yet
the residual interest continues to generate cash flow and is
expected to do so for the foreseeable future, we may use a cash
flow based valuation in such cases. However, although the
tax-exempt bonds owned by NPPF II continued to provide scheduled
cash flows and a cash flow based valuation methodology may have
been utilized, the Company did not value the junior certificates
using the cash flow based valuation method because of the
imminent mandatory auction date, as discussed in
Business Our Assets STEP and Other
Structured Credit Entities below. The senior certificate
was valued at $113.4 million which was lower than its
principal value of $116.1 million. Prior to the
consummation of this offering, we intend to restructure NPPF II
into two separate trusts. See Business Our
Assets STEP and Other Structured Credit Assets.
Cash Flow
Based Valuation
As discussed above, we generally use an asset based valuation to
measure the fair value of our junior certificate holdings.
However, we may use a cash flow based valuation in cases where
the asset based valuation yields a result close to zero (or
negative) yet the residual interest continues to generate cash
flow and is expected to do so for the foreseeable future.
As described above, during the latter part of 2008, due to
increases in market volatility and credit spread premia, and a
decrease in liquidity in the municipal bond market, there was a
reduction in value of the underlying assets of NPPF II to a
level below the par value of the senior certificates which led
to a zero valuation of the junior certificates. In addition, the
value of the underlying assets of the Merrill Lynch Trusts fell
below the par value of the senior certificates and the junior
certificates had a zero valuation using the
44
above described asset based methodology. For a further
discussion of the Merrill Lynch Trusts, see
Business Our Assets STEP and Other
Structured Credit Entities below.
However, the tax-exempt bonds owned by the Merrill Lynch Trusts
continued to provide scheduled cash flows and carried short
maturity dates ranging through 2011 and 2012. Therefore, the
Company determined that the cash flow based valuation
methodology would be used to value the junior certificates.
Under this methodology, the net future cash flows to the junior
certificates were determined based on the current rates of the
underlying investment assets and offset by the current rates on
the senior certificates, less any recurring trust expenses.
These net future cash flows were discounted by applying the
average discount rate applied to par as determined by the
independent pricing services in measuring the fair market value
of the assets.
The Net Carry or net investment earned by the trust
is comprised of the income earned on the tax exempt securities
acquired by the trust offset by the stated interest paid to the
senior certificates. The Net Carry is recorded on an accrual
basis and is recorded as a component of income-investments in
the consolidated statements of operations. Any accrued and
unpaid Net Carry is included as a component of receivables in
the consolidated statements of assets and liabilities.
Interest
Rate Swap
The fair value of the interest rate swaps is either included in
derivative asset or derivative liability in the consolidated
statement of assets and liabilities. Fair value is determined by
obtaining broker or counterparty quotes. Because there were
observable inputs used to arrive at these quoted market prices,
we considered the interest rate swaps to be Level 2
financial instruments within the valuation hierarchy. The change
in the unrealized loss is included as a component of unrealized
gains/(losses) derivatives in the consolidated
statements of operations. The periodic payments or receipts
under our interest rate swap contracts are recorded as an
increase or decrease in interest expense or income in the
consolidated statements of operations.
Income
Taxes
We believe we have operated to qualify and expect to continue to
operate as a partnership for U.S. federal income tax
purposes. As a partnership, we will not pay federal income tax
and will be treated as a pass through entity. However, MFCA
Funding, Inc., a wholly owned subsidiary of our company, is
organized as a C-corporation for U.S. federal income tax
purposes and will pay federal income tax. Further, we may be
subject to certain state and local income taxes.
With respect to MFCA Funding, Inc., deferred tax assets and
liabilities are determined using the asset and liability method
whereby deferred tax assets and liabilities are established for
future tax consequences of temporary differences between the
financial statement carrying amounts of assets and liabilities
and their tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in years in which those temporary differences are
expected to reverse. A valuation allowance is established when
necessary to reduce a deferred tax asset to the amount expected
to be realized. As of June 30, 2010 and December 31,
2009 and 2008, we had recorded a 100% valuation allowance
against the deferred tax asset in each period.
We evaluate tax positions taken or expected to be taken in the
course of preparing our tax returns to determine whether the tax
positions are more-likely than-not of being
sustained by the applicable tax authority. Our tax benefit or
tax expense is adjusted accordingly for tax positions not deemed
to meet the more-likely than-not threshold in the current year.
We record interest and penalties associated with audits as a
component of income before income taxes. Penalties are recorded
as an operating expense, and interest expense is recorded as
interest expense in the statements of operations. We incurred no
interest and penalties for the period from inception to
June 30, 2010.
Share-Based
Compensation
We issued share based compensation to the directors and
employees of the Former Manager and we account for such
issuances as equity-settled transactions using the methodology
prescribed by ASC Topic 718
45
(formerly SFAS No. 123(R), Share Based
Compensation, and Emerging Issues Task force (EITF)
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services). Non-cash incentive compensation to
employees was $0 for the six months ended June 30, 2010,
$313,591 and $776,422 for the years ended December 31, 2009
and 2008, respectively, and $892,232 for the period
June 12, 2007 (commencement of operations) through
December 31, 2007. Share based compensation for directors
was $7,836 for the six months ended June 30, 2010, $158,375
and $100,000 for the years ended December 31, 2009 and
2008, respectively, and $50,000 for the period June 12,
2007 (commencement of operations) through December 31, 2007.
Employees of our Former Manager received LTIP shares. LTIP
shares are a special class of limited liability company
interests whereby, upon the occurrence of certain events, we
will revalue our assets and an increase in the valuation will be
allocated first to the holders of the LTIP shares to equalize
the capital accounts of each LTIP share with the capital account
of each common share. Upon equalization of the capital accounts,
the LTIP shares will achieve full parity with the common shares
and, to the extent the LTIP shares are vested, can be converted
into common shares (a
book-up
event).
In June 2009, we offered to exchange existing LTIP shares, or
old LTIPs, for new LTIP shares, or new LTIPs, at a rate of
one-for-two,
whereby one new LTIP was issued in exchange for two old LTIPs.
Under the terms of the LTIP shares, we revalued our assets upon
the occurrence of certain specified events, and any increase in
valuation from the time of grant until such event were allocated
first to the holders of the LTIP shares to equalize the capital
accounts of each LTIP share with the capital account of a common
share. Upon equalization of the capital accounts, the LTIP
shares achieved full parity with the common shares for all
purposes, including with respect to subsequent allocations and
distributions, including, to the extent vested, liquidating
distributions. If such parity is reached, vested LTIP shares
become convertible into an equal number of common shares and
have all the rights of common shares following conversion. Such
parity was reached and vested LTIP shares were converted into an
equal number of common shares. Under the old LTIPs the
performance target was $10.00 per share. Under the new LTIPs the
performance target was $1.25 per share.
At the time the Company offered to exchange old LTIPs for new
LTIPs, the net asset value per share of the Company was below
the new performance target of $1.25 per share. Holders who
agreed to exchange their LTIP shares reduced the number of their
LTIP shares in exchange for the greater likelihood that the
performance target would be met and their shares would become
convertible to common shares. At the same time, the Company was
able to reduce the number of outstanding LTIPs without incurring
additional expense. All holders of outstanding LTIP shares
elected to convert to new LTIPs. The Company did not record any
compensation expense in connection with the LTIP exchange.
At a meeting of our board of directors held on July 23,
2009, the directors approved the issuance of common shares in
partial payment of a Performance Share allocation to our
manager. These shares were valued at $2.01 per share, which is
higher than the LTIP shares performance target of $1.25
per share. The issuance of these shares constituted a
book-up
event and the vested LTIP shares became eligible for
conversion to common shares. All LTIP shares were converted to
common shares as of December 31, 2009 and no LTIP shares
are currently outstanding. We did not record any compensation
expense in connection with the LTIP exchange. At the time of the
exchange, we estimated the fair value of a new LTIP share to be
$2.80 and the fair value of an old LTIP share to be $1.61 (or
$3.22 for two old LTIP shares).
Non-management directors received restricted common shares.
Quarterly distributions on each restricted common share, whether
vested or not, will be the same as those made on common shares.
The restricted shares are subject to restrictions on transfer
during the vesting period. In general, unvested restricted
shares will vest upon a change of control or other liquidation.
The fair value of the restricted common shares as of the grant
date is being amortized to share based compensation over the
three year vesting period of the underlying grants, net of
assumed forfeitures.
The restricted common shares granted to non-management directors
are common shares that are subject to vesting over a stated
period. Prior to vesting, the shares cannot be voluntarily or
involuntarily sold, transferred, pledged or assigned. Upon
vesting, the restriction is lifted and the shares are classified
as common
46
shares. LTIP shares are a separate class of shares that are
treated as common shares with all rights, privileges and
obligations attendant thereto, except that they cannot be
voluntarily or involuntarily sold, transferred, pledged or
assigned. LTIP shares vest over a stated period in the same
manner as the restricted common shares granted to non-management
directors. However, upon vesting, LTIP shares do not
automatically convert to common shares. LTIP shares become
convertible to common shares upon the occurrence of certain
specified events, and any increase in valuation from the time of
grant until such event is allocated first to LTIP shares in
order to equalize capital accounts (a
Book-Up
Event). In order for a
Book-Up
Event to occur, the specified event must be valued in excess of
a performance target which is designated at the time the LTIP
shares are granted. As such, LTIP shares have a performance
incentive component that does not exist for the restricted
common shares granted to non-management directors. LTIP shares
are granted to persons who provide services to the company or
its Manager.
Recent
Accounting Pronouncements
In June 2009, the FASB issued ASC Topic 860, Transfers and
Servicing and ASC Topic 810, which changed the accounting
for securitizations and variable interest entities, or VIEs. ASC
Topic 860 eliminates the concept of a qualified special purpose
entity, or QSPE, which is an off-balance sheet trust that meets
the qualifications in SFAS 140, changes the requirements
for derecognizing financial assets, and requires additional
disclosures about transfers of financial assets, including
securitization transactions and continuing involvement with
transferred financial assets. ASC Topic 810 will change the
determination of whether and when a VIE, should be consolidated.
ASC Topic 860 and ASC Topic 810 are effective for fiscal years
beginning after November 15, 2009. We are currently
evaluating the impact that ASC Topic 860 and ASC Topic 810 will
have on the consolidated financial statements.
In June 2009, the FASB issued ASC Topic 855, Subsequent
Events (formerly SFAS No. 165), which establishes
general standards of accounting for, and disclosing, events that
occur after the balance sheet date but before the financial
statements are issued or available to be issued. ASC Topic 855
requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, i.e.
whether the date represents the date the financial statements
were issued or were available to be issued.
In August 2009, the FASB issued Accounting Standards Update, or
ASU, 2009-5,
Fair Value Measurements and Disclosures Measuring
Liabilities at Fair Value, which amends ASC Topic 820 to provide
further guidance on how to measure the fair value of a
liability. ASU
2009-5
primarily sets forth the types of valuation techniques to be
used to value a liability when a quoted price in an active
market for the identical liability is not available. In these
circumstances, ASU
2009-5 states
that a company can apply the quoted price of an identical or
similar liability when traded as an asset, or other valuation
techniques that are consistent with principles of ASC Topic 820.
ASU 2009-5
will be effective for the next reporting period and we do not
expect such adoption to have a material effect on the
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update, or
ASU, 2010-6,
Fair Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements, which amends ASC
Topic 820 to provide further guidance on how to provide greater
levels of desegregation of asset classes. ASU
2010-6
primarily requires that transfers in and out of Level 1 and
Level 2 be disclosed, that investment activities within
Level 3 be disclosed on a gross basis, and that disclosure
be provided on valuation techniques and inputs used for fair
value measurements. ASU
2010-6 will
be effective for the next reporting period and we do not expect
such adoption to have a material effect on the consolidated
financial statements and footnotes.
Results
of Operations
Our principal sources of operating revenue are derived from
interest and realized and unrealized gains on our portfolio of
investments.
Our total revenue is dependent upon the aggregate balance of the
assets we own, the interest rates on those assets, and the
realized and unrealized gains or losses on our portfolio of
bonds. The aggregate balance of assets we own has declined from
our inception in 2007 until June 30, 2010 due to losses on
certain
47
investments. These losses were caused, in general, by the
decline in market value of the bonds we purchased and held
directly or in NPPF II or the Merrill Lynch Trusts. We also
incurred losses on an interest rate swap we entered into to
hedge our exposure to tax-exempt bonds. The average interest
rate on the tax-exempt bonds we own directly is 6.73%. The
average yield on the B certificates in NPPF II is 14.17%. The
earnings on our cash are 0.06%. Prior to the consummation of
this offering, we intend to restructure NPPF II into two
separate trusts. See Business Our
Assets STEP and Other Structured Credit Assets.
A portion of our revenue is derived from realized and unrealized
gains on our portfolio of bonds. Since the bonds we currently
own have fixed interest rates, as prevailing market interest
rates increase the value of our bonds decreases, assuming no
other factors affect the value of the bond. If the bonds are not
sold, this decline in value results in an unrealized loss from
one reporting period to the next. If the bonds are sold, the
decline in value results in a realized loss. Similarly, if
prevailing interest rates decrease, the value of our bonds
increases, resulting in realized or unrealized gains.
We acquired our portfolio of bonds in the last three quarters of
2007 and the first quarter of 2008, as the credit crisis
developed. During this time the demand for unrated tax-exempt
bonds weakened and the value of our bonds declined as a result.
In addition, the value of the underlying bonds in the Merrill
Lynch Trusts declined rapidly. The rate on such assets was based
on an interest spread over the London Interbank Offered Rate or
Bond Market Association rate, both of which declined
precipitously. As a result, the value of these bonds also
declined.
During 2008, we hedged our interest rate risk on our municipal
bond portfolio using the Securities Industry and Financial
Markets Association Municipal Swap Index. In normal financial
markets, interest rates on this index and municipal bonds
typically move in the same direction. For example, historically,
as the municipal swap index declines, interest rates in the
municipal market also decline, creating a hedge. In 2008,
interest rates in the Treasury and municipal markets moved in
opposite directions as investors reduced risk exposure.
Therefore, the yield on the swap index declined as the yield on
the municipal bonds increased, resulting in a loss of
$25 million on our hedge.
Our expenses consist primarily of management fees, professional
fees, incentive compensation, amortization of financing costs,
and general and administrative expenses, as described below. Our
management fees increase as the Net Asset Value (NAV) of the
company increases (except when offset by the portfolio
management fees of STEPs or other structured transactions that
our manager manages, as described in
Management The Management
Agreement Base Management Fees below). Other
expenses are not tied to NAV.
48
A summary of our results of operations for the six months ended
June 30, 2010 and 2009, for the two years in the year ended
December 31, 2009 and the period from June 12, 2007
(commencement of operations) to December 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(inception)
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income-investments
|
|
$
|
3,808,113
|
|
|
$
|
4,603,671
|
|
|
$
|
8,581,819
|
|
|
$
|
8,106,531
|
|
|
$
|
|
|
Income-total return swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903,623
|
|
|
|
1,150,382
|
|
Income-other
|
|
|
13,571
|
|
|
|
10,190
|
|
|
|
23,345
|
|
|
|
1,225,434
|
|
|
|
3,937,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,821,684
|
|
|
|
4,613,861
|
|
|
|
8,605,164
|
|
|
|
10,235,588
|
|
|
|
5,087,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee (related party)
|
|
|
696,815
|
|
|
|
322,287
|
|
|
|
962,670
|
|
|
|
1,276,477
|
|
|
|
1,111,993
|
|
Amortization of financing costs
|
|
|
|
|
|
|
34,468
|
|
|
|
194,559
|
|
|
|
38,912
|
|
|
|
|
|
Professional fees(1)
|
|
|
189,001
|
|
|
|
878,442
|
|
|
|
1,102,273
|
|
|
|
2,047,694
|
|
|
|
374,727
|
|
Insurance
|
|
|
9,411
|
|
|
|
193,257
|
|
|
|
266,788
|
|
|
|
313,994
|
|
|
|
96,250
|
|
Directors compensation
|
|
|
15,000
|
|
|
|
43,500
|
|
|
|
58,500
|
|
|
|
391,570
|
|
|
|
65,627
|
|
Other general and administrative(1)
|
|
|
39,719
|
|
|
|
22,266
|
|
|
|
61,341
|
|
|
|
268,986
|
|
|
|
90,260
|
|
Interest expense
|
|
|
92,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash incentive compensation (related party)
|
|
|
7,836
|
|
|
|
464,736
|
|
|
|
471,966
|
|
|
|
876,422
|
|
|
|
942,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,050,489
|
|
|
|
1,958,956
|
|
|
|
3,118,097
|
|
|
|
5,214,055
|
|
|
|
2,681,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
2,771,195
|
|
|
|
2,654,905
|
|
|
|
5,487,067
|
|
|
|
5,021,533
|
|
|
|
2,406,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
(474,191
|
)
|
|
|
(18,957,635
|
)
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,829,108
|
)
|
|
|
(2,710,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
|
|
|
|
|
(474,191
|
)
|
|
|
(18,957,635
|
)
|
|
|
(38,829,108
|
)
|
|
|
(2,710,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
1,991,448
|
|
|
|
20,694,588
|
|
|
|
54,464,711
|
|
|
|
(81,112,777
|
)
|
|
|
|
|
Derivatives
|
|
|
(411,023
|
)
|
|
|
|
|
|
|
27,095
|
|
|
|
7,241,926
|
|
|
|
(17,835,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
|
1,580,425
|
|
|
|
20,694,588
|
|
|
|
54,491,806
|
|
|
|
(73,870,851
|
)
|
|
|
(17,835,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from
operations before Performance Share Allocation
|
|
|
4,351,620
|
|
|
|
22,875,302
|
|
|
|
41,021,238
|
|
|
|
(107,678,426
|
)
|
|
|
(18,139,052
|
)
|
Performance Share Allocation
|
|
|
|
|
|
|
(3,283,586
|
)
|
|
|
(5,920,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from
operations after Performance Share Allocation
|
|
$
|
4,351,620
|
|
|
$
|
19,591,716
|
|
|
$
|
35,100,790
|
|
|
$
|
(107,678,426
|
)
|
|
$
|
(18,139,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The year ended December 31, 2009 reflects reclassification
of $138,900 of accounting fees from other general and
administrative to professional fees. |
Realized
and Unrealized Gains from Investments and
Derivatives
For the six months ended June 30, 2010, we had no realized
gains or losses and $1.6 million of net unrealized gains
from investments and derivatives, principally as a result of
appreciation in the value of our interest in the Class B
Certificates of NPPF II and direct investments in tax-exempt
bonds. For the six months ended June 30, 2009, we had
realized losses of $0.5 million from the disposition of
direct investment in
49
tax-exempt
bonds and unrealized gains of $20.7 million from
appreciation in NPPF II and direct investments in tax-exempt
bonds.
For the year ended December 31, 2009, we had total net
realized and unrealized gains from investments and derivatives
of $35.5 million. We had unrealized gains of
$54.5 million from appreciation in value of our interests
in NPPF II and the Merrill Lynch Trusts (as defined below), our
direct investments in tax-exempt bonds and an interest rate
swap. We had a realized loss of $0.5 million from the sale
of tax-exempt bonds, and a realized loss of $18.5 million
from the sale of the Class B Certificates of certain trusts
issued by Merrill Lynch (the Merrill Lynch
Trusts) back to Merrill Lynch, as discussed below in
Revenue.
For the year ended December 31, 2008, we had total net
realized and unrealized losses from investments and derivatives
of $112.7 million. We had unrealized losses of
$81.1 million from depreciation in the value of our
interests in the NPPF II Class B Certificates, Merrill
Lynch Trust Class B Certificates and our direct
investments in tax-exempt bonds. We had an unrealized gain of
$7.2 million from appreciation in the value of derivatives.
For the period from June 12, 2007 (commencement of
operations) through December 31, 2007, we had total net
realized and unrealized losses from a total return swap
derivative of $20.5 million, consisting of
$2.7 million of realized losses from derivatives and
$17.8 million of unrealized losses from derivatives.
We terminated our total return swap and converted it into the
NPPF II structure in response to the volatility and illiquidity
in the market precipitated by the financial crisis. The
conversion was undertaken for the following reasons. First, the
restructuring provided us a one year window to identify better
opportunities to sell the underlying assets in more stable
markets and avoid the need to sell in a volatile market at
depressed prices. Second, NPPF II did not require the posting of
additional collateral due to decreases in the value of the
underlying collateral which eliminated the need to continually
transfer margin between the company and the counterparty. The
conversion also created additional risk to the company because
the total amount of collateral NPPF II was required to post was
greater than the total amount of collateral the company was
required to post in connection with the total return swap. Other
than as described above, the economic positions of the parties
involved in the conversion did not change.
Revenue
Total revenue for the six months ended June 30, 2010 was
$3.8 million compared with $4.6 million for the six
months ended June 30, 2009. We earned our revenue primarily
from interest income from our investments in NPPF II
Class B Certificates, Merrill Lynch Trusts Class B
Certificates and our direct investments in tax-exempt bonds. The
revenue for the six months ended June 30, 2010 is lower
than the revenues for the same period in 2009 due to the
termination of the Merrill Lynch Trust in 2009 and dispositions
of $29.0 million of bonds from NPPF II during the six
months ended June 30, 2009.
Total revenue for the year ended December 31, 2009 was
$8.6 million, primarily earned from interest income from
our investment in the NPPF II Class B Certificates and our
direct investments in tax-exempt bonds. Total revenue for the
year ended December 31, 2008 was $10.2 million,
consisting of $8.1 million earned from interest income from
our investment in the NPPF II Class B Certificates,
investment in the Merrill Lynch Trusts Class B
Certificates described above and our direct investments in
tax-exempt bonds, $1.2 million interest earned on cash
balances, and $0.9 million interest earned from a total
return swap. Total revenue for the period from June 12,
2007 (commencement of operations) through December 31, 2007
was $5.1 million, consisting of $3.8 million interest
earned on cash balances, and $1.3 million interest earned
from a total return swap and tender option bond program.
Expenses
Our principal operating expenses include management fees,
professional fees, including auditing, tax, legal and accounting
fees, insurance, directors compensation, general and
administrative expenses, and non-cash incentive compensation.
Total expenses for the six months ended June 30, 2010 were
$1.1 million compared with $2.0 million for the six
months ended June 30, 2009. The reduction in expenses for
the six
50
months ended June 30, 2010 was principally the result of
(i) lower legal fees, (ii) elimination of financial
advisory fees, (iii) a reduction in insurance premiums and
(iv) a reduction in incentive compensation.
Total expenses were $3.1 million, $5.2 million and
$2.7 million for the years ended December 31, 2009 and
2008, and the period from June 12, 2007 (commencement of
operations) through December 31, 2007, respectively. The
significant decline in expenses in 2009 as compared to 2008 was
principally the result of (i) lower legal fees, (ii) a
reduction in the number of directors of our company and
(iii) a reduction in incentive compensation.
Management fees were $0.7 million for the six months ended
June 30, 2010, compared with $0.3 million for the six
months ended June 30, 2010.
Management fees consisted of $1.0 million,
$1.3 million and $1.1 million for the years ended
December 31, 2009 and 2008, and the period from
June 12, 2007 (commencement of operations) through
December 31, 2007, respectively. See
Management Our Manager for a description
of the Management Agreement.
Management
Agreement with Muni Capital Management
We are externally managed and advised by our manager pursuant to
the Management Agreement, which is described under
Management Our Manager.
Performance
Share Allocation
We did not pay our manager a Performance Share allocation for
the six months ended June 30, 2010. For the six months
ended June 30, 2009, we paid our manager a Performance
Share allocation of $3.3 million, with $1.2 million
paid in cash and $2.1 million paid in common shares of our
company. For the year ended December 31, 2009, we paid our
manager a Performance Share allocation of $5.9 million,
with $2.1 million paid in cash and $3.8 million paid
in common shares of our company. Prior periods did not have
Performance Share allocations.
The Performance Share entitles our manager to an allocation of
profits and cash distributions, payable quarterly in arrears.
From our inception until June 30, 2010, the Performance
Share entitled our manager to an allocation in an amount equal
to the product of: (i) the product of: (i) 20% of the
dollar amount by which (a) our consolidated net income,
before distributions on the Performance Share, per weighted
average common share for such quarter, exceeds (b) an
amount equal to the product of (1) the weighted average of
the prices per share of our common shares in any equity
offerings by us, including this offering, multiplied by
(2) the greater of (A) 2.0% and (B) 0.75% plus
one-fourth of the ten-year MMD Index (a benchmark index
customarily used in pricing municipal bonds) for such quarter
multiplied by (ii) the weighted average number of common
shares outstanding in such quarter. The current Performance
Share allocation formula is set forth in
Management The Management
Agreement Management Fee Performance
Share herein.
51
The following table shows the calculation of the Performance
Share allocation during 2009.
ALLOCATION
OF PROFITS TO PERFORMANCE SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2009
|
|
|
Q2 2009
|
|
|
Q3 2009
|
|
|
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Shares outstanding
|
|
|
|
|
|
|
17,847,015
|
|
|
|
36,241,429
|
|
|
|
36,695,141
|
|
Less excluded Incentive Shares
|
|
|
|
|
|
|
(566,915
|
)
|
|
|
(290,958
|
)
|
|
|
(57,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for Performance Share Allocation
|
|
|
|
|
|
|
17,280,100
|
|
|
|
35,950,471
|
|
|
|
36,637,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital raised on shares for Performance Share Allocation
|
|
|
|
|
|
$
|
172,276,000
|
|
|
$
|
199,841,475
|
|
|
$
|
195,217,252
|
|
Quarterly hurdle rate
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Base return for Performance Share Allocation
|
|
|
|
|
|
$
|
3,441,667
|
|
|
$
|
3,480,436
|
|
|
$
|
3,950,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
|
|
|
|
$
|
8,982,551
|
|
|
$
|
13,892,751
|
|
|
$
|
17,131,797
|
|
Exclude non cash incentive compensation
|
|
|
|
|
|
|
463,591
|
|
|
|
1,145
|
|
|
|
3,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, adjusted
|
|
|
|
|
|
|
9,446,142
|
|
|
|
13,893,896
|
|
|
|
17,135,109
|
|
Less base return on capital
|
|
|
|
|
|
|
(3,441,667
|
)
|
|
|
(3,480,436
|
)
|
|
|
(3,950,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for performance share calculation
|
|
|
|
|
|
$
|
6,004,475
|
|
|
$
|
10,413,460
|
|
|
$
|
13,184,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Share Allocation
|
|
|
|
|
|
$
|
1,200,895
|
|
|
$
|
2,082,691
|
|
|
$
|
2,636,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Net Assets Resulting from Operations
after Performance Share Allocation
For the six months ended June 30, 2010, we had a net
increase in net assets resulting from operations after
Performance Share allocation of $4.4 million or $0.12 per
weighted average basic and diluted common share outstanding. For
the six months ended June 30, 2009, we had a net increase
in net assets resulting from operations after Performance Share
allocation of $19.6 million or $0.87 per weighted average
basic and diluted common share outstanding. These increases are
primarily due to the appreciation in value of our various
tax-exempt assets and net interest income earned on those assets.
For the year ended December 31, 2009, we had a net increase
in net assets resulting from operations, after Performance Share
allocation, of $35.1 million or $1.30 per weighted average
basic and diluted common shares outstanding, primarily from
appreciation in value of our various assets. For the year ended
December 31, 2008, we had a net decrease in net assets
resulting from operations, after Performance Share allocation of
$107.7 million or $4.39 per weighted average basic and
diluted common shares outstanding (as revised to reflect the
impact of the June 2009 rights offering), primarily from
depreciation in value of our various assets. For the period from
June 12, 2007 (commencement of operations) through
December 31, 2007, we had a net decrease in net assets
resulting from operations, after Performance Share allocation,
of $18.1 million or $0.74 per weighted average basic and
diluted common shares outstanding (as revised to reflect the
impact of the June 2009 rights offering), primarily from
depreciation in value of our total return swap.
Effective January 1, 2009, we calculate basic and diluted
net increase (decrease) in net assets resulting from operations
per share by dividing net increase (decrease) in net assets from
operations for the period by the weighted average common shares
outstanding for the period, which includes common shares
outstanding, as well as vested and unvested restricted common
shares and vested and unvested LTIP shares. Prior to
January 1, 2009, basic and diluted net increase (decrease)
in net assets from operations per share did not take into
account the effect of unvested restricted common shares,
unvested LTIP shares.
As of June 30, 2010, 20,000 restricted shares had not
vested. As of December 31, 2009, 22,500 restricted shares
had not vested and all LTIP shares had been converted to common
shares. As of December 31, 2008, 15,000 restricted shares
and 246,584 LTIP shares had not vested and 320,331 LTIP shares
had vested. Both
52
basic and fully diluted shares outstanding include the
unrestricted common shares outstanding during the years ended
December 31, 2009 and December 31, 2008. Fully diluted
shares outstanding also include the dilutive effect of unvested
restricted common shares, vested LTIP shares that have not
achieved parity and unconverted LTIP shares.
For the year ended December 31, 2008, we determined that
the unvested restricted common shares and unvested LTIP shares
and the vested LTIP shares that have not achieved parity are
anti-dilutive. Therefore, the weighted average shares
outstanding on a fully diluted basis are the same as the
weighted average shares outstanding used for basic net
(decrease) increase in net assets from operations per share.
Distributions
We made distributions to the holders of our common shares of
$0.06 per share for the period from January 1, 2010 through
August 31, 2010. For the year ended December 31, 2009,
we did not make any distributions. We made distributions of
$0.24 per share for the year ended December 31, 2008 and
$0.08 per share for the period from June 12, 2007
(commencement of operations) through December 31, 2007.
Liquidity
and Capital Resources
We have minimal periodic liquidity needs, consisting primarily
of the 3% per annum interest accrual on the NPPF II Class A
Certificates and the base management fees paid to our manager.
These periodic amounts have been fully covered by the interest
generated by our portfolio of bonds in prior periods. A portion
of the portfolio interest in excess of the amounts needed to
cover such liabilities is used each quarter to reduce the
principal balance of the NPPF II Class A Certificates.
Beyond liquidity needed to acquire additional assets for growth,
our largest liquidity need is for the repayment of the principal
amount of the NPPF II Class A Certificates. These
certificates, which had a principal balance of approximately
$116.1 million at the beginning of the first quarter of
2009, have a current principal balance of approximately
$42.9 million which is expected to be reduced by
approximately $8.6 million by the end of November 2010, on
the distribution date, and are currently scheduled to be repaid
in full in the first quarter of 2011. The repayments to date
have been achieved as the result of portfolio dispositions. We
expect to continue paying down the balance of the Class A
Certificates either by continued disposition of the assets,
refinancing the Class A Certificates with a new holder or
by extending the repayment date with the current holder. We have
the option to extend the repayment date by one year if we pay
down the outstanding balance by $10.0 million. Unless the
balance has already been reduced to zero as a result of further
dispositions, we intend to make the $10.0 million pay-down
during the first quarter of 2011 using the methods set forth in
the second preceding sentence. This payment would reduce the
outstanding principal balance to not more than approximately
$24.3 million, an amount we would expect to pay off by the
first quarter of 2012 as a result of further dispositions of
portfolio bonds.
As of June 30, 2010, we had cash and cash equivalents of
$28.3 million and restricted cash of $0.4 million
which is not available to us. At June 30, 2010, we had
outstanding liabilities including management fees and other
liabilities of $0.8 million.
We believe that our liquidity level is sufficient to enable us
to meet our anticipated liquidity requirements for at least the
next twelve months. We may seek to invest in the residual
certificates of tender option bond programs as part of our near
term and longer term financing strategy. In addition, we may
seek to obtain fixed rate term financing as part of our longer
term financing strategy. The cost and availability of such
financing may be adversely impacted by concerns about the
systemic impact of unemployment, inflation, energy costs,
geopolitical issues, the U.S., European and other international
mortgage markets, declining residential and commercial real
estate markets, as well as significant bankruptcies and
government interventions in the credit markets and by interest
rate volatility.
53
Cash
Flows from Operations
Our net cash used in operating activities for the six months
ended June 30, 2010 was $.1 million, consisting of
$3.8 million investment income, net purchases of
investments of $2.6 million, $1.1 million in general
and administrative expenses, and margin deposits of
$.2 million. For the six month period ended June 30,
2009, we used cash of $4.5 million for operating
activities, consisting of $4.7 million of investment
income, $8.2 million net purchases of investments, and
$1.0 million in general and administrative expenses.
Our net cash provided by operating activities for the year ended
December 31, 2009 was $45,782, consisting of investment
income of $9.7 million, net purchases of investments of
$7.1 million, general and administrative expenses of
$2.2 million and margin deposits of $.3 million.
Our net cash used in operating activities for the year ended
December 31, 2008 was $114.3 million, consisting of
investment and interest income of $7.1 million, restricted
cash collateral released by a counterparty of
$29.0 million, net purchases of investments of
$106.9 million, net realized losses on termination of
derivatives of $38.8 million and general and administrative
expenses of $4.0 million.
Our net cash used in operating activities for the period
June 12, 2007 (commencement of operations) through
December 31, 2007 was $29.4 million, consisting of
investment income of $3.7 million, collateral posted with a
total return swap counterparty of $29.0 million, realized
losses on the termination of derivatives of $2.0 million
and general and administrative expenses of 2.1 million.
Cash
Flows from Financing Activities
Our net cash used in financing activities for the six months
ended June 30, 2010 was $1.1 million for the
distributions to the holders of our common shares. We did not
have any cash flow from financing activities for the six month
period ended June 30, 2009.
Our net cash provided by financing activities provided net cash
of $19.5 million for the year ended December 31, 2009,
consisting of $21.6 million from the issuance of common
shares (net of costs of $.2 million) and $2.1 million
cash used to pay the Performance Share allocation.
Our net cash used in financing activities used net cash of
$4.3 million for the year ended December 31, 2008,
primarily due to distributions to common and LTIP shareholders.
Our net cash provided by financing activities provided net cash
of $157.5 million for the period June 12, 2007
(commencement of operations) through December 31, 2007,
consisting of $158.9 million from the issuance of common
shares (net of costs of $13.5 million) and
$1.4 million of cash used for distributions to common and
LTIP shareholders.
Off-Balance
Sheet Arrangements
As of June 30, 2010 and December 31, 2009, we did not
have any off-balance sheet arrangements, as defined by SEC rules.
Contractual
Obligations
As of June 30, 2010 and December 31, 2009, we owed our
manager $116,925 and $114,756, respectively, for the payment of
management fees and reimbursable expenses pursuant to the
Management Agreement. The initial term of the Management
Agreement expires on December 31, 2010, and is
automatically renewed for a one-year term on each anniversary
date thereafter unless terminated as set forth in the Management
Agreement. As such, we have a contractual obligation to pay our
manager an estimated management fee of $1.3 million based
on the asset value as of December 31, 2009.
We may employ leverage in connection with our acquisitions of
interests in STEPs and other structured credit entities and may
engage in total return swaps to provide us with economically
leveraged returns. We may also employ more traditional methods
of financing, currently expected to consist primarily of
warehouse credit facilities and secured lines of credit. See
Business Our Financing Strategy.
54
Qualitative
and Quantitative Information About Market Risk
We are exposed to credit risk and interest rate risk related to
the interests we hold in tax-exempt bonds. Interest rates may be
affected by economic, geo-political, monetary and fiscal policy,
market supply and demand and other factors generally outside our
control, and such factors may be highly volatile. Our interest
rate risk sensitive assets and liabilities and financial
derivatives typically are held for long-term investment and not
held for sale purposes. Our intent in investing in STEPs and
other structured credit transactions is to limit interest rate
risk by matching the terms of our investment assets with the
terms of our liabilities and, to the extent necessary, through
the use of hedging instruments, but market conditions may
preclude us from doing so.
We hold five tax-exempt bonds directly for four different
obligors. The aggregate par amount of these bonds as of
June 30, 2010 was $19.8 million. The weighted average
coupon of these bonds was 6.73% and the weighted average
maturity was 18.2 years as of June 30, 2010.
As of June 30, 2010, we hold the Class B Certificates
of NPPF II. As of June 30, 2010, NPPF II is a portfolio of
20 tax-exempt bonds with an aggregate par value of
$137.1 million, a weighted average yield of 6.11%, and a
weighted maturity of 26.1 years. NPPF II issued two classes
of Certificates, Class A and Class B. We own the
Class B Certificates with a par amount of
$74.2 million and a fair value of $44.9 million as of
June 30, 2010. For the $137.1 million par value of
bonds in the NPPF II portfolio, a 100 basis point increase
in interest rates would result in a reduction in their market
value of approximately $9 million. Additionally, we have
further hedged increases in interest rates by entering into an
interest rate swap with a 10 year term and a
$5 million notional balance, as further described in
Business Our Assets Derivative
Assets herein. A 100 basis point increase in rates
would result in a market value gain of approximately $300,000.
Increases or decreases in LIBOR, BMA or MMD may result in
corresponding increases or decreases in our interest income and
distributions payable to holders of certificates issued by STEPs
and tender option bond trusts and payments to counter-parties
under total return swaps, thereby mitigating the net earnings
impact on our overall portfolio. For example, AAA
MMD, a benchmark municipal interest rate, declined from 5.04% on
January 2, 2009 to 4.13% on December 31, 2009. As a
result of this decline in interest rates and reduction in credit
spreads, the average price of our portfolio as a percentage of
par increased from 64.0% to 77.5%. In the event that long-term
interest rates increase, the value of fixed rate tax-exempt
bonds would decrease. We may consider hedging this risk in the
future if the benefit outweighs the cost of the hedging
strategy. Such changes in interest rates would not have a
material effect on the income of these bonds, which generally
will be held to maturity.
We seek to manage our credit risk through underwriting and
credit analyses that are performed in advance of acquiring an
investment and our managers continued surveillance of our
investments. The obligations that we may consider as reference
assets for total return swaps and for future STEPs and other
structured credit transactions are subjected to a comprehensive
credit analysis process.
55
BUSINESS
Overview
We are a specialty finance company that focuses on the
investment in the debt instruments of United States non-profit
and municipal entities primarily through direct and indirect
acquisition of tax-exempt mortgage revenue bonds or other
obligations (secured primarily by interests in real estate),
assets derived from such bonds or other assets as described
herein. We are or expect to be involved in a variety of
businesses, including holding or acquiring tax-exempt
obligations, mortgage-related holdings, interests in structured
credit entities, taxable municipal bonds (including Build
America Bonds, which are described herein), derivative
instruments, equity interests in real estate (such as affordable
housing partnerships), other equity investments, investments in
taxable tails or tax credits and other assets. We
derive our income from interest on the assets held by us and our
subsidiaries and from any gains on the sale or prepayment of
assets. Our assets are, in general, primarily secured by
mortgages on the real estate held by the obligors. We may also
invest in equity interests in entities that primarily hold real
estate interests, particularly in affordable housing.
We specialize in acquiring direct and indirect debt interests in
middle-market non-profit and municipal borrowers that are, in
general, primarily secured by mortgages backed by the real
estate interests of such borrowers, and often secured by the
pledges of gross revenue of such borrowers and a debt service
reserve fund as well, although we may invest in debt instruments
not secured by either real estate or the cash flows of a
non-profit entity or a debt service reserve fund.
We are organized as a Delaware limited liability company and we
believe we have operated and intend to operate in a manner to
qualify as a partnership for U.S. federal income tax
purposes. This structure allows us to combine the limited
liability, governance and management characteristics of a
corporation with the pass-through tax features of a partnership.
As a result, the income we generate generally will pass through
to our shareholders. One or more of our subsidiaries may be
organized as taxable C corporations that will be subject to
applicable U.S. federal, state and local income tax on
their earnings. Our wholly-owned subsidiary, MFCA Funding, Inc.,
which is a taxable C corporation, may enter into derivative
arrangements or engage, directly or through such derivative
arrangements, in sales and trading activities. See
Material Federal Income Tax Consequences for
additional information concerning the tax consequences of an
investment in our Class A common shares.
Our portfolio of assets, as of June 30, 2010, consisted of
the following:
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five tax-exempt obligations issued by or on behalf of
middle-market non-profit entities with an aggregate market value
of approximately $17.7 million and an aggregate notional
balance of approximately $19.8 million, secured by first
mortgages or deeds of trust in the real property held by such
entities as well as, in many cases, a pledge of the
obligors gross revenue and a one-year debt service reserve
fund; two of these obligations are held by MFCA Funding, Inc.,
our wholly-owned subsidiary;
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approximately $44.9 million by notional balance of junior
trust certificates of NPPF II, a STEP which owns 20 tax-exempt
obligations primarily issued by or on behalf of non-profit
entities; NPPF II is an unconsolidated subsidiary of ours,
having an aggregate notional balance of approximately
$137.1 million;
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an interest rate swap with a notional amount of
$5.0 million obligating us to pay a fixed rate of interest
in return for receiving a floating rate of interest tied to
LIBOR, with a
mark-to-market
loss of approximately $384,000; and
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cash and cash equivalents of approximately $28.3 million.
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The primary component of our revenue is net interest income, or
the difference between the interest income on our interest
earning assets and the interest cost of our borrowings. Our net
interest income totaled $3.8 million for the six months
ended June 30, 2010. Prior to the consummation of this
offering, we intend to restructure NPPF II into two separate
trusts. See Our Assets STEP and
Other Structured Credit Assets.
See Our Assets for additional
information concerning our assets.
56
Our
Manager and its Affiliates
We are externally managed and advised by Muni Capital
Management. Muni Capital Management is a wholly-owned subsidiary
of Tricadia Holdings. Prior to March 18, 2009, we were
managed by the Former Manager. In February 2009, Tiptree
acquired a controlling interest in us, and caused the assignment
of our Management Agreement from the Former Manager to Muni
Capital Management. Currently, Tiptree owns approximately 73.81%
of our outstanding Class B common shares
representing % of our combined
voting power immediately after this offering, and may also
purchase Class A common shares pursuant to this offering.
Tricadia is an asset management firm founded in 2003 by Michael
Barnes and Arif Inayatullah. Tricadia is based in New York, New
York, has approximately $5 billion in assets under
management and employs approximately 50 professionals.
Market
Overview
We seek to acquire, among other possible investments described
herein, the types of obligations described below.
Middle
Market Non-Profit Entities
Part of our focus is on obligations issued by or on behalf of
501(c)(3) non-profit public organizations that have
$50 million or less in annual revenues, which we refer to
as middle market non-profit entities. These
obligations are generally secured by first mortgages or deeds of
trust on the real property held by the entities, may be
additionally secured by the pledges of gross revenue of such
entities and a debt service reserve fund. Based on data set
forth in The Nonprofit Almanac 2008, which is based on
Form 990 reporting from 2005, approximately 400,709
reporting charitable tax-exempt entities controlled
approximately $1.1 trillion of assets. These charitable
tax-exempt 501(c)(3) organizations constitute a portion of the
target market of our company, and include, among others,
hospitals, schools, universities, multi-family housing,
redevelopment districts and clinics.
We believe that obligations issued by or on behalf of these
entities can be an attractive asset for us since many of these
entities have local support and provide important services to
their communities and typically are able to provide a mortgage
or revenue pledge as security for their obligations.
Furthermore, we believe that the debt obligations of
middle-market non-profit entities generally are attractive
assets because (i) they often exhibit favorable credit
characteristics such as having a strong market position or being
a provider of essential services and (ii) such entities
often have the benefit of receiving predictable payments from
government sources or commercial insurers, which provide much of
the funding for the services provided by such entities.
Middle market, non-profit entities often find it difficult to
raise capital in the traditional capital markets as a result of
their size, the complex nature of their business or regulatory
framework and because they do not seek to raise large amounts of
money. As a result, these borrowers have traditionally relied on
local commercial banks to provide financing. Our manager has the
expertise to selectively identify and purchase obligations of
these obligors in the secondary market and can offer them
financing alternatives in the primary market.
Revenue
Bonds
We expect that a significant portion of the middle-market
tax-exempt bonds that we acquire will be revenue bonds, which
are secured primarily by a first mortgage or deed of trust on
the non-profit entity obligors real property, as well as
the operating revenues of the obligor and a debt service reserve
fund. These bonds are distinguished from general obligation
bonds that are generally secured solely by a pledge of the
taxing power of the nominal governmental issuer of the bonds.
Therefore, the repayment of the revenue bonds will depend
entirely on the revenues of the non-profit entity obligor
and/or any
private guarantor of the bonds.
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Revenue bonds include bonds issued on behalf of non-profit
organizations, such as the organizations discussed under
Tax-Exempt Obligations below . Revenue
bonds typically have yields in excess of general obligation
bonds.
We also occasionally finance projects with revenue bonds for
facilities owned by municipal entities, such as county-owned
hospitals that cannot grant a mortgage on the property. We would
therefore seek to secure available collateral, such as a
leasehold mortgage or a lien on accounts receivable, or require
the obligor to agree that its assets cannot be encumbered by
other lenders. We are attracted to revenue bonds issued by
municipally owned entities because they typically have yields in
excess of general obligation bonds. All of our current
underlying bonds are revenue bonds, and are described in
Business Portfolio Overview.
Municipally-Owned
Obligations
We occasionally finance projects owned by municipal entities,
such as county-owned hospitals, that cannot grant a mortgage on
the property financed. We would therefore seek to secure
available collateral, such as a leasehold mortgage or a lien on
accounts receivable, or obtain a pledge that assets cannot be
encumbered by other lenders. Other than the inability to receive
a mortgage, the characteristics of these assets are similar to
revenue bonds described above.
General
Obligation Bonds and Structured Finance
Opportunities
We may also acquire general obligation
government-issued bonds. General obligation bonds, unlike
revenue bonds, are secured by the governmental issuers
pledge of its faith, credit and taxing power, which may be
limited or unlimited, for the payment of principal and interest
and, as a result, are generally more highly rated than revenue
bonds. According to The Bond Buyers Annual Bond
Sales and Annual Note Sales statistical archive, there were
approximately $4.193 trillion of long-term and short-term
general obligation bonds and notes issued during the ten-year
period between January 1, 2000 and December 31, 2009.
We may seek to enhance our returns from these types of bonds by
depositing all or a portion of the beneficial interests in such
bonds in structured finance trusts. Prior to the tightening
conditions in the credit and lending environments experienced
since August 2007, investors were able to take advantage of the
historically low default rates of general obligation tax-exempt
bonds and other highly-rated or enhanced tax-exempt obligations
to obtain financing in the short-end of the municipal bond
marketplace. An investor could then earn the spread between such
financing and their residual position with limited capital risk
and limited expected volatility.
As a result of ongoing instability in this marketplace, we
believe that there will be continued price volatility in the
underlying assets, resulting in opportunities to acquire
performing assets at favorable prices. We believe that our
knowledge of the marketplace will enable us to opportunistically
take advantage of continuing dislocations in this market.
However, the global credit crisis, which began in 2007,
continues to impact the availability and the cost of financing,
and may limit our ability to profit from these opportunities.
See Our Financing Strategy herein.
Market
Trends and Opportunities
The dislocation in the capital markets that began in 2007
affected the municipal bond market by reducing liquidity and
initially driving up yields in all rating categories. According
to The Bond Buyer, reported assets in municipal bond
funds declined from $397.55 billion in September 2008,
which was an all-time high at that time, to $336.94 billion
in December 2008. This decline resulted from $9.1 billion
in outflows from the funds and the remainder from market losses.
From January 1 through December 21, 2009, municipal bond
funds have reported inflows of $77.38 billion according to
The Bond Buyer. These inflows, together with market
appreciation of $42.39 billion, lifted the industry-wide
valuation of the assets of municipal bond mutual funds to
$463.59 billion.
Although there was an increase in municipal bond mutual fund
assets in 2009, various factors have contributed to a decline in
yield. Since the Federal Reserve Bank cut its benchmark interest
rate to a range of
58
zero to 0.25% on December 16, 2008, The Bond Buyer
Revenue Bond Index declined 127 basis points from 6.22%
on December 18, 2008 to 4.95% on December 30, 2009. In
addition, the popularity of Build America Bonds, or BABs, which
were created by the American Recovery and Reinvestment Tax Act
enacted on February 17, 2009, has contributed to a decline
in yield in 2009. BABs are issued by selected municipalities as
an alternative to tax-exempt bonds. Since BABs are taxable
municipal bonds, they reduce the supply of tax-exempt bonds and
increase demand for other tax-exempt bonds. Since April 15,
2009, the date of the first BABs issuance, $148.9 billion
of BABs were issued.
However, we believe that there still are attractive
opportunities to acquire municipal obligations. The decline in
the use of municipal bond insurance for investment grade and
non-investment grade tax-exempt obligations has increased the
opportunities to buy obligations that generate yield both in the
primary and secondary markets. A number of insurers have exited
the market since 2007, and The Bond Buyer reports that
the percentage of bonds issued with insurance was 8.5% through
December 2009, down from a peak of over 50% in 2005.
Furthermore, over a longer time period, from June 28, 2007
to July 29, 2010, yields on tax-exempt obligations have
increased both in nominal terms and relative to 30 year
Treasury bonds. In nominal terms, according to The Bond
Buyers Revenue Bond Index, yields on tax-exempt bonds
increased from 4.71% to 4.80%. Relative to Treasury bonds, over
the same period, the spread increased from -50 basis points
to +83 basis points. The interest rate spread between
general obligation bonds and revenue bonds, based on The Bond
Buyers 20 Bond GO and Revenue Bond Indices, increased
from 11 basis points to 59 basis points over the same
time period. The reduction in the number of active bond
insurers, the increased interest rates for tax-exempt bonds and
the increased spread for revenue bonds relative to government
obligation bonds all have created attractive opportunities to
acquire tax-exempt obligations in both the primary and secondary
markets.
We also may directly invest in BABs, which are taxable
obligations and therefore offer higher yields than tax-exempt
obligations.
Competitive
Strengths
Experienced Management Team. Our management
team has significant tax-exempt and structured finance
experience, and have been involved in tax-exempt financings in a
variety of capacities, including the originating and structuring
of such financings and structuring of such structured finance
vehicles. Members of our management, namely Christopher Conley,
Eileen Mullin and Daniel DiBono, originated, structured, and
continue to manage Non-Profit Preferred Funding Trust I
(NPPF I), a $416.5 million,
multi-tranche STEP transaction that is currently held by
unaffiliated third party investors (including affiliates of our
Former Manager). From inception through December 31, 2009,
NPPF I made all scheduled cash distributions. However, as a
result of a combination of rating methodology changes and rating
migration in the underlying portfolio, Fitch downgraded the
certificates of NPPF I as follows:
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Class A
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From AAA
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To A/LS2
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Class B
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From AA
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To BBB/LS5
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Class C
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From A
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To B/LS5
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Class D
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From BBB
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To CCC/RR3
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Our management team also structured NPPF II, a
$182.6 million STEP transaction which owns tax-exempt bonds
issued by or on behalf of non-profit obligors, which issued
Class B junior certificates that we currently hold. In
addition, members of our management team were involved in the
formation of our company.
Disciplined Acquisition Process. We believe
that we and our manager employ a sophisticated and disciplined
underwriting process, which is based on detailed credit analysis
of obligors and underlying collateral. Our manager performs an
extensive and detailed due diligence process for each proposed
and/or
planned transaction, as discussed in Credit
Analysis and Risk Management below. Our manager has
significant expertise in analyzing the operations and financial
statements of non-profit institutions that issue or are
otherwise obligors of tax-exempt instruments.
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Primary Market Origination Network. Our
manager has developed extensive contacts among originators of
unrated municipal obligations, which we believe will provide us
with access to these types of assets. This network includes
regional and local broker-dealers and independent financial
advisors. This network may result in favorable pricing on asset
acquisitions and originations, which could produce greater
returns to investors. Furthermore, we also intend to utilize
this network to partner with such broker-dealers in the
structuring and marketing of structured products.
Significant Ownership Interest by Our Management
Team. Our management team (excluding
Tiptrees holdings) owns in the aggregate approximately
1,835,984 common shares, or approximately 4.91% of our common
shares outstanding after giving effect to this offering. We
believe that our management teams interests and those of
our shareholders are aligned, since we believe that the
significant equity interest held by our management team
encourages them to focus on building long term value and a
strong franchise.
Our
Business Objective and Strategies
Our business objective is to acquire municipal obligations
(which in many cases are primarily secured by mortgages of real
property or deeds of trust secured by real property),
mortgage-related holdings and other assets, a portion of which
we expect will consist of pass-through income exempt from
U.S. federal income tax. We intend to seek to achieve this
objective through acquisitions of the following types of assets:
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tax-exempt obligations;
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interests in non-recourse, low to moderately leveraged
structured credit entities that own tax-exempt obligations;
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total return swaps and other derivative arrangements relating to
tax-exempt obligations;
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taxable municipal obligations (including BABs); and
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interest rate and credit hedges to reduce price volatility and
risk.
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We may also opportunistically acquire from time to time assets
that are within our managers areas of expertise and
experience but do not relate to tax-exempt obligations or BABs,
subject to maintaining our classification as a partnership for
U.S. federal income tax purposes and our exemption from
registration under the Investment Company Act. Prior to the
consummation of this offering, we intend to restructure NPPF II
into two separate trusts that will each have a separate
investment strategy. See Business Our
Assets STEP and Other Structured Credit Assets.
Our manager has extensive expertise in health care, education,
service/advocacy, cultural and research sectors and considerable
(though less extensive) expertise in affordable housing and
military housing, redevelopment/tax increment financing bonds,
research, infrastructure, philanthropic and general obligation
bonds. We intend to acquire assets principally within these
sectors. We concentrate on investments in bonds from issuers
throughout the United States and do not generally focus on any
specific geographic regions. We expect to continue to invest in
unrated bonds or bonds rated below investment grade, though we
may also invest in investment grade obligations. We expect to
continue to invest in the health care, education, social
services and cultural sectors, and expand into other sectors
such as affordable housing, military housing and general
obligation as the opportunities arise.
Our governing instruments do not limit the types of assets we
may acquire. The tax-exempt obligations that we acquire may be
investment grade or non-investment grade and may be rated or
unrated. As described below, these obligations may be issued to
obtain funds for various public purposes, including the
construction of a wide range of public facilities, refunding of
outstanding obligations and obtaining funds for general
operating expenses and loans to other public institutions and
facilities. In addition, obligations that we acquire may be
issued by or on behalf of public authorities to finance
privately owned or operated facilities, including facilities for
the local furnishing of electricity or gas or sewage, solid
waste disposal or other specialized facilities. We also may
enter (through our subsidiary) into total return swaps that are
subject to tax on the income earned under the swap. In addition,
we may acquire tax-exempt obligations that are subject to
60
alternative minimum tax, and may also acquire opportunistically
from time to time assets that generate taxable income.
A discussion of the material federal income tax implications of
the ownership of our Class A common shares is set forth in
Material U.S. Federal Income Tax Considerations
below. Potential investors should also consult their own tax
advisors in determining the federal, state, local, foreign or
any other tax consequences regarding the ownership of our
Class A common shares.
Although we do not actively seek to trade our assets, from time
to time we may take advantage of marketplace opportunities and
dispose of assets prior to their stated maturity or prior to the
termination date of a structured credit entity. In 2009, such
dispositions resulted in realized losses of $19.0 million.
However, this amount was in excess of the carrying value of
these assets at the time of disposition and therefore resulted
in a net increase to our net asset value.
As we invest our capital, we expect the composition of our
portfolio to change in size and asset type. We have no target
level for assets in specific industry classes or geographic
location. We plan to continue to acquire tax-exempt and taxable
bonds in the health care, education, social services, and
cultural organization sectors. We also plan to acquire assets
(which may consist of debt or equity securities) in other
sectors on which we and our manager have been less focused, such
as affordable housing, redevelopment, military housing,
infrastructure, research, philanthropic and general obligation,
sectors on which both us and our manager have been less focused
as of the date hereof.
The primary types of assets that we intend to acquire are
described below.
Tax-Exempt
Obligations
We expect that a significant portion of the tax-exempt
obligations that we acquire directly or which comprise our
underlying assets will be unrated or rated below investment
grade by one or more nationally recognized rating agencies
(Baa3 or lower by Moodys or BBB-
or lower by Fitch or Standard & Poor). We may, under
certain circumstances, obtain private ratings on unrated
tax-exempt obligations.
We expect that a significant portion of the tax-exempt
obligations underlying our assets or which we acquire directly
will be issued by or on behalf of one of the following types of
non-profit institutions or state authorities:
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Health Care: general and acute care hospitals,
critical access hospitals, behavioral and primary health care
providers, assisted living facilities, clinics, long-term care
facilities and continuing care retirement communities;
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Educational: primary, secondary, technical and
higher education institutions, including private, public,
charter, religious or independent schools;
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Housing: entities whose primary purpose is to
own or capitalize multifamily or single family residential
rental properties, and state housing authorities which issue
tax-exempt bonds in order to finance residential mortgage loans,
including loans for affordable housing projects, in their
states, as well as military housing bonds;
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Infrastructure: institutions related to power
generation, utilities, roads, transportation, water, sewage and
other aspects of public infrastructure;
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Redevelopment/Tax Increment Financing
Bonds: specially-created tax districts that
generate specific tax revenue from a defined area surrounding a
redevelopment project;
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Cultural: museums, aquariums, zoos, botanical
gardens, performing arts venues (such as opera, symphony, dance
and theater) and public television and radio;
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Research: non-degree granting institutions
whose primary purpose is research;
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Philanthropic: institutions whose primary
purpose is to distribute funds to other entities, generally for
humanitarian purposes; and
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Service/advocacy: organizations that provide
community and social services to different constituent groups,
including social service organizations, professional
associations and religious organizations.
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Our tax-exempt assets may also include moral
obligation bonds, which typically are issued by special
purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of the
bonds becomes a moral, but not a legal, obligation of the state
or municipality in question.
In addition, our tax-exempt obligations may include Certificates
of Participation, or COPs, issued by government authorities or
entities to finance the acquisition of equipment, land
and/or
facilities or the construction of facilities. COPs represent
participation interests in a lease, an installment purchase
contract or a conditional sales contract relating to the assets
being financed. COPs generally are not backed by the
obligors unlimited taxing power. Instead, payment is
subject to annual appropriation by the obligor, and if
insufficient funds are allocated to the obligation, we may not
received scheduled distributions of principal and interest in
full. Furthermore, certain COPs are secured by property that
serves the basic functions of government, and therefore
foreclosing on such property could be difficult.
We generally do not expect to directly acquire any tax-exempt
obligations originated by our manager. We do, however, expect
that any STEPs and other structured credit entities in which we
acquire an interest will hold tax-exempt obligations that were
originated by our manager and later sold to such vehicles. We
also expect the reference portfolios relating to our total
return swaps, if any, to include tax-exempt obligations
originated by our manager.
As of June 30, 2010, we directly or indirectly owned bonds
having an aggregate fair value of $125.5 million,
$107.8 million of which were held in NPPF II, and
$17.7 million of which were held directly by us and MFCA
Funding, Inc. The obligors of approximately $29.3 million
of these bonds at fair value are educational organizations
(23.4% of total), approximately $26.9 million are health
care/acute care organizations (21.4%), approximately
$32.8 million are health care/behavioral organizations
(26.1%), approximately $7.7 million are social services
organizations (6.1%) and approximately $28.8 million are
other non-profit organizations (23.0%). As presented in the
chart below, just over 70% of the current portfolio consists of
education and health care bonds.
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Total Education
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$
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29,296,824
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23.4
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%
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Total Health Care Acute
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$
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26,895,687
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21.4
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%
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Total Health Care Behavioral
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$
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32,810,443
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26.1
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%
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Total Social Services
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$
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7,665,136
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6.1
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%
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Total Other Non Profit
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$
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28,847,299
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|
|
|
23.0
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%
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Total fair value
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$
|
125,515,389
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|
|
|
100.0
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%
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With portfolio growth and diversification over time, we expect
that the concentrations in health care and education will
decrease, although there can be no assurance as to the extent of
the decrease, if any.
STEP
and Other Structured Credit Entities
As part of our strategy, we may acquire interests in STEPs or
other structured credit entities that hold tax-exempt
obligations. We expect that these obligations will be primarily
secured, in general, by mortgages or deeds of trust backed by
the real estate interests of such borrowers, and often secured
by the operating revenues of such borrowers, as well as a debt
service reserve fund. We expect that most of these vehicles will
be managed by our manager, although we may opportunistically
acquire interests in structured credit entities managed by third
parties. The underlying assets held by these entities may
consist of tax-exempt obligations originated by our manager or
third parties and later sold to them.
The STEP structure was developed to permit the pass-through of
tax-exempt interests in underlying bonds to the holders of trust
certificates. Like many structured finance transactions, STEP
transactions use tranching of the certificates to create credit
enhancement.
62
The certificates in a STEP transaction differ from many other
types of structured finance transactions in that they represent
equity interests in the transaction and, as such, the tax-exempt
nature of the bond interest is passed through and each
certificateholder participates in the gain from the sale or
disposition of the underlying assets. A STEP is a special
purpose entity that is structured as a partnership for
U.S. federal income tax purposes and issues two or more
classes of certificates to finance the acquisition by the STEP
of a portfolio of tax-exempt obligations. The classes of
certificates issued by the STEP have differing levels of
priority with respect to distributions of the income generated
by the assets held by the STEP. We may acquire all or a portion
of the junior STEP certificates issued by such entities. We may
also acquire all or a portion of the more senior classes of
certificates. In the event we acquire at least a majority of the
most junior class of certificates and such interest represents a
majority voting interest
and/or other
indications of majority control (such as the ability to
unilaterally replace the trustee), these STEPs and other
structured credit entities will be treated as our subsidiaries.
It is our current expectation that, based on the interests we
expect to own in STEP issuers, they will not be treated as our
subsidiaries. We are not required to purchase any minimum amount
of interests in a STEP.
On May 8, 2008, we and Merrill Lynch agreed to create four
new trusts (the Merrill Lynch Trusts) to acquire
four bonds previously held as part of a Tender Option Bond
program by issuing Class A Senior Certificates (the
senior certificates) and Class B Junior
Certificates (the junior certificates). We purchased
the junior certificates and Merrill Lynch Capital Services
(Merrill) purchased the senior certificates of the
trusts. We paid approximately $20.5 million in aggregate
for all the junior certificates and Merrill paid
$79.6 million for the senior certificates for a total
purchase price of $100.1 million.
The Merrill Lynch Trusts held the following bonds: the Denver
Health and Hospital Authority Bonds with a par value of
$25.0 million and a rate of 67% of
3-month
LIBOR plus 110 basis points; the St. Lukes Hospital
of Bethlehem bonds with a par value of $25.9 million and a
rate of 67% of
3-month
LIBOR plus 92 basis points; the Texas Municipal Gas
Acquisition and Supply Corporation II bonds with a par
value of $25.0 million, a rate of BMA plus 47 basis
points, and a maturity of September 15, 2017; and the Texas
Municipal Gas Acquisition and Supply Corporation II bonds
with a par value of $25.0 million, a rate of BMA plus
55 basis points, and a maturity of September 15, 2027.
As of May 8, 2008, the date of formation of the Merrill
Lynch Trusts, the total par value of the four bonds was
$100.9 million and the total fair value of the bonds at
that date was approximately $80.8 million. The junior
certificates had been carried at fair value and were included as
a component of investments in the consolidated statements of
assets and liabilities. The fair value of the junior
certificates was a cash flow-based valuation because the asset
based valuation yielded a result of zero but the residual
interest was still generating cash flow.
The junior certificates received the residual income comprised
of the income from the bonds, less the interest on the senior
certificates, and less any expenses of the trusts. On
October 9, 2009, we sold the junior certificates to Merrill
for approximately $2.0 million. At the time of the sale,
the bonds underlying the four trusts were valued at
$77.8 million, which was less than the par amount of the
senior certificates of $79.2 million. The junior
certificates at the time were valued at $0.2 million based
on the estimated future cash flow from the trusts through the
final distribution dates. The company realized a loss of
$18.5 million which was recorded upon the sale and is
included as a component of net realized loss
investments in the consolidated statements of operations.
Although we recorded a net realized loss, the sale resulted in a
net increase to the net asset value of the company of junior
certificates at the time of the sale.
Our manager may receive management fees from STEPs or other
structured credit entities for which it serves as manager. Such
fees will be paid by the issuers, and any STEP certificates that
we purchase will be at a price net of any placement fees payable
to placement agents. The base management fee otherwise payable
by us to our manager pursuant to the Management Agreement for
any fiscal year may be reduced, but not below zero, by our
proportionate share of the amount of any STEP or other
structured credit portfolio management fees that are paid to our
manager during such year by STEP or other structured credit
entities in which acquire an interest, based on the percentage
of the most junior class of certificates we hold in those STEPs
or other structured credit entities; provided, however, that our
manager reserves its right, to the extent contractually
permitted, to charge its full base management fee with respect
to STEPs or other structured credit entities for which it serves
as manager.
63
Taxable
Municipal Bonds (including Build America Bonds)
We may acquire taxable municipal bonds. Taxable municipal bonds
are issued for issuers or projects that do not qualify for
tax-exempt financing or that qualify to be issued as BABs. The
creation of BABs by the American Recovery and Reinvestment Tax
Act expanded the issuance of taxable municipal bonds to
approximately 20% of all municipal bonds issued during 2009.
BABs currently allow a 35% interest payment subsidy (or up to a
45% subsidy with respect to certain recovery
zones which have significant poverty, unemployment,
foreclosure rates or are generally distressed) by the
U.S. federal government with respect to issuances by
municipalities and state-owned institutions. We may acquire
taxable municipal obligations rated investment grade as well as
unrated or below investment grade. We expect that the taxable
municipal obligations that we may acquire will be issued by or
on behalf of the types of institutions or authorities similar to
those that issue tax-exempt obligations, as described above.
Total
Return Swaps
We may enter into total return swaps as a means of making
economically leveraged acquisitions of portfolios of tax-exempt
obligations. A total return swap is a derivative financing
strategy that permits us to (i) obtain an economic position
which is equivalent to the acquisition of collateral or the
accumulation of collateral for a STEP or other structured
transaction and (ii) hedge collateral-based risk. A total
return swap is a bilateral financial contract where one party
makes regular payments based on a fixed or variable rate, while
the other party makes payments based on the return of an
underlying asset (which may include collateral and which need
not be owned by either party), which includes both the income it
generates and any capital gains. On the specified termination
date of a swap, the swap counterparty will be required to pay us
a portion of the positive total return (interest and capital
gains/losses on the underlying portfolio of obligations less
financing costs and adjusted for hedge gains/losses) derived
from the portfolio. Alternatively, if the portfolio has suffered
losses, we will share in the losses up to our agreed exposure.
In addition, a total return swap may contain certain termination
and default provisions that require us to transfer additional
amounts to the swap counterparty or post cash collateral under
certain circumstances. We will not be treated as the owner of
the underlying portfolio subject to a total return swap for tax
or financial reporting purposes, and any income earned by us
from the total return swap will be taxable to us. We generally
expect that the term of any total return swap that we may
acquire will range from six months to one year. We may hold
total return swaps through MFCA Funding, Inc., our wholly-owned
subsidiary.
We are not currently a party to any total return swaps; however,
we may use total return swaps in the future. Our future usage of
total return swaps in order to finance our acquisitions will
depend on our analysis of alternative financing methods,
including STEPs and tender option bond programs.
Tender
Option Bond Programs
We may use tender option bond programs as a means of financing
some tax-exempt obligations purchased in secondary market
transactions. In tender option bond programs, municipal bonds,
STEP certificates or other municipal obligations are deposited
in a special purpose vehicle, usually a trust.
The tender option bond trust issues two classes of securities:
(1) floating rate certificates, with an aggregate face
value approximately equal to the market value of the underlying
municipal assets, entitling the holders to a variable interest
rate based on prevailing short-term tax-exempt rates, which is
reset periodically by a remarketing agent based on changes in
short-term interest rates, and (2) a residual certificate,
which establishes an economically leveraged position in the
underlying tax-exempt assets.
Each holder of floating rate certificates has the right to
exercise a tender option, which entitles such holder upon proper
notice to tender its certificates for redemption (often
restricted to a date on which the floating rate is reset) at a
purchase price of 100% of the face amount thereof plus accrued
and unpaid interest. If the remarketing agent is unable to
remarket such tendered certificates to another holder on or
before the required redemption date, the tender agent purchases
such certificates with the proceeds of a draw on a liquidity
facility arranged in advance by the dealer. The holder of the
residual certificate typically has an obligation to reimburse
the liquidity provider for any such draws on the liquidity
facility
64
There are also a number of circumstances under which the
floating rate certificates are subject to mandatory redemption.
These events typically include, among others: (i) the
designated termination date (typically, 80% of the expected life
of the underlying municipal bonds, determined either to maturity
or first par call, if such bonds are deposited in the trust at a
premium), (ii) the scheduled expiration date of the
liquidity facility, unless earlier renewed or replaced with a
substitute liquidity facility, (iii) a change in the
interest rate mode applicable to the floating rate certificates,
subject to the right of the holders of the floating rate
certificates to elect to retain their certificates,
notwithstanding such change, (iv) the business day
immediately preceding the date of effectiveness of a substitute
liquidity facility, subject to a similar election to retain,
(v) an event of default under the liquidity facility,
(vi) a withdrawal, suspension or downgrade of the rating of
the underlying municipal bonds below a designated ratings
threshold, (vii) reasonable grounds for the belief that the
registration of the trust is required under the Investment
Company Act or that certificates have been sold in violation of
the Securities Act, (viii) reasonable grounds for the
belief that the trust may be subject to material tax
liabilities, (ix) a determination that the interest on any
underlying municipal bonds that are tax-exempt bonds, as
applicable, is includable in the gross income of the owners
thereof, whether or not such determination is final or
appealable under applicable procedural law, and (x) the
bankruptcy of the liquidity provider. Except in cases where an
election to retain has been exercised by a holder of floating
rate certificates, the occurrence of any of the foregoing
mandatory tender events triggers a sale of the underlying
municipal bonds. Whether or not the proceeds of any such sale of
bonds are sufficient to redeem the tendered floating rate
certificates in full, at a price equal to 100% of their face
amount plus accrued and unpaid interest, the holder of the
residual certificate typically has an obligation to reimburse
the liquidity provider for any draw on the liquidity facility
made in connection with such mandatory tender of floating rate
certificates.
There are also a number of circumstances under which the right
of the holders of floating rate certificates to exercise the
tender option terminates, triggering the redemption of the
floating rate certificates (and related residual certificate)
and the sale or distribution in kind of the underlying municipal
bonds. These events typically include: (i) the bankruptcy
of the issuer or obligor of the underlying municipal bonds and,
if applicable, any other specified principal credit source,
(ii) an uncured failure by the issuer (and, if applicable,
such other principal credit source) to pay interest in respect
of the underlying municipal bonds, (iii) a withdrawal,
suspension or downgrade of the rating of the underlying
municipal bonds (and, if applicable, such other principal credit
source) below investment grade and (iv) a determination
that the interest on the underlying municipal bonds is
includable in the gross income of the owners thereof that is
final and nonappealable under applicable procedural law. The
occurrence of any of the foregoing tender option termination
events triggers a sale of the underlying municipal bonds. If the
proceeds of any such sale of bonds are not expected to be
sufficient to redeem the tendered floating rate certificates
(and the related residual certificate) in full, the affected
bonds are distributed in kind to the holders of certificates, in
redemption thereof, pro rata based on the respective face
amounts of their floating rate or residual certificates.
If we were to deposit a municipal bond, STEP certificate or
other municipal obligation in a tender option bond trust, we
would likely retain the residual certificate issued by such
trust, evidencing an ownership interest in such underlying
asset. Generally, we may use tender option bond programs as a
means of financing the acquisition of bonds that have credit
ratings ranging from AAA to BBB (or
their respective equivalents), utilizing credit enhancement with
respect to any bonds rated lower than AA- (or its
equivalent) to enable a rating on the related floating rate
certificates of at least AA- (or its equivalent) ,
as is typically required by the purchasers of such certificates.
We may also use tender option bond programs as a means of
financing our acquisition of senior certificates issued by our
STEPs or other structured credit subsidiaries.
In addition to tax-exempt assets, we may also use tender option
bond programs as a means of financing our acquisition of taxable
municipal bonds (including Build America Bonds). Although tender
option bond programs structured to accommodate the financing of
taxable municipal bonds share many of the features of
traditional tender option bond programs designed for tax-exempt
municipal obligations, they do not include the features included
to preserve the tax-exempt characterization of income
distributions on the underlying assets.
While we do not currently participate in any tender option bond
programs, we have done so in the past and may do so in the
future.
65
Other
Strategies
We may also acquire other types of assets consistent with our
overall business objective, directly or through the purchase of
interests in structured transactions. These assets may include,
but are not limited to:
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Short-term taxable tail bonds that finance the cost
of issuance of related tax-exempt obligations, with a security
interest that may be pari passu to such tax-exempt obligations,
but have a shorter maturity. Short-term taxable tail
bonds are bonds issued in conjunction with a tax-exempt bond
issue that is not eligible for tax-exempt financing, usually to
fund a portion of the cost of issuing the bonds that is in
excess of the 2% limitation for such costs. Typically, taxable
tail bonds range in size from $200,000 to $1,000,000 and have
terms of 5 years or less.
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Asset-backed obligations backed by interests in student loans
(including federally guaranteed student loans (including
consolidation loans) and private student loans). Such
obligations are securities collateralized by the cash flows
generated from pools of student loans. These student loans are
unsecured obligations of an individual borrower that may be
guaranteed by the federal government, by private credit
guarantors or not at all.
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Tax credits, which are available for purchase to fund the equity
in affordable housing and economic development activities, among
other purposes. Tax credits permit the owner to take a reduction
in federal income taxes owed equal to the dollar amount of
credits purchased.
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These or other assets that we acquire may result in taxable
income to investors in our Class A common shares.
Operating
History
We were formed on April 23, 2007 and commenced operations
in June 2007 upon completion of a private offering of 17,250,100
common shares at $10 per share, resulting in net proceeds of
approximately $159 million. At the completion of the
offering, we entered into a management agreement with the Former
Manager.
Purchase
of Common Shares by Tiptree and Transfer of Management
Agreement
On February 5, 2009, Tiptree acquired 10,170,830
outstanding common shares in negotiated private transactions,
representing approximately 57% of the common shares outstanding
as of such date, at an average price of approximately $1.26 per
common share. As a result of the additional transactions
described below, as of June 30, 2010, Tiptree owned
27,617,687 common shares, representing approximately 74% of our
outstanding common shares.
On March 18, 2009, the Former Manager, Tricadia Capital and
our manager entered into an assignment and assumption agreement
that provided for the assignment of the Management Agreement to
our manager. In consideration for the assignment, beginning on
March 18, 2012, for a 10 year period, our manager has
agreed to make payments to Cohen & Company equal to
10% of the revenue earned by our manager in excess of
$1 million, subject to certain adjustments.
Subsequent
Tiptree Tender Offer and Company Rights Offering
On May 12, 2009, Tiptree commenced a tender offer to
purchase all of our outstanding common shares for the purchase
price of $1.00 per common share. The tender offer expired on
June 19, 2009. Tiptree purchased 2,443,550 common shares
through the tender offer.
Also on May 12, 2009, we issued subscription rights to the
then holders of our common shares and LTIP shares to purchase up
to an aggregate of 18,116,964 new common shares at the price of
$1.20 per common share. We completed the rights offering on
June 26, 2009, issuing 18,116,964 new common shares and
raising $21.7 million before taking into account the
expenses of the offering. We used the net proceeds from the
rights offering for working capital and general corporate
purposes.
66
In connection with the foregoing transactions, we also offered
one replacement LTIP share with a performance target of $1.25
per LTIP share in exchange for two then-outstanding LTIP shares
with a performance target of $10.00 per LTIP share. LTIP
shareholders exchanged 566,915 LTIP shares with a performance
target of $10.00 per LTIP share for 283,458 new LTIP shares with
a performance target of $1.25 per LTIP share.
For additional information concerning our LTIP shares, see
Management Compensation Equity
Compensation.
Our
Assets
Tax-Exempt
Obligations
We hold five tax-exempt obligations issued by or on behalf of
middle-market non-profit entities with an aggregate par amount
of approximately $19.8 million and a market value of
approximately $17.7 million as of June 30, 2010. Two of the
obligations are held by MFCA Funding, Inc., our wholly-owned
subsidiary. All of the obligations are pledged as further
support to the holder of the Class A Certificates of NPPF
II, as described below.
We are subject to a modified deficit restoration obligation in
the event the values of NPPF II assets are insufficient to fully
redeem the Class A Certificates of NPPF II. Our modified
deficit restoration obligation is supported by the deposits of
all five of these tax-exempt obligations into a collateral
account for the benefit of the holders of the Class A
Certificates of NPPF II. We are not permitted to transfer any of
the assets that have been deposited into the collateral account
without the consent of the holders of the Class A
Certificates. The security interest with respect to all five of
these tax-exempt obligations can be terminated at our option at
any time if we contribute additional cash collateral to NPPF II
in the amount of $7 million, less the aggregate amount of
all contributions previously made in respect of sinking fund
payments or in respect of sale or other disposition proceeds.
Following the restructuring described in
Business Our Assets STEP and Other
Structured Credit Assets, the security interest with
respect to all five of these tax-exempt obligations can be
terminated at our option at any time if we contribute cash
collateral in an aggregate amount of $7 million to NPPF II
and NPPF III (as defined below), which amount will be allocated
between NPPF II and NPPF III in proportion to the par amount of
Class A certificates issued by each trust and outstanding
after giving effect to the restructuring, less the aggregate
amount of all contributions previously made in respect of
sinking fund payments or in respect of sale or other disposition
proceeds.
These tax-exempt obligations are, in general, primarily secured
by a first mortgage or deed of trust on the real property held
by the borrower, and often also secured by the pledges of gross
revenue of such borrower as well as a debt service reserve fund.
The financial covenants of these tax-exempt obligations
typically require borrowers to demonstrate satisfactory debt
service coverage and typically restrict or limit dispositions of
assets during the term of the obligation. Standard covenants
also may include, but may not be limited to, compliance with
days cash on hand, and additional long term debt and short-term
debt thresholds. In most transactions, the borrower also
covenants to provide quarterly unaudited financial statements,
an annual audit and quarterly and annual certificates of
compliance with all covenants.
STEP
and Other Structured Credit Assets
In a typical STEP transaction there are multiple tranches, all
of which are secured successively by the assets of a trust.
Portfolio losses impact the tranches in reverse seniority order,
starting with the most junior tranches. The tranche that is the
first to experience the impact of portfolio losses is referred
to as the first-loss tranche.
An important part of our initial strategy was to acquire the
first-loss tranches of STEPs. These STEPs typically include the
tax-exempt obligations as described in
Tax-Exempt Obligations above. The
financial crises of the last few years has had a significant
impact on liquidity in general, and structured financings and
STEPs have both seen their issuances dramatically reduced.
67
We attempted to execute our initial strategy by accumulating
$181.7 million in assets for the first STEP using short
term warehouse financing from an unaffiliated third party bank
in the form of a total return swap. The intent was to refinance
the assets into a STEP structure with significant participation
from third party investors. As a result of the dislocation in
the capital markets beginning in the fall of 2007, the STEP
certificates were not marketable at that time. In response to
market conditions, we stopped accumulating collateral, and, with
the help of the swap counterparty, refinanced the total return
swap into NPPF II.
On February 21, 2008, NPPF II, a newly-created trust,
acquired a portfolio of tax-exempt obligations with a then
current par value of $185.7 million. A majority of these
obligations had previously been held as part of the reference
portfolio for the above-mentioned total return swap. We
purchased all of the Class B Certificates, which are not
rated and had an original face value of $56.2 million, for
$56.2 million. The Class A Certificates, which had an
original face value of $118.1 million, were purchased by an
unaffiliated third party. Since the creation of NPPF II, there
have been no additional acquisitions of municipal obligations or
other assets.
In February 2009, the trust agreement governing NPPF II was
revised such that the Class A Certificate Holder agreed to
extend the mandatory auction date, which was originally
scheduled for February 2009. This revised agreement enhanced the
collateral package for the Class A Certificate Holder
consisting of the following:
(i) Partial pay down of the Class A Certificates in
the amount of $8,000,000;
(ii) The posting of additional collateral consisting of
$19.8 million par value of unencumbered bonds held by our
company. It was further agreed that such bonds could be released
back to the company at any time in exchange for a further
$7,000,000 pay down of the Class A Certificates.
(iii) An accelerated pay down provision in which a portion,
initially 86.65%, of the interest collected on the NPPF
IIs tax-exempt obligations in excess of interest payable
on the Class A Certificates is used to further reduce the
Class A Certificates (the Excess Distribution
Amount). The Class A Distribution Percentage is
modified at the beginning of each quarterly distribution period
for any dispositions of trust assets in order to maintain a
minimum annual distribution to the Class B Certificates.
For the quarterly distribution paid during the quarter ended
June 30, 2010, the Class A Distribution Percentage was
83.7669%; and
(iv) A provision that not less than 80% of all proceeds
from collateral dispositions would be distributed to the
Class A Certificate Holders:
In return for these provisions, the mandatory auction date was
extended by two years to February 2011, and we were granted an
option to extend the auction date for an additional year in
exchange for a further $10 million pay down of the
Class A Certificates.
During 2009, $46.9 million par value of tax-exempt
securities were redeemed, sold or paid down. Of this amount,
$1.1 million was disposed of at face value in connection
with scheduled sinking fund payments, $5.7 million was
disposed of in connection with refinancing of the bond by the
issuer, and $40.1 million was sold based on our
managers evaluation of the market and the portfolio at the
time of the sale.
During 2009, the Class A certificates were paid down by
$50.2 million which includes the $8 million
contributed by the Class B Certificate Holder as part of
the negotiated extension described above (paragraph (i)),
$4.7 million from the payment of excess interest as
described above (paragraph (iii)) and $37.5 million from
the proceeds of dispositions of tax-exempt securities,
distributed as described in the paragraph (iv)). During this
same period, in accordance with distribution rules described
above and contained in the NPPF II Trust Agreement, the
Class B Certificate Holders received total payments of
$5.9 million.
Prior to the consummation of this offering, we intend to
restructure NPPF II into two separate trusts. Following the
restructuring, the two trusts will each have a separate
investment strategy, as discussed below. We expect to achieve
administrative efficiencies by separating NPPF II into separate
trusts based on investment strategies. In addition, following
the separation of NPPF II into separate trusts, we expect that
NPPF III will be able to engage in certain financing
transactions with respect to mortgage-related assets that are
not currently
68
available to NPPF II because of its pursuit of the Real Estate
Investment Strategy (as defined below). In connection with this
restructuring:
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certain bonds held by NPPF II as of the date of the
restructuring (the Transferred Bonds) will be
transferred to a newly formed trust to be named Non-Profit
Preferred Funding Trust III (NPPF III). The
Transferred Bonds will consist of bonds that were acquired by
NPPF II through the pursuit of the General Investment Strategy
(as defined below). The remainder of the bonds held by NPPF II
as of the date of the restructuring, which consist of bonds
acquired by NPPF II through the pursuit of the Real Estate
Investment Strategy, will continue to be held by NPPF II;
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NPPF III will issue two classes of certificates, Class A
certificates and Class B certificates, with a fair market value
equivalent to the fair market value of the Transferred Bonds.
These certificates will be issued to the holder of Class A
certificates and the holder of Class B certificates of NPPF
II in exchange for Class A certificates and Class B
certificates of NPPF II with an equivalent fair market value.
Each holder will, subject to the bullet points below, retain the
remainder of NPPF II certificates not transferred, with a fair
market value equivalent to the fair market value of the assets
retained by NPPF II;
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the Class A Certificates and Class B certificates of
NPPF III will be issued in the same proportion as the
Class A certificates and Class B certificates of NPPF
II outstanding immediately prior to the restructuring;
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the bonds held by the Company and by MFCA Funding, Inc. which,
prior to the restructuring, were pledged as support to the
holder of the Class A certificates of NPPF II will be
allocated such that a portion of such bonds will be pledged to
support the holder of the Class A certificates of NPPF II
and a portion of such bonds will be pledged the holder of the
Class A Certificates of NPPF III. The portion of such bonds
pledged to each trust will bear the same percentage that the par
amount of Class A certificates issued by such trust bears
to the total par amount of Class A certificates issued by
NPPF II and by NPPF III;
|
|
|
|
|
|
the trust agreement governing NPPF II will be amended and
restated to give effect to the foregoing transactions;
|
|
|
|
|
|
the trust agreement governing NPPF III will have the same
material terms as the amended and restated trust agreement
governing NPPF II, other than terms driven by the Real Estate
Investment Strategy applicable to NPPF II, but inapplicable to
NPPF III;
|
|
|
|
|
|
we will be subject to a modified deficit restoration obligation
in the event the values of NPPF IIIs assets are
insufficient to fully redeem the Class A certificates of
NPPF III. This modified deficit restoration obligation will be
identical to our modified deficit restoration obligation with
respect to NPPF II;
|
|
|
|
|
|
we will have a supplemental modified deficit restoration
obligation pursuant to which our Class B certificates
issued by NPPF II will be pledged as further support to the
holder of the Class A Certificates of NPPF III and our
Class B certificates issued by NPPF III will be pledged as
further support to the holder of the Class A Certificates
of NPPF II;
|
|
|
|
|
|
NPPF II will remain an unconsolidated subsidiary of
ours; and
|
|
|
|
|
|
NPPF III will become an unconsolidated subsidiary of ours.
|
Following the restructuring, the investment strategies of NPPF
II and NPPF III will be as follows:
|
|
|
|
|
NPPF II will seek to make investments in the debt instruments of
non-profit and municipal entities primarily through direct and
indirect acquisition of tax-exempt mortgage revenue bonds or
other obligations (secured primarily by interests in real
estate) (the Real Estate Investment
Strategy); and
|
|
|
|
|
|
NPPF III will seek to make investments generally in the debt
instruments of non-profit and municipal entities (the
General Investment Strategy).
|
69
Derivative
Assets
On July 14, 2009, we entered into an interest rate swap for
the purpose of hedging portfolio-wide interest rate risk with
Tiptree, as a
back-to-back
swap with Morgan Stanley Capital Services Inc., or Morgan
Stanley. Twice each year, on January 16 and July 16,
beginning on January 16, 2010 and continuing through
July 16, 2019, we will pay to Tiptree, the swap
counterparty (and Tiptree will remit to Morgan Stanley), a fixed
rate of 3.6475% based on a notional amount of $5.0 million,
and four times each year, on January 16, April 16,
July 16 and October 16, beginning on October 16, 2009
and continuing through July 16, 2019, the swap counterparty
will pay to us an amount equal to a floating rate of three-month
LIBOR based on the notional amount. As of July 19, 2010, we
have paid an aggregate of $614,375 to the swap counterparty
(with $432,000 consisting of margin payments and $182,375
consisting of interest payments) and received swap interest
payments in an aggregate amount of $17,180 from the swap
counterparty pursuant to the interest rate swap. All amounts we
paid to Tiptree pursuant to the interest rate swap were
thereafter remitted by Tiptree to Morgan Stanley.
Portfolio
Overview
We have a portfolio of federally tax-exempt revenue bonds which
have been issued to provide construction or long-term financing
for non-profit corporations. The non-profit entities financed by
us are in sectors that include, among others, health care,
educational, housing, infrastructure, redevelopment, cultural,
research, philanthropic and service/advocacy.
As of June 30, 2010, we held direct or indirect interests
in 25 tax-exempt revenue bonds representing 22 separate
borrowers. The total par amount of directly held bonds was
$19.8 million as of June 30, 2010 and the fair value
was $17.7 million. We also own the class B junior
certificates of NPPF II. NPPF II is a STEP that issued senior
certificates and junior certificates. The total par amount of
bonds held in NPPF II was $137.1 million as of
June 30, 2010 and the fair value was $107.8 million.
An unaffiliated third party owns the senior certificates of NPPF
II, the fair value of which was $62.9 million as of
June 30, 2010. The junior certificates we hold had a fair
value of $44.9 million as of June 30, 2010.
Some of the tax-exempt bonds that we hold directly or indirectly
have limited liquidity and do not trade in an active secondary
market. All of the bonds are secured by (1) either a first
lien mortgage or a negative pledge on the property, (2) a
pledge of gross revenues
and/or
(3) a debt service reserve fund which is required to be
funded with at least 12 months of principal and interest.
The debt service reserve funds for all borrowers are fully
funded except for the tax-exempt obligation known as Madison
Center, which has not made its monthly debt service payment
since May 1, 2010. The trustee elected to use funds
available in the debt service reserve fund to make up the
deficiency for the August 15, 2010 semi-annual bond
payment. See Investment in trusts
NPPF II for further information. With respect to the
tax-exempt obligation known as Sierra Canyon, the obligor paid
quarterly debt service from the debt service reserve fund for
the quarters ending April 30, 2009, January 31, 2010
and April 30, 2010, but as of July 31, 2010, the
obligor has replenished the debt service reserve fund in full.
The trustee has informed our manager that it believes that none
of these draws constituted defaults under the obligation, since
they were each replenished within 90 days of each draw.
70
The following table summarizes our tax-exempt obligation
holdings as of June 30, 2010:
CONSOLIDATED
SCHEDULE OF INVESTMENTS
As of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligor
|
|
Obligor
|
|
|
|
|
|
|
|
|
Par
|
|
|
Proportional
|
|
|
Fair
|
|
Tax-Exempt Bonds
|
|
City
|
|
State
|
|
|
Coupon
|
|
|
Maturity
|
|
|
Value
|
|
|
Ownership(4)
|
|
|
Value
|
|
|
Investments in trusts NPPF II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21st Century Charter School Project
|
|
Colorado
Springs
|
|
|
AZ
|
|
|
|
6.00
|
%
|
|
|
Oct-32
|
|
|
$
|
3,550,000
|
|
|
|
100
|
|
|
$
|
2,576,084
|
|
Sacramento Country Day School
|
|
Sacramento
|
|
|
CA
|
|
|
|
5.65
|
%
|
|
|
Aug-37
|
|
|
|
13,350,000
|
|
|
|
100
|
|
|
|
10,561,052
|
|
Sierra Canyon High School Foundation(1)
|
|
Chatsworth
|
|
|
CA
|
|
|
|
6.00
|
%
|
|
|
May-32
|
|
|
|
3,840,506
|
|
|
|
18
|
|
|
|
3,152,095
|
|
Maranatha High School(1)
|
|
Pasadena
|
|
|
CO
|
|
|
|
7.25
|
%
|
|
|
Aug-37
|
|
|
|
11,900,000
|
|
|
|
43
|
|
|
|
9,350,187
|
|
Maine Central Institute
|
|
Pittsfield
|
|
|
ME
|
|
|
|
6.00
|
%
|
|
|
Aug-37
|
|
|
|
4,440,000
|
|
|
|
99
|
|
|
|
3,657,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Education
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,080,506
|
|
|
|
|
|
|
|
29,296,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care Acute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yampa Valley Medical Center(1)(2)(5)
|
|
Steamboat Springs
|
|
|
CO
|
|
|
|
5.13
|
%
|
|
|
Sep-29
|
|
|
|
7,500,000
|
|
|
|
18
|
|
|
|
6,978,675
|
|
Labette County Medical Center(1)(2)
|
|
Parsons
|
|
|
KS
|
|
|
|
5.75
|
%
|
|
|
Sep-37
|
|
|
|
750,000
|
|
|
|
3
|
|
|
|
716,001
|
|
UMass Memorial Medical Center(6)(10)
|
|
Worchester
|
|
|
MA
|
|
|
|
5.00
|
%
|
|
|
Jul-33
|
|
|
|
10,920,000
|
|
|
|
10
|
|
|
|
10,145,499
|
|
West Penn Allegheny Health System(7)(10)
|
|
Pittsburgh
|
|
|
PA
|
|
|
|
5.38
|
%
|
|
|
Nov-40
|
|
|
|
11,530,000
|
|
|
|
2
|
|
|
|
8,721,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Health Care Acute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,700,000
|
|
|
|
|
|
|
|
26,561,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care Behavioral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cope Community Services(1)
|
|
Tucson
|
|
|
AZ
|
|
|
|
6.13
|
%
|
|
|
Aug-37
|
|
|
|
4,385,000
|
|
|
|
27
|
|
|
|
3,464,293
|
|
Madison Center(1)(2)(8)
|
|
South Bend
|
|
|
IN
|
|
|
|
5.25
|
%
|
|
|
Feb-28
|
|
|
|
4,000,000
|
|
|
|
13
|
|
|
|
2,218,800
|
|
Alternatives Unlimited
|
|
Whitinsville
|
|
|
MA
|
|
|
|
7.38
|
%
|
|
|
Mar-38
|
|
|
|
10,780,000
|
|
|
|
99
|
|
|
|
9,017,362
|
|
Family Guidance Center for Behavioral Health Care
|
|
St. Joseph
|
|
|
MO
|
|
|
|
5.50
|
%
|
|
|
Mar-37
|
|
|
|
5,250,000
|
|
|
|
97
|
|
|
|
3,918,036
|
|
NHS III Properties
|
|
Lafayette
|
|
|
PA
|
|
|
|
6.50
|
%
|
|
|
Oct-37
|
|
|
|
6,740,000
|
|
|
|
97
|
|
|
|
5,442,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Health Care Behavioral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,155,000
|
|
|
|
|
|
|
|
24,061,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Social Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill of San Joaquin Valley
|
|
Stockton
|
|
|
CA
|
|
|
|
5.85
|
%
|
|
|
Sep-37
|
|
|
|
3,405,000
|
|
|
|
97
|
|
|
|
2,684,749
|
|
Guadalupe Centers
|
|
Kansas City
|
|
|
MO
|
|
|
|
6.15
|
%
|
|
|
Feb-38
|
|
|
|
4,430,000
|
|
|
|
100
|
|
|
|
3,343,033
|
|
Tri-County Community Action Program(10)
|
|
Berlin
|
|
|
NH
|
|
|
|
6.50
|
%
|
|
|
Sep-37
|
|
|
|
2,100,000
|
|
|
|
98
|
|
|
|
1,637,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Social Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,935,000
|
|
|
|
|
|
|
|
7,665,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Non Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Country of World Peace
|
|
Maharishi Vedic City
|
|
|
CO
|
|
|
|
5.70
|
%
|
|
|
Feb-37
|
|
|
|
17,460,000
|
|
|
|
95
|
|
|
|
12,395,552
|
|
Global Country of World Peace
|
|
Maharishi Vedic City
|
|
|
CO
|
|
|
|
5.80
|
%
|
|
|
Feb-37
|
|
|
|
1,145,000
|
|
|
|
5
|
|
|
|
824,927
|
|
YMCA of the Capital Area(11)
|
|
Baton Rouge
|
|
|
LA
|
|
|
|
6.25
|
%
|
|
|
Sep-37
|
|
|
|
9,655,000
|
|
|
|
98
|
|
|
|
7,006,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Non Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,260,000
|
|
|
|
|
|
|
|
20,227,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments of NPPF II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,130,506
|
|
|
|
|
|
|
|
107,811,621
|
|
Senior Certificates
|
|
|
|
|
|
|
|
|
3.00
|
%
|
|
|
Feb-11
|
|
|
|
(62,935,954
|
)
|
|
|
|
|
|
|
(62,935,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Certificates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,194,552
|
|
|
|
100
|
|
|
|
44,875,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligor
|
|
Obligor
|
|
|
|
|
|
|
|
|
Par
|
|
|
Proportional
|
|
|
Fair
|
|
Tax-Exempt Bonds
|
|
City
|
|
State
|
|
|
Coupon
|
|
|
Maturity
|
|
|
Value
|
|
|
Ownership(4)
|
|
|
Value
|
|
|
Direct Investments in Tax-Exempt Securities held by the
Company(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care Acute:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labette County Medical Center(1)
|
|
Parsons
|
|
|
KS
|
|
|
|
5.75
|
%
|
|
|
Sep-37
|
|
|
|
350,000
|
|
|
|
1
|
|
|
|
334,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Health Care Acute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
|
|
|
|
334,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care Behavioral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida Care Properties(1)
|
|
Canton
|
|
|
MS
|
|
|
|
6.50
|
%
|
|
|
Aug-27
|
|
|
|
5,035,000
|
|
|
|
21
|
|
|
|
4,661,315
|
|
Florida Care Properties(1)
|
|
North Ft. Myers
|
|
|
VA(9
|
)
|
|
|
6.50
|
%
|
|
|
Aug-27
|
|
|
|
4,475,000
|
|
|
|
19
|
|
|
|
4,088,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Health Care Behavioral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,510,000
|
|
|
|
|
|
|
|
8,749,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Investments in Tax-Exempt Securities held by the
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,860,000
|
|
|
|
|
|
|
|
9,083,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Investments in Tax-Exempt Securities held by Funding,
Inc.(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Non Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular Research Foundation(1)
|
|
New York
|
|
|
NY
|
|
|
|
5.40
|
%
|
|
|
Jan-35
|
|
|
|
2,000,000
|
|
|
|
11
|
|
|
|
1,564,280
|
|
Project CURE
|
|
Centennial
|
|
|
CO
|
|
|
|
7.38
|
%
|
|
|
Feb-28
|
|
|
|
7,905,000
|
|
|
|
100
|
|
|
|
7,056,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Investments in Tax-Exempt Securities held by
Funding, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,905,000
|
|
|
|
|
|
|
|
8,620,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,959,552
|
|
|
|
|
|
|
$
|
62,579,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
MFCA holds less than 50% of the bonds outstanding and, as a
result, cannot unilaterally direct bondholder rights and
remedies in the event of a default. |
|
(2) |
|
These bonds may trade in an active secondary market. |
|
(3) |
|
Bonds are pledged to support the senior certificates of NPPF II. |
|
(4) |
|
Determined as current par outstanding divided by original
issuance size. |
|
|
|
(5) |
|
This bond is rated BBB by Standard & Poors and
is not rated by Fitch and Moodys |
|
|
|
(6) |
|
This bond is rated BBB+ by Standard & Poors and
Baa1 by Moodys. The bond is not rated by Fitch. |
|
(7) |
|
This bond is rated BB- by Standard & Poors, BB-
by Fitch and B1 by Moodys. |
|
|
|
(8) |
|
This bond is rated CCC by Standard & Poors and
is not rated by Fitch and Moodys. |
|
|
|
(9) |
|
The Commonwealth of Virginia issued the bond securing the
property located in North Ft. Myers, Florida. |
|
|
|
(10) |
|
As of July 2010, we have fully disposed of our interests in
these tax-exempt obligations at an aggregate realized loss of
$2.7 million. |
|
|
|
(11) |
|
As of September 2010, we have fully disposed of our interests in
this tax-exempt obligations at a realized loss of $190,400. |
The changes in the valuation of the bonds held by us primarily
reflect changes in the general interest rate environment and the
demand for unrated municipal bonds in the municipal market. The
values of our bonds are determined by the lower of 1) the
average price from two independent pricing services, or
2) the price that would be determined by applying the
credit spread described above to the AAA municipal market rate.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Estimates Investments.
With the exception of Sierra Canyon and Madison Center, as
described above, none of our borrowers has had to utilize funds
from the debt service reserve fund for debt service payments.
72
Below is a brief summary of each of the tax-exempt obligations
directly or indirectly held by us as of June 30, 2010
(other than the obligations sold prior the date hereof, as
indicated in the table above). Except as indicated in the table
above, none of the obligations is rated by the rating agencies.
Investments
in trusts NPPF II
Education:
21st
Century Charter School Project.
21st Century Charter School Project (GEO Foundation
Holdings) manages Pikes Peak Preparatory School (formerly known
as 21st Century Charter School), a charter school located
in Colorado Springs, Colorado operating grades kindergarten
through twelfth. Bond proceeds were primarily used to refinance
existing debt and to pay for costs of issuance. The right to
foreclose on the mortgage is held for seven years from the date
of issuance, which is until October 4, 2014, by the
purchasers of new market tax credits that partially funded the
transaction. After seven years, the right to foreclose on the
mortgage reverts to the bondholders.
Sacramento
Country Day School.
Sacramento Country Day School is an independent, co-educational,
college preparatory school located in Sacramento, California
serving pre-kindergarten through grade 12. Bond proceeds were
primarily used to construct a new lower school building,
refurbish existing classroom space, refinance existing debt and
to fund a debt service reserve fund and to pay for costs of
issuance.
Sierra
Canyon High School Foundation.
Sierra Canyon High School Foundation is an independent,
co-educational day school located in Chatsworth, California,
operating grades early kindergarten through twelfth. Bond
proceeds were primarily used to fund the construction of the
current upper school campus, fund a debt service reserve fund
and to pay for costs of issuance.
Maranatha
High School.
Maranatha High School is a non-denominational, Christian
co-educational high school located in Pasadena, California. Bond
proceeds were primarily used to refinance existing debt,
renovate classroom space, purchase a contiguous property,
reimburse prior capital expenditures, fund capitalized interest
and a debt service reserve fund and to pay for costs of issuance.
Maine
Central Institute.
Maine Central Institute (MCI) is a co-educational private
day and boarding school for students in grades nine through
postgraduate which was founded in 1866 and is located in
Pittsfield, Maine. Bond proceeds were primarily used to finance
renovation and expansion of the current dining area,
construction of a student center, upgrade of existing telephone
and computer capabilities, renovation of space to provide
additional staff housing, refinancing existing debt and to fund
a debt service reserve fund and to pay for costs of issuance.
Health Care Acute:
Yampa
Valley Medical Center.
Yampa Valley Medical Center, located in Steamboat Springs,
Colorado, provides health care and related services to residents
and visitors of Northern Colorado. Bond proceeds were primarily
used to expand the existing hospital facility and acquisition of
upgraded medical equipment, fund a debt service reserve fund and
to pay for costs of issuance.
73
Labette
County Medical Center.
Labette County Medical Center is a County-owned, non-profit
hospital, located in Parsons, Kansas. Bond proceeds were
primarily used to refinance existing debt, finance renovations
and additions to the existing hospital buildings, fund a debt
service reserve fund and to pay costs of issuance. The bond is
held by NPPF II, as to 69.2% of our aggregate interest therein,
and as a direct investment of our company, as to 31.8% of our
aggregate interest therein. The bonds held as a direct
investment are pledged to support the Class A Certificates
of NPPF II.
Health Care Behavioral:
COPE
Community Services.
COPE Community Services (formerly known as COPE Behavioral
Services) is a behavioral health care organization operating
from nearly twenty locations throughout Tucson, Arizona. Bond
proceeds were primarily used to fund the construction and
renovation of several facilities, fund a capitalized interest
fund, fund a debt service reserve fund and pay costs of issuance.
Madison
Center.
Madison Center, established in 1949, provides behavioral health
care services in St. Joseph, Elkhart, LaPorte, Marshall and
Porter Counties in northern Indiana. Bond proceeds were
primarily used to purchase or reimburse the cost of certain land
for expansion of its existing campus, construct a child and
adolescent center and geriatric psychiatric facility, undertake
other demolition, construction and renovation projects on the
South Bend, Indiana campus, fund a debt service reserve fund and
to pay for costs of issuance.
Madison Center has not made its monthly debt service payment
since May 1, 2010. Reductions in funding from the State of
Indiana and the loss of volume in certain of Madison
Centers programs have reduced revenue and consumed cash,
and these trends are expected to continue. The trustee elected
to use funds available in the debt service reserve fund to make
up the deficiency for the August 15, 2010 semi-annual bond
payment. As of September 30, 2010, the borrower has not yet
replenished the debt service reserve fund. We understand that
management at Madison Center is preserving cash while
considering its strategic alternatives and as of the date hereof
has no current plans to resume debt service payments.
Alternatives
Unlimited.
Alternatives Unlimited provides residential and employment
services to adults with developmental or psychiatric
disabilities. Located in Whitinsville, Massachusetts, the agency
works with special need individuals in 44 different communities
throughout central Massachusetts. Bond proceeds were primarily
used to refinance existing debt, reimburse the organization for
prior capital expenditures, fund a debt service reserve fund and
to pay for costs of issuance.
Family
Guidance Center for Behavioral Health Care.
Family Guidance Center for Behavioral Health Care, located in
St. Joseph, Missouri, provides services in crisis intervention,
children, youth and adult mental health, family planning and
chemical dependency. Bond proceeds were primarily used to
purchase and renovate a building to house administrative offices
and adult and children outpatient counseling services, fund a
debt service reserve fund and to pay for costs of issuance.
NHS
III Properties.
NHS III Properties, located in Lafayette Hill, Pennsylvania, is
a wholly owned subsidiary of Northwestern Human Services, the
largest non-profit provider of community-based mental health
services, mental retardation program, and other human services
to the publicly funded sector in Pennsylvania. Bond proceeds
were primarily used to refinance outstanding indebtedness, fund
a debt service reserve fund and to pay for costs of issuance.
74
Social Services:
Goodwill
Industries of San Joaquin Valley.
Goodwill Industries of San Joaquin Valley, or Goodwill,
located in Stockton, California, is one of the 184 member
organizations that provide job training and placement services
to assist people with employment barriers in becoming
self-sufficient. Goodwill does this by operating retail stores
and other businesses in the community that provide
on-the-job
training and fund Goodwills programs. Bond proceeds
were primarily used for the acquisition and improvement of two
buildings, fund a debt service reserve fund and to pay for costs
of issuance.
Guadalupe
Centers.
Guadalupe Centers, or GCI, is a non-profit community service
provider and charter school located in Kansas City, Missouri.
The mission of GCI is to improve the quality of life for
individuals in the Latino communities of greater Kansas City.
GCI is a nonsectarian organization with two major affiliations:
The Heart of America United Way and the National Council of
La Raza. Bond proceeds were primarily used to refinance
outstanding debt, expand the preschool childcare facility for a
charter school, fund a debt service reserve fund and to pay for
costs of issuance.
Other Non Profit:
Global
Country of World Peace.
Global Country of World Peaces primary mission is to
promote world peace. Bond proceeds were primarily used to
reimburse the company, located in Maharishi Vedic City, Iowa,
for prior capital expenditures, fund new construction of several
peace centers across the country, fund capitalized interest and
a debt service reserve fund and to pay for costs of issuance.
Direct
Investments in Tax-Exempt Securities held by our
Company
Health Care Acute
(See Labette County Medical Center above)
Health Care Behavioral:
Florida
Care Properties.
Florida Care Properties is a behavioral health care organization
that owns and operates five adult training centers in
Mississippi and one in Florida. Bond proceeds were primarily
used to acquire the six training facilities, fund a debt service
reserve fund and to pay for costs of issuance. The company holds
one bond supported by a training center in Mississippi and one
bond supported by a training center in Florida.
Direct
Investments in Tax-Exempt Securities held by Funding,
Inc.
Other Non Profit:
Cardiovascular
Research Foundation.
Cardiovascular Research Foundation, located in New York, New
York, is a private research medical foundation dedicated to
promoting advances in cardiovascular medicine, specifically
interventional cardiology, and the diagnosis and treatment of
endovascular disorders. Bond proceeds were primarily used for
the acquisition and renovation of a parcel of land and an
existing building, to fund a debt service reserve fund and to
pay for costs of issuance.
75
Project
CURE (Benevolent Health Care Foundation).
Project CURE (Benevolent Health Care Foundation), located in
Centennial, Colorado, is a humanitarian relief organization that
collects medical surplus supplies and equipment and donates it
to developing countries. Bond proceeds were primarily used to
refinance existing debt, fund a debt service reserve fund and to
pay for costs of issuance.
Our
Financing Strategy
We intend to employ low to moderate leverage on a non-recourse
basis in connection with our acquisitions of interests in STEPs
and other structured credit entities, which may include tender
option bond trusts. Our NPPF II transaction, for example,
consists of two tranches of securities, with the senior tranche
similar to traditional bank portfolio lending, without the use
of credit ratings or sophisticated cash flow or
collateralization tranching techniques. We may pursue similar
financing strategies for other portfolios.
We may also engage in total return swaps to provide us with
economically leveraged returns, although any income we earn
under such swaps will be fully taxable to us or result in our
passing through taxable income to shareholders, including
holders of our Class A common shares. For additional
information concerning this part of our strategy, see
Our Business Objective and
Strategies Total Return Swaps above.
In addition, we may employ more traditional methods of
financing, currently expected to consist primarily of the
following:
|
|
|
|
|
Warehouse Credit Facilities. Warehouse credit
facilities generally require the borrower to maintain cash
collateral on deposit with the warehouse lenders and are secured
by the assets acquired. We would expect that these facilities
would be structured so that we would not be deemed to be the tax
owner of the obligations. If we were deemed to be the tax owner
of the obligations, we would not be able to deduct the interest
payments on the financing. We generally expect that the terms of
these facilities would range from six months to one year.
|
|
|
|
Secured Lines of Credit. These lines of credit
would be secured by the assets acquired.
|
Credit
Analysis and Risk Management
Our manager has an asset acquisition committee and our
wholly-owned subsidiary, MFCA Funding, Inc., has a credit
committee, as discussed below.
Additional information regarding each committee, as well as our
independent directors, is set forth under Management.
Due
Diligence
Our asset acquisition process includes due diligence conducted
by our manager.
Our due diligence with respect to obligations secured by, in
whole or in part, real-estate related assets begins with an
initial review process by our manager, focusing on potential
investment returns, competitive positioning and property
fundamentals. If the asset passes our initial screening and
meets our risk-adjusted return targets, our manager will proceed
with more detailed underwriting, due diligence and risk
assessment. This process will include in-depth market research
and the development of a comprehensive investment analysis and
financial model. Careful attention will be paid to the following
factors, among other things, with respect to the real
estate-related assets of the borrower
and/or the
operations of the borrower:
|
|
|
|
|
geographic location and property type;
|
|
|
|
|
|
condition and use of the property;
|
|
|
|
|
|
market growth demographics;
|
|
|
|
|
|
historical performance;
|
76
|
|
|
|
|
current and projected cash flow;
|
|
|
|
|
|
potential for capital appreciation;
|
|
|
|
|
|
prospects for liquidity through sale, financing or refinancing
of the asset; and
|
We will also generally seek to condition our obligation to close
the purchase of investment in any such asset on the delivery of
certain documents, which may include (i) evidence of
marketable title, subject to such liens and encumbrances as are
acceptable to us, (ii) title insurance policies and
(iii) environmental reports.
Our due diligence process may also include reviewing third-party
revenue sources such as external contracts, service
arrangements, pledges, philanthropic support and other items,
and reviewing publicly available information about the obligor.
Ongoing
Monitoring
Our manager has the primary responsibility for monitoring our
assets for potential impairment issues. The surveillance process
includes a regular review of market conditions and public
announcements by obligors, ongoing dialogues with obligors, a
periodic review of collateral statistics and performance,
meetings to discuss credit performance and a watch list.
Insurance
If we acquire tax-exempt obligations that are secured by real
property, we will seek to ensure that the properties are covered
by adequate insurance provided by reputable companies, with
commercially reasonable deductibles, limits and policy
specifications customarily carried for similar properties. There
are, however, certain types of losses that may be either
uninsurable or not economically insurable, such as losses due to
floods, storms, riots, terrorism or acts of war. If an uninsured
loss occurs, we could lose our invested capital in, and
anticipated profits from, the asset.
Competition
We believe that our managers industry expertise and
relationships provide us with a competitive advantage. This
expertise helps us to assess risks and determine appropriate
pricing for potential assets. In addition, we believe that our
managers relationships and reputation enable us to
effectively identify and compete for attractive asset
acquisition opportunities.
However, in acquiring our assets, we compete with mutual funds,
closed-end funds, specialty finance companies, hedge funds,
insurance companies, institutional investors, investment banking
firms, financial institutions and other entities. New
competitors continually emerge, including competitors
specifically focused on purchasing tax-exempt assets. A
proliferation of companies that are similar to ours may increase
the competition for equity capital and thereby adversely affect
the market value of our Class A common shares.
Many of our competitors are significantly larger than us, have
greater access to capital and other resources and may possess
other competitive advantages. Some of our competitors may be
able to accept more risk than we can. In addition, some of our
competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety
of assets than we do. They may also enjoy significant
competitive advantages that result from, among other things, a
lower cost of capital and better operating efficiencies.
Competition may limit the number of suitable asset acquisition
opportunities available to us. It may also result in higher
prices, lower yields and a narrower spread of yields over our
borrowing costs, making it more difficult for us to acquire
assets on attractive terms. In addition, competition for
desirable assets could delay the investment of proceeds from
this offering in desirable assets, which may in turn reduce our
earnings per share and negatively affect our ability to maintain
our distributions.
77
Our affiliates may establish or manage other entities in the
future that compete with us for assets. If any present or future
affiliated investment entities have a business focus similar to
ours, we may compete with those entities for access to the
benefits that our relationship with our affiliates provides to
us, including access to business opportunities. For example,
certain funds managed by affiliates of our manager currently
invest in tax-exempt obligations similar to the tax-exempt
obligations in which we invest. We cannot assure you that, under
such circumstances, our manager will allocate the most
attractive opportunities to us.
Regulatory
Environment
Tax
Requirements
We believe that we have been organized and have operated so that
we have qualified, and will continue to qualify, to be treated
for U.S. federal income tax purposes as a partnership and
not as an association or a publicly traded partnership taxable
as a corporation. Our determination is based solely on an
opinion from Ashurst LLP. In general, an entity that is treated
as a partnership for U.S. federal income tax purposes is
not subject to U.S. federal income tax at the entity level.
Consequently, as a holder of our Class A common shares, you
will be required to take into account your allocable share of
items of our income, gain, loss, deduction and credit for our
taxable year ending within or with your taxable year, regardless
of whether we make cash distributions on a current basis with
which to pay any resulting tax.
Investment
Company Act Exclusions
We intend to continue to conduct our operations so that we are
not required to register as an investment company under the
Investment Company Act. We expect many of our subsidiaries to
rely on the exemption from registration under
Section 3(c)(5)(C) of the Investment Company Act available
to companies primarily engaged in purchasing or otherwise
acquiring mortgages and other liens on, and interests in, real
estate (as described in more detail below). Additionally,
certain subsidiaries may rely on the exemptions available under
Sections 3(c)(5)(A) or (B) of the Investment Company
Act for companies that are primarily engaged in one or more of
the following businesses: (i) purchasing or otherwise
acquiring notes, drafts, acceptances, open accounts receivable,
and other obligations representing part or all of the sales
price of merchandise, insurance and services; and
(ii) making loans to manufacturers, wholesalers, and
retailers of, and to prospective purchasers of, specified
merchandise, insurance, and services. In turn, we intend to
conduct our operations so that we qualify for the exception from
the definition of investment company provided for under
Section 3(c)(6) of the Investment Company Act.
Section 3(c)(6) of the Investment Company Act excepts from
the definition of an investment company any company primarily
engaged, directly or through majority-owned subsidiaries, in one
or more of the 3(c)(5) Businesses, or in one or more of such
businesses (from which not less than 25% of such companys
gross income during its last fiscal year was derived) together
with an additional business or businesses other than investing,
reinvesting, owning, holding or trading in securities. We may
rely on Section 3(c)(6) to the extent we engage directly,
or through our majority-owned subsidiaries, in
3(c)(5) Businesses, including engaging in purchasing or
otherwise acquiring directly mortgages or interests secured
primarily by mortgages or deeds of trust and other liens and
interests in real estate. The SEC staff has issued little
interpretive guidance with respect to Section 3(c)(6) and
any guidance published by the staff could require us to adjust
our strategy accordingly. However, under the current
interpretation of the term primarily engaged used by
the SEC and the SEC staff, Section 3(c)(6) excepts a
company from the definition of investment company if that
company devotes at least 55% of its assets to, and derives at
least 55% of its income from, a combination of (1) 3(c)(5)
Businesses, from which the company derived at least 25% of its
gross income during its last fiscal year, and (2) an
additional business or businesses other than investing,
reinvesting, owning, holding or trading in securities.
Accordingly, we intend to conduct our operations to meet these
asset and income requirements.
The determination of whether an entity is a majority-owned
subsidiary of ours is made by us. The Investment Company Act
defines a majority-owned subsidiary of a person as a company 50%
or more of the outstanding voting securities of which are owned
by such person, or by another company which is a majority-owned
subsidiary of such person. The Investment Company Act further
defines voting securities as any
78
security presently entitling the owner or holder thereof to vote
for the election of directors of a company. We will treat
companies, including STEP issuers, in which we own at least a
majority of the voting equity as majority-owned subsidiaries for
purposes of Section 3(c)(6) of the Investment Company Act.
Because there is little guidance in this area, there can be no
assurance that the SEC or its staff will not change its view on
the interpretation of Section 3(c)(6) or that they would
otherwise agree with our analysis, which, in either case, could
cause us to adjust our investment strategy. Any such adjustment
to our investment strategy would have a material adverse effect
on us.
As noted, we expect many of our subsidiaries (including certain
STEP issuers) to rely on the exemptions from registration under
Section 3(c)(5) of the Investment Company Act, and in
particular, Section 3(c)(5)(C) available to companies
primarily engaged in purchasing or otherwise acquiring mortgages
and other liens on, and interests in, real estate.
Section 3(c)(5)(C) of the Investment Company Act excepts
from the definition of the term investment company any person
who is not engaged in the business of issuing redeemable
securities,
face-amount
certificates of the installment type or periodic payment plan
certificates, and who is primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate. In order to qualify for this
exemption, at least 55% of a companys portfolio must be
composed of mortgages and other liens on and interests in real
estate (collectively, qualifying assets) and at
least 80% of the companys portfolio must be composed of
real estate-related assets. Qualifying assets include mortgage
loans and obligations secured primarily by a first mortgage or
deed of trust on the real property held by the borrower,
mortgage-backed securities that represent the entire ownership
in a pool of mortgage loans and other interests in real estate.
We expect that our subsidiaries relying on
Section 3(c)(5)(C) (and our company, to the extent we
engage in such activities directly) will adhere to guidance
published by the SEC staff (and on our analyses of such
guidance) to determine which assets are qualifying
assets and real estate-related assets. For
instance, consistent with such guidance, tax-exempt revenue
bonds primarily secured by mortgage loans or deeds of trust in
real property constitute qualifying assets. To the extent that
the SEC staff publishes new or different guidance with respect
to these matters, we may be required to adjust our strategy
accordingly. Thus, these limitations could result in us or the
subsidiary holding assets we might wish to sell or selling
assets we might wish to hold.
Certain of our subsidiaries may also seek to rely on the
exemptions under Sections 3(c)(5)(A) or (B) of the
Investment Company Act available to companies primarily engaged
in sales financing, factoring or making loans to manufacturers
or retailers for purchases of specified merchandise or services.
We expect that our subsidiaries relying on
Sections 3(c)(5)(A) or (B) will adhere to guidance
published by the SEC staff (and on our analyses of such
guidance) to determine the types of financings, loans or
receivables that may be held.
Additionally, certain of our subsidiaries, including certain
STEP issuers, may seek to rely on the Investment Company Act
exemption under
Rule 3a-7
provided to certain structured financing vehicles that pool
income-producing assets and issue securities backed by those
assets. Such structured financings may not engage in portfolio
management practices resembling those employed by mutual funds.
Accordingly, our STEP subsidiaries that rely on
Rule 3a-7
will be subject to a trust agreement which contains specific
guidelines and restrictions limiting the discretion of the STEP
issuer and the portfolio manager. In particular, the agreements
will prohibit the STEP issuer from acquiring and disposing of
assets primarily for the purpose of recognizing gains or
decreasing losses resulting from market value changes. Certain
sales and purchases of assets, such as dispositions of an
underlying asset that has gone into default or is at risk of
imminent default, may be made so long as the STEP issuers do not
violate the guidelines contained in the trust agreements and are
not based primarily on changes in market value. The proceeds of
permitted dispositions may be reinvested in underlying assets
that are consistent with the credit profile of the STEP vehicle
under specific and predetermined guidelines. In addition, absent
obtaining further guidance from the SEC, substitutions of assets
may not be made solely for the purpose of enhancing our
investment returns as the holders of the most junior
certificates issued by the STEP issuer. As a result of these
restrictions, certain of our STEP subsidiaries may suffer losses
on their assets and we may suffer losses on our investments in
those STEP subsidiaries.
79
If we fail to meet the tests for compliance with
Section 3(c)(6) (including if we or our subsidiaries
relying on Section 3(c)(5) fail to meet the tests
applicable under that subsection and from the SECs related
guidance), we may be deemed to be an investment company. As we
seek to invest the net proceeds of this offering , we may rely
for our exemption from registration under the Investment Company
Act upon
Rule 3a-2,
which provides a safe harbor exemption, not to exceed one year,
for companies that have a bona fide intent to be engaged in an
excepted activity but that temporarily fail to meet the
requirements for another exemption from registration as an
investment company. As required by the rule, our board of
directors will adopt a resolution declaring our bona fide intent
to be engaged in excepted activities. Reliance upon
Rule 3a-2
is permitted only once every three years. As a result, if we
fail to meet the tests for compliance with Section 3(c)(6),
or if we otherwise fail to maintain our exclusion from
registration and another exemption is not available, we may be
required to register as an investment company, or we may be
required to acquire
and/or
dispose of assets in order to meet the applicable tests. Any
such asset acquisitions or dispositions may be of assets that we
would not acquire or dispose of in the ordinary course of our
business, may be at unfavorable prices or may impair our ability
to make distributions to shareholders and result in a decline in
the price of our common shares.
If we are required to register under the Investment Company Act,
we would become subject to substantial regulation with respect
to our capital structure (including our ability to use
leverage), management, operations, transactions with affiliated
persons (as defined in the Investment Company Act), and
portfolio composition, including restrictions with respect to
diversification and industry concentration and other matters.
Registration under the Investment Company Act would likely limit
our ability to follow our current investment and financing
strategies, impair our ability to make distributions to our
common shareholders and, as a result, cause a decline in the
price of our Class A common shares.
Legal
Proceedings
There are no legal proceedings pending against us or to which we
are a party.
Offices
Our principal executive offices are located at 2929 Arch Street,
17th Floor, Philadelphia, Pennsylvania 19104. Our managers
principal executive offices are at 780 Third Avenue, 22nd Floor,
New York, New York 10017.
We lease our principal executive offices from the Former
Manager. See Certain Relationships and Related
Transactions Lease Arrangement with the Former
Manager for further information. We do not own any real
property.
Employees
We do not have any employees. Our business is managed by
employees of our manager under the Management Agreement.
80
MANAGEMENT
Our
Manager
We are externally managed and advised by our manager pursuant to
the Management Agreement, which is described below. As more
fully described below under The Management
Agreement Responsibilities of our Manager, our
manager is responsible for providing us with senior management,
managing our assets, administering our business activities and
managing our
day-to-day
operations.
Our manager is a wholly-owned subsidiary of Tricadia Holdings.
Tricadia Holdings is an asset management firm founded in 2003 by
Michael Barnes and Arif Inayatullah. Tricadia Holdings is based
in New York, New York, has approximately $5 billion in
assets under management and employs approximately 50
professionals. Affiliates of Tricadia Holdings manage a wide
variety of hedge funds, managed accounts, real estate-related
portfolios and permanent capital businesses, including some
funds and accounts that invest in similar assets as us, such as
obligations secured by interests in real estate and
derivative-based transactions, as well as structured finance
vehicles. Our manager also manages Non-Profit Preferred Funding
Trust I, a $416.5 million, multi-tranche STEP
transaction with an investment strategy similar to us.
Directors
and Executive Officers
Our board of directors consists of five
directors, of
whom are considered independent under the NASDAQ Listing Rules.
We intend to appoint additional directors prior to the
consummation of this offering. Because we are a controlled
company under the NASDAQ Listing Rules, we are not
required to have a majority of independent directors.
Pursuant to the terms of the Management Agreement, our manager
provides us with our executive officers. In addition to serving
as officers of our company and our subsidiaries, all of our
executive officers are employees of Tricadia or one or more of
the affiliates or entities that it manages.
The following table sets forth information regarding our
directors and executive officers:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Title
|
|
Michael Barnes
|
|
|
44
|
|
|
Chairman and Chief Executive Officer; Director
|
Geoffrey Kauffman
|
|
|
51
|
|
|
President; Director
|
Christopher Conley
|
|
|
55
|
|
|
Chief Operating Officer
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Julia Wyatt
|
|
|
52
|
|
|
Chief Financial Officer and Secretary
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Daniel G. Cohen
|
|
|
40
|
|
|
Director
|
Andrew Gordon
|
|
|
56
|
|
|
Director
|
Thomas J. Reilly, Jr.
|
|
|
70
|
|
|
Director
|
81
The following describes the experience of our non-management
directors. Biographies of our executive officers are set forth
under The Management Team.
|
|
|
|
|
Background Summary
|
|
|
|
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Daniel G. Cohen
|
|
Mr. Cohen served as our chairman from our formation in 2007
through March 2009. He is currently the chairman and chief
executive officer of Cohen & Company, an investment firm
specializing in credit-related fixed income products and
investments, and has served in such capacity since 2001. From
2001 to 2006, Mr. Cohen also served as chief executive officer
of Cohen & Company. Mr. Cohen holds similar management
positions in certain investment advisory subsidiaries and the
broker-dealer subsidiary of Cohen & Company. Mr. Cohen has
been chairman of the board of directors of The Bancorp, Inc., a
bank holding company, since 2000 and served as its chief
executive officer from 1999 to 2000. From 2000 until 2006, Mr.
Cohen served on the board of directors of TRM Corporation, an
operator of automated teller machines, and as its Chairman from
2003 until 2006. From 1995 to 2000, Mr. Cohen served as an
officer of Resource America, an asset management company,
serving as its chief operating officer from 1998 to 2000. From
1997 to 1999, Mr. Cohen was a director of Jefferson Bank of
Pennsylvania, a commercial bank. Mr. Cohen was selected to
serve as one of our directors because he is the chairman of the
Former Manager and has extensive experience and familiarity with
us. In addition, he has extensive experience in investments and
board service.
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|
|
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Andrew Gordon
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Mr. Gordon has served as a director since March 2009. He is
currently Managing Partner of Gordon Financial Advisors LLC, a
boutique investment bank he founded in 2008. He is also CEO of
SPiN Global Management LLC, a table tennis focused enterprise
that he founded in 2008. Prior to forming Gordon Financial
Advisors, Mr. Gordon was a Managing Director in
JP Morgans Financial Institutions Investment Banking
Group from 2004 through 2007, where he led a team of investment
bankers focused on delivering JP Morgans products and
services to the asset management sector, particularly equity and
debt capital raising and mergers and acquisitions. Prior to JP
Morgan, Mr. Gordon was a Managing Director at Lehman Brothers
from 1987 through 1996, where he focused on the financial
institutions sector, and a Managing Director at Credit Suisse
First Boston from 1997 through 2000, where he led Credit Suisse
First Bostons asset management investment banking coverage
effort. He also served as chief operating officer of two asset
managers, Lehman Brothers Global Asset Management, from 1992
through 1996, and Trilogy Advisors, from 2000 through 2003.
While at Lehman Brothers Global Asset Management, Mr. Gordon
served as chairman of the board of its mutual fund complex. Mr.
Gordon received his B.A. from Columbia College and his M.B.A.
from Columbia Business School, where he was a member of the Beta
Gamma Sigma Honor Society. Mr. Gordon was selected to serve as
one of our directors because he has significant financial and
investment experience.
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82
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|
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Background Summary
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Thomas J. Reilly, Jr.
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Mr. Reilly has served as a director since June 2007. He is
currently retired from active employment. Mr. Reilly was a
member of the board of trustees of Taberna Realty Finance Trust,
a specialty finance REIT, from April 2005 until December 2006.
From 1965 to 1996, Mr. Reilly worked in public accounting at
Arthur Andersen LLP, providing audit and consulting services to
multinational companies in the manufacturing, professional
services, construction and distribution industries. Mr. Reilly
was a partner at Arthur Andersen from 1976 to 1996 and was head
of the Philadelphia office audit division from 1979 to 1986.
Mr. Reilly currently serves as a director and audit committee
chair of Astea International, Inc., a global provider of service
management solutions, a director and audit committee chair for
inTEST Corporation, a designer, manufacturer and marketer of
semiconductor automatic test equipment, a member of the advisory
board of World Affairs Council of Philadelphia, and former
president of Center City Residents Association. Mr. Reilly
received his B.S. in economics with a major in accounting from
Villanova University in 1961. Mr. Reilly was selected to serve
as one of our directors because he has a strong background in
accounting and finance as well as extensive experience in board
service.
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Independent
Directors
Messrs. Reilly
and
are independent directors within the meaning of the NASDAQ
Listing Rules.
Board
Committees
Prior to the consummation of this offering, we anticipate that
our board of directors will establish an audit committee, as
discussed below. Our board of directors may not have any other
committees and we expect that the full board of directors will
take action on compensation, director nomination and corporate
governance matters where necessary or appropriate.
The audit committee will be comprised of
Messrs. Reilly, and
. Mr. Reilly will chair the committee.
The audit committee will be responsible for, among other things,
engaging independent public accountants, reviewing with the
independent public accountants the plans and results of the
audit engagement, approving professional services provided by
the independent public accountants, reviewing the independence
of the independent public accountants, considering the range of
audit and non-audit fees and reviewing the adequacy of our
internal accounting controls.
Mr. Reilly will serve as the Companys audit committee
financial expert, as such term is defined by the Sarbanes-Oxley
Act of 2002.
Because we are a controlled company under the NASDAQ
Listing Rules, we are not required to have a compensation
committee or nominating and corporate governance committee
comprised of independent directors.
Compensation
Interlocks
None of our executive officers has a relationship that would
constitute an interlocking relationship with executive officers
or directors of another entity or insider participation in
compensation decisions.
83
Compensation
Executive
Compensation
Compensation
Discussion and Analysis
We are externally managed and have no employees. Because the
Management Agreement provides that our manager is responsible
for managing our affairs, our executive officers, who are
employees of our manager and its other affiliates, do not
receive cash compensation from us for serving as our executive
officers. In their capacities as officers or employees of our
manager or its other affiliates, they devote a portion of their
time to our affairs as is required for the performance of the
duties of our manager under the Management Agreement.
We pay our manager a management fee, and our manager uses the
proceeds from the management fee in part to pay compensation to
its officers and employees. It is our understanding that the
compensation paid to our executive officers by our manager or
its other affiliates is not allocated in a manner that would
allow us to determine that portion of their compensation that is
related to the services performed for us and that portion that
is related to services performed for other entities. See
The Management Agreement
Performance Share for information with respect to the
transfer by our manager of shares of our common stock to our
executive officers.
We have not included tabular disclosure concerning compensation
to our named executive officers since we do not provide them
with cash or other compensation and have not provided them with
equity compensation within the period or otherwise required to
be reported in tabular form.
Director
Compensation
Members of our board of directors who are employees of any of
our affiliates, whom we refer to as excluded directors, do not
receive compensation for serving on the board of directors. Each
other director, whom we refer to as a non-excluded director,
receives an annual retainer of $10,000, payable in cash.
Non-excluded directors who are members of the audit committee
receive an additional $10,000 cash retainer, with an additional
$5,000 cash retainer payable to the chairperson of the audit
committee. We do not intend to compensate directors for
additional committee meetings that occur on a date different
from a full board of directors meeting date. We also reimburse
all of our directors for their travel expenses incurred in
connection with their attendance at full board and committee
meetings.
Our non-excluded directors are also eligible to receive shares,
options and other share-based awards as additional compensation
from time to time. See Equity
Compensation below.
Compensation
of Directors in 2009
The table below indicates the compensation earned by our
non-excluded directors for 2009.
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Fees Earned
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Share-Based
|
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All Other
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Total
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Name
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or Paid in Cash
|
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Awards
|
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Compensation
|
|
Compensation
|
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Daniel G. Cohen
|
|
$
|
7,500
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|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
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7,500
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|
Andrew Gordon
|
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$
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7,500
|
|
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$
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31,650
|
|
|
$
|
0
|
|
|
$
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39,150
|
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Thomas J. Reilly, Jr.
|
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$
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14,750
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|
|
$
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15,375
|
|
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$
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0
|
|
|
$
|
30,125
|
|
Mr. Cohen received $7,500 in cash, earned by attending
meetings of the board of directors in the second, third and
fourth quarters of 2009. Mr. Gordon received
(i) $7,500 in cash, earned by attending meetings of the
board of directors in the second, third and fourth quarters of
2009 and (ii) an award of restricted common shares with an
aggregate grant date fair value of $31,650 (calculated in
accordance with FASB ASC Topic 718). Mr. Reilly received
(i) $14,750 in cash, earned by attending meetings of the
board of directors in each of the four quarters of 2009 and
(ii) an award of restricted common shares with an aggregate
grant date fair value of $15,375 (calculated in accordance with
FASB ASC Topic 718). Upon the acquisition of a controlling
interest in our common stock by Tiptree in the first quarter of
2009, we implemented the compensation structure described under
Director Compensation.
84
Equity
Compensation
In connection with our initial offering in June 2007, common
shares were reserved for certain officers and employees of the
Former Manager as LTIP shares. LTIP shares are a special class
of limited liability company interest that have the same rights
to voting and distributions as the common shares, but do not
have any rights to liquidating distributions until they are
converted into common shares. Holders of LTIP shares were
entitled to convert their LTIP shares into an equal number of
common shares if, in certain circumstances, the valuation of our
assets exceeded a specified threshold that we refer to as the
performance target.
In July 2009, the LTIP shares became eligible to be converted
into common shares because we issued to our manager common
shares valued at $2.01 per Share, exceeding the performance
target of $1.25, as partial payment for a performance fee for
the second quarter of 2009. All of the holders of the LTIP
shares elected to convert their LTIP shares into common shares,
and there are currently no LTIP shares outstanding.
We may offer shares, options and other share-based awards under
our 2007 Equity Incentive Plan, or other equity incentive plans
we may establish in the future, to our executive officers and
directors. We
anticipate
that
of our common shares will be reserved for equity incentive
awards at the time of this offering. The terms and conditions of
awards will be determined by our board of directors.
Management
Team
Pursuant to the terms of the Management Agreement, our manager
provides us with our management team. The following describes
the experience of our executive officers and other members of
the management team.
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Name/position at the Company
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Background Summary
|
|
|
|
|
Michael Barnes
Chief Executive Officer and Chairman
|
|
Our Chief Executive Officer and Chairman of our board of
directors since March 2009, Mr. Barnes is a founding partner of
Tricadia. Prior to the formation of Tricadia in 2003, Mr.
Barnes spent two years as Head of Structured Credit Arbitrage
within UBS Principal Finance LLC, a wholly owned subsidiary of
UBS Warburg, which conducts proprietary trading on behalf of the
firm. Mr. Barnes joined UBS in 2000 as part of the merger
between UBS and PaineWebber Inc. Prior to joining UBS, Mr.
Barnes was a Managing Director and Global Head of the Structured
Credit Products Group of PaineWebber. Prior to joining
PaineWebber in 1999, he spent 12 years at Bear, Stearns
& Co. Inc., the last five of which he was head of their
Structured Transactions Group. We selected Mr. Barnes as
Chairman based on his extensive experience in credit asset
management. Mr. Barnes received his A.B. from Columbia College.
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85
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|
|
Name/position at the Company
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Background Summary
|
|
Geoffrey Kauffman
President
|
|
Our President and a member of the board of directors since March
2009, Mr. Kauffman has been a Managing Director of Tricadia
since 2005 and the President and Chief Operating Officer of
Tiptree since its inception in 2007. Since joining Tricadia in
2005, Mr. Kauffman has been overseeing a variety of strategic
acquisition opportunities and permanent capital projects,
including the development of Tiptree. Prior to joining
Tricadia, from 2002 to 2004, Mr. Kauffman was a partner
with the Shidler Group in a similar capacity, with his primary
focus being the development of a credit derivative products
company (CDPC). Before joining the Shidler Group, from 1997 to
2001, Mr. Kauffman was involved in the launch of the CGA
Group of companies, which originated financial guarantee
contracts. From 1997 through 1999, he was the President, Chief
Underwriting Officer and Principal Representative of CGA
Bermuda, Ltd, the CGA Groups Bermuda based insurance
subsidiary. From 2000 to 2001, he was the President and Chief
Executive Officer of CGA Investment Management. Prior to
joining CGA, Mr. Kauffman was at AMBAC and the MBIA / AMBAC
International joint venture in 1995 and 1996, where he helped
develop their international structured finance department. Prior
to AMBAC, from 1989 to 1995, Mr. Kauffman was with FGICs
ABS group and helped establish that business, focusing on CDOs,
asset backed securities and multi-seller conduit programs.
Prior to FGIC, Mr. Kauffman worked in the Investment
Banking Division of Marine Midland Bank (now HSBC), where he
focused on middle market mergers and acquisitions and structured
finance. We selected Mr. Kauffman as a member of the board of
directors because of his significant and diverse experience in
financial transactions, particularly credit transactions, as
well as his experience in developing emerging companies. Mr.
Kauffman holds a B.A. (Psychology) from Vassar College and an
M.B.A. (Finance) from Carnegie Mellon University.
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Christopher Conley
Chief Operating Officer
|
|
Our Chief Operating Officer, since 2009, Mr. Conley was a
Managing Director at Cohen & Company Securities, LLC and
co-head of the municipal finance platform for Cohen &
Company from 2007 through 2009. Previously, beginning in 1997,
Mr. Conley was president of Non-profit Capital, LLC, which he
founded to meet the capital needs of acute care, rural health
care, behavioral health care and long-term care facilities
through a national funding program. Prior to establishing
Non-profit Capital, LLC, Mr. Conley was a senior vice president
at Tucker Anthony & Company from 1995 to 1997, where he led
the municipal bond securitization effort. Prior to Tucker
Anthony, Mr. Conley was senior vice president in charge of the
Health Care Group at Lehman Brothers in New York from 1983 to
1995, where he completed financing for health care facilities of
all types, including multi-hospital systems, community based
hospitals, academic medical centers, behavioral health care
providers and long-term care facilities. Before that,
Mr. Conley was employed in the Health Care Group in Booz,
Allen & Hamiltons New York office from 1980 to 1983.
Apart from his business activities, Mr. Conley has served as
chairman of the board of Our Lady of Mercy Medical Center in the
Bronx, New York, and has served on the finance committee of
Catholic Health Initiatives (CHI), a multi-state $6 billion
revenue health system. Mr. Conley is a graduate of the
University of Notre Dame, where he obtained a B.A. in
anthropology, and was awarded a Masters of Health Administration
from Duke University.
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86
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|
|
Name/position at the Company
|
|
Background Summary
|
|
Julia Wyatt
Chief Financial Officer and Secretary
|
|
Our Chief Financial Officer and Secretary since 2009, Ms. Wyatt
is also the Chief Financial Officer of Tricadia. Prior to
joining Tricadia in 2005, from 1996 to 2005, Ms. Wyatt was the
Chief Financial Officer of Havell Capital Management (HCM), a
specialized investment management firm dedicated to managing
funds in fixed income markets. During her tenure with HCM,
Ms. Wyatt was responsible for all non-investment related
aspects of the firm, including financial, legal, regulatory and
client services. Prior to HCM, from 1992 to 1996, Ms. Wyatt was
a senior member of the fixed income management group with
Neuberger Berman. Previously, from 1987 to 1991, she was
employed by Morgan Grenfell Capital Management, where she was
the Treasurer and Director of Client Services. Ms. Wyatt
obtained her C.P.A. license during her years from 1980 to 1988,
with Deloitte & Touche, spending the last two years in the
Executive Office Research Department. Ms. Wyatt has a B.S. in
Accounting from the University of Utah.
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|
|
|
Eileen Mullin
Senior Analyst
|
|
Our Senior Analyst since 2009, Ms. Mullin leads the group that
performs in-depth credit analysis of all potential borrowers in
the municipal finance sector. Previously, from 2005 to 2009,
she was a director at Cohen & Company. Ms. Mullin
worked as a health care analyst for Prudential Investment
Advisors nine tax-exempt funds from 1994 to 1995. She
also was a member of Moodys Investors Services
Public Finance Division from 1991 to 1994 in the Health Care
Group, where she had responsibility for Moodys new and
ongoing health care ratings in thirteen States. Prior to that
time, starting in 1987, Ms. Mullin was an investment banker in
the health care finance group for both Kidder, Peabody &
Co. and Bear, Stearns and Co. From 1985 to 1987, she worked in
the Debt Issuance Unit of the New York State Medical Care
Facilities Finance Agency, which was the largest health care
issuer in the country. She has also worked as an independent
consultant from 1995 to 2005, providing credit analyses for
other individuals and companies. Ms. Mullin received her
undergraduate degree from Smith College and a Masters in
Business Administration from Boston University.
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Ellen Curry
Controller
|
|
Our Controller, Ms. Curry previously served as a Director at
Core Management, Inc., a construction management company, where
she was dedicated to finance, accounting and business oversight
and worked from 2002 to 2007. From 1999 to 2002, Ms. Curry, as
President of Corporate Financial Consulting at Foresight
Solutions, analyzed the viability of real estate development
projects, developed operating budgets and prepared presentations
for lending institutions, and managed the income tax accounting
and tax investment strategy for a financial guaranty reinsurer.
Prior to that time, Ms. Curry had senior roles at American
Business Financial Services and Enhance Financial Services Group
and was employed by Goldman Sachs, Thomson McKinnon Securities
and PricewaterhouseCoopers. Ms. Curry is a CPA and received her
MBA in Finance, Magna Cum Laude, from the Leonard N. Stern
School of Business at New York University. Ms. Curry attended
the International Management Program at the Australian Graduate
School of Management and received her BBA in Accounting, Summa
Cum Laude, from Baruch College.
|
87
|
|
|
Name/position at the Company
|
|
Background Summary
|
|
Daniel DiBono
Vice President
|
|
Our Vice President, Mr. DiBono is primarily responsible for
surveillance of our existing credits as well as other areas of
operations and structuring. Mr. DiBono is also a member of
the group that performs in-depth credit analysis on potential
borrowers in the municipal finance sector. Mr. DiBono was
previously a Vice President at Cohen & Company from 2007 to
2009 and was responsible for closing all directly originated
tax-exempt bond transactions. Mr. DiBonos experience
includes turnaround management, financial forecasting and
business plan development in the corporate sector and business
development in the financial services sector. Mr. DiBono
received a Bachelor of Science in Business Administration from
the State University of New York at Albany, concentrating in
Finance and Marketing.
|
The
Management Agreement
We are party to the Management Agreement, which is dated as of
June 12, 2007. The Management Agreement initially was with
the Former Manager and assigned to the current manager on
March 18, 2009, following the purchase by Tiptree, an
affiliate of our manager, of a majority of our then-outstanding
common shares. For further information concerning the
assignment, see Business Operating
History.
Responsibilities
of Our Manager
Pursuant to the terms of the Management Agreement, our manager
is required to provide us with our management team, along with
appropriate support personnel to provide the management services
to be provided by our manager to us, the members of which team
shall have as a primary responsibility the management of us and
shall devote such of their time to our management as the board
of directors reasonably deems necessary and appropriate,
commensurate with our level of activity from time to time.
Pursuant to the Management Agreement, our manager is responsible
for approving our acquisition of municipal obligations and other
assets, administering our business and managing our
day-to-day
operations. The Management Agreement requires our manager to
manage our business affairs in conformity with the policies and
the asset acquisition guidelines that are approved by at least a
majority of our independent directors and monitored by the board
of directors. These policies and guidelines include, among other
things, that, for investments not originated by the company or
any affiliate, our manager will conduct specific due diligence,
including, without limitation, the analysis of market outlook
for the securities, sector preference, concentration limits,
general strategy and yield targets. The senior officers of the
manager will then determine whether to cause the acquisition of
the security by the company. For investments originated by us or
one of our affiliates, the manager will conduct specific due
diligence and credit analysis and determine the inclusion of
such security prior to its purchase by the company (or a
subsidiary). Any consideration, due diligence or vote by us may
only occur 90 days after the security has been originated.
Any such security may only be purchased at a price that reflects
its fair market value. The manager may retain the services of
independent third parties to assist it with due diligence and
valuation. Less than 70% of the aggregate principal amount of
the assets of the company or a subsidiary thereof may consist of
investments originated, directly or indirectly, by us or one of
our affiliates.
Among other things, our manager is responsible for (i) the
selection, purchase, monitoring and sale of our portfolio
assets, (ii) our financing and risk management activities
and (iii) providing us with asset advisory services. Our
manager is responsible for our
day-to-day
operations and performs (or causes to be performed) such
services and activities relating to our assets and operations as
may be appropriate, including, without limitation, the following:
(1) serving as our consultant with respect to the periodic
review of the asset acquisition and credit criteria and
parameters for our acquisitions, borrowings and operations, any
modifications to which must be approved by a majority of our
independent directors, and other policies for the approval of
our board of directors;
88
(2) investigating, analyzing and selecting possible asset
acquisition opportunities;
(3) with respect to prospective asset acquisitions,
conducting negotiations with borrowers, sellers and purchasers
and their respective agents, representatives and investment
bankers;
(4) engaging and supervising, on our behalf and at our
expense, independent contractors who provide investment banking,
mortgage brokerage, securities brokerage and other financial
services and such other services as may be required relating to
our assets;
(5) negotiating on our behalf for the sale, exchange or
other disposition of any of our assets;
(6) coordinating and managing operations of any joint
venture or co-investment interests held by us and conducting all
matters with any joint venture or co-investment partners;
(7) providing executive and administrative personnel,
office space and office services required in rendering services
to us;
(8) administering our
day-to-day
operations and performing and supervising the performance of
such other administrative functions necessary to our management
as may be agreed upon by our manager and the board of directors,
including the collection of revenues and the payment of our
debts and obligations and maintenance of appropriate computer
services to perform such administrative functions;
(9) communicating on our behalf with the holders of any of
our equity or debt securities as required to satisfy the
reporting and other requirements of any governmental bodies or
agencies or trading markets and to maintain effective relations
with such holders;
(10) counseling us in connection with policy decisions to
be made by our board of directors;
(11) evaluating hedging strategies and engaging in hedging
activities on our behalf, consistent with our status as a
partnership and with our asset acquisition guidelines;
(12) counseling us regarding the maintenance of our
qualification as a partnership for U.S. federal income tax
purposes and monitoring compliance with the requirements for
maintaining such qualification;
(13) counseling us regarding the maintenance of our
exemption from the Investment Company Act and monitoring
compliance with the requirements for maintaining an exemption
thereunder;
(14) assisting us in developing criteria for asset
purchases that are specifically tailored to our business
objectives and making available to us its knowledge and
experience with respect to tax-exempt bonds and other assets,
STEP and tender option bond programs and other structured credit
entities;
(15) representing and making recommendations to us in
connection with the purchase and finance of and commitment to
purchase and finance tax-exempt bonds and other assets, STEP
certificates, tender option bond program certificates and
interests in other structured credit entities, and in connection
with the sale and commitment to sell such assets;
(16) selecting broker-dealers to effect transactions on our
behalf;
(17) monitoring the operating performance of our assets and
providing periodic reports with respect thereto to our board of
directors, including comparative information with respect to
such operating performance and budgeted or projected operating
results;
(18) investing and reinvesting any money and securities of
ours (including investing in short-term investments pending the
acquisition of other assets, payment of fees, costs and
expenses, or payments of dividends or distributions to our
shareholders as such dividends or distributions may be
authorized or approved by our board of directors), and advising
us as to our capital structure and capital raising;
(19) causing us to retain qualified accountants (subject to
approval of the audit committee of our board of directors) and
legal counsel, as applicable, to assist in developing
appropriate accounting procedures, compliance procedures and
testing systems with respect to financial reporting obligations
and compliance with the Code and to conduct quarterly compliance
reviews with respect thereto;
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(20) causing us to qualify to do business in all applicable
jurisdictions and to obtain and maintain all appropriate
licenses;
(21) assisting us in complying with all regulatory
requirements applicable to us in respect of our business
activities, including preparing or causing to be prepared all
financial statements required under applicable regulations and
contractual undertakings and all reports and documents, if any,
required under the Exchange Act;
(22) taking all necessary actions to enable us to make
required tax filings and reports;
(23) handling and resolving all claims, disputes or
controversies (including all litigation, arbitration, settlement
or other proceedings or negotiations) in which we may be
involved or to which we may be subject arising out of our
day-to-day
operations, subject to such limitations or parameters as may be
imposed from time to time by the board of directors;
(24) using commercially reasonable efforts to cause
expenses incurred by or on our behalf to be commercially
reasonable or commercially customary and within any budgeted
parameters or expense guidelines set by our board of directors
from time to time;
(25) advising us with respect to obtaining appropriate
warehouse or other financings for our assets;
(26) advising us with respect to and structuring long-term
financing vehicles for our portfolio of assets, and offering and
selling securities publicly or privately in connection with any
such structured financing;
(27) performing such other services as may be required from
time to time for management and other activities relating to us
and our assets as our board of directors shall reasonably
request or our manager or our board of directors shall deem
appropriate under the particular circumstances; and
(28) using commercially reasonable efforts to cause us to
comply with all applicable laws.
Limitation
of Liability
Pursuant to the Management Agreement, our manager has not
assumed any responsibility other than to render the services
called for thereunder in good faith and will not be responsible
for any action of our board of directors in following or
declining to follow our managers advice or
recommendations. Our manager and its members, managers,
officers, directors, employees and affiliates will not be liable
to us, any of our subsidiaries, our directors, our shareholders
or any shareholders or partners of our subsidiaries for acts
performed in accordance with and pursuant to the Management
Agreement, except by reason of acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of
their duties under the Management Agreement. We have agreed to
indemnify our manager and its members, and their respective
managers, officers, directors, employees and affiliates and each
person controlling our manager with respect to all expenses,
losses, damages, liabilities, demands, charges and claims
arising from acts of such indemnified party not constituting bad
faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with
and pursuant to the Management Agreement. Our manager has agreed
to indemnify us, our shareholders, directors, officers,
employees and each other person, if any, controlling us with
respect to all expenses, losses, damages, liabilities, demands,
charges and claims arising from acts of our manager constituting
bad faith, willful misconduct, gross negligence or reckless
disregard of its duties under the Management Agreement. As
required by the Management Agreement, our manager carries errors
and omissions insurance.
Term
and Termination
The initial term of the Management Agreement expires on
December 31, 2010, and shall be automatically renewed for a
one-year term on each anniversary date thereafter unless
terminated as described below. Our independent directors will
review our managers performance annually and, following
the initial term, the Management Agreement may be terminated
annually (upon 180 days notice) upon the affirmative
vote of at least two-thirds of our independent directors, or by
a vote of the holders of a majority of our outstanding common
shares, based upon (i) unsatisfactory performance that is
materially detrimental to us or (ii) a
90
determination that the management fee payable to our manager is
not fair, subject to our managers right to prevent such a
termination pursuant to clause (ii) by accepting a
reduction of the management fee agreed to by at least two-thirds
of our independent directors and our manager. We must provide
180 days prior notice of any such termination and our
manager will be paid a termination fee equal to three times the
average annual base management fee for the two
12-month
periods preceding the date of termination, calculated as of the
end of the most recently completed fiscal quarter prior to the
date of termination (and annualized for any partial year), which
may make it costly and difficult for us to terminate the
Management Agreement. In addition, we will be required to redeem
the Performance Share held by our manager for a price equal to
three times the average annual distributions paid in respect of
such Performance Share for the two
12-month
periods immediately preceding the date of termination.
We may also terminate the Management Agreement without payment
of the termination fee with 30 days prior written
notice for cause, which is defined in the Management Agreement
to mean:
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our managers continued material breach of any provision of
the Management Agreement following a period of 30 days
after written notice thereof;
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our managers engagement in any act of fraud,
misappropriation of funds or embezzlement against us;
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our managers gross negligence, willful misconduct or
reckless disregard in the performance of its duties under the
Management Agreement;
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the commencement of any proceeding relating to our
managers or Tricadias bankruptcy, insolvency,
dissolution, or similar matters that is not withdrawn within
60 days;
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the entry of a court order or decree respecting our
managers or Tricadias bankruptcy or insolvency, or
our manager or Tricadia ceasing to pay its debts as they become
due or making a general assignment for its creditors; or
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a change of control (as defined in the Management Agreement),
other than certain permitted changes of control, of our manager
or Tricadia.
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Cause does not include unsatisfactory performance, even if that
performance is materially detrimental to our business. Our
manager may terminate the Management Agreement, without payment
of the termination fee, in the event we become regulated as an
investment company under the Investment Company Act.
Furthermore, our manager may decline to renew the Management
Agreement for any reason by providing us with
180 days written notice. Our manager may also
terminate the Management Agreement upon 60 days
written notice if we default in the performance of any material
term of the Management Agreement and the default continues for a
period of 30 days after written notice to us, whereupon we
would be required to pay our manager a termination fee.
Management
Fee
We do not employ personnel and therefore rely on the resources
of our manager to conduct our operations. Our manager uses the
proceeds from its management fee in part to pay compensation to
its officers and employees who, notwithstanding that certain of
them also are our officers, receive no cash compensation
directly from us.
Base
Management Fee
We pay our manager a base management fee, or Base Management
Fee, monthly in arrears in an amount equal to 1/12 of our equity
multiplied by 1.50%. We believe that the Base Management Fee is
comparable to the base management fee received by the managers
of comparable externally managed specialty finance companies.
For purposes of calculating the Base Management Fee, our
equity means, for any month, the sum of the net
proceeds from any issuance of our common shares, after deducting
any underwriting or initial purchasers discounts and
commissions or placement fees and other expenses and costs
relating to the issuance, plus (or minus) our retained earnings
(or deficit) at the end of such month (without taking into
account any non-cash equity compensation expense incurred in
current or prior periods), which amount shall be reduced by any
amount that we pay for the repurchases of our common shares. The
foregoing calculation of the Base
91
Management Fee will be adjusted to exclude one-time events
pursuant to changes in U.S. GAAP, as well as non-cash
charges, after discussion between our manager and our
independent directors and approval by a majority of our
independent directors in the case of non-cash charges.
The Base Management Fee is required to be calculated by our
manager within 15 business days after the end of each month and
such calculation is required to be promptly delivered to us. We
are obligated to pay the Base Management Fee within 20 business
days after the end of each month.
The Management Agreement provides that the Base Management Fee
payable to our manager for any fiscal year will be reduced, but
not below zero, by our proportionate share of the amount of any
STEP and other structured credit portfolio management fees that
are paid to our manager for such year by the STEP and other
structured credit entities in which we acquire invest, based on
the percentage of the most junior class of certificates we hold
in such STEPs and other structured credit entities provided,
however, that our manager reserves its right, to the extent
contractually permitted, to charge its full base management fee
with respect to any STEPs or other structured credit entities
for which it serves as manager. Any other fees paid to our
manager and its affiliates will not reduce the amount of fees we
pay under the Management Agreement. In 2009, we paid our manager
a base management fee of $730,215.
Performance
Share
We have awarded our manager a Performance Share in our company
that represents a special limited liability company interest
that entitles our manager to a special allocation of our profits
and cash distributions if we exceed a specified performance
threshold. The Performance Share entitles our manager to an
allocation of profits and cash distributions, payable quarterly
in arrears, in an amount equal to 20% of any increase in the
Companys Book Value, after giving effect to the recovery
of any previous reduction in the Companys Book Value, if
the Companys net appreciation for the applicable quarter
exceeds an annualized hurdle rate of 5% (on an annualized basis)
and to the extent the distribution does not cause the
Companys net appreciation to fall below the hurdle rate.
Book Value is determined by calculating
shareholders equity of the Company determined in
accordance with U.S. GAAP, adjusted to exclude (i) the
effects of one-time events pursuant to changes in
U.S. GAAP, (ii) distributions, including Performance
Share distributions, (iii) non-cash charges (including,
without limitation, changes in goodwill and incentive
compensation expenses), and (iv) the direct impact of the
issuance or cancellation of Shares of the Company (but not
adjusted to exclude indirect effects attributable to the
increase or decrease in shareholders equity). As
consideration for the acquisition of the right to manage the
company from the Former Manager, our manager will, beginning on
March 18, 2012 and until March 18, 2022, remit to the
Former Manager payments equal to 10% our managers revenue
in excess of $1 million (including the above-discussed
Performance Share, and less certain adjustments). In 2009, we
issued common shares to our manager in lieu of cash
distributions owed pursuant to its ownership of the Performance
Share as follows: (i) 553,407 common shares valued at $2.17
per share; (ii) 438,712 common shares valued at $2.01 per
share; and (iii) 721,528 shares valued at $2.43 per
share.
We have from time to time issued common shares to our manager in
lieu of making cash distributions owed to our manager as
described above. Our manager has from time to time compensated
our executive officers with common shares it received from us as
described above.
Reimbursement
of Expenses
Although our managers employees perform certain legal,
accounting, due diligence tasks and other services that outside
professionals or outside consultants otherwise would perform,
our manager will not be paid or reimbursed for the time required
in performing such tasks.
We will pay all operating expenses, except those specifically
required to be borne by our manager under the Management
Agreement. The expenses required to be paid by us include, but
are not limited to: transaction costs incident to the
acquisition, disposition and financing of our assets; legal,
tax, accounting, consulting, administrative and other similar
service fees and expenses; the compensation and expenses of our
directors; the cost of directors and officers
liability insurance; the costs associated with the establishment
and maintenance of any credit facilities, tender option bond
programs and other financing arrangements and other indebtedness
of ours (including commitment fees, accounting fees, legal fees,
closing and other costs); expenses associated with other
securities offerings of our company; expenses relating to making
distributions
92
to our shareholders; the costs of printing and mailing proxies
and reports to our shareholders; costs associated with any
computer software or hardware, electronic equipment or purchased
information technology services from third party vendors that is
used solely for us; costs incurred by employees and agents of
our manager and its affiliates for travel on our behalf; costs
and expenses incurred with respect to market information systems
and publications, research publications and materials;
settlement, clearing and custodial fees and expenses; expenses
of our transfer agent; the costs of maintaining compliance with
all federal, state and local rules and regulations or any other
regulatory agency; all taxes and license fees; and all insurance
costs incurred by us or on our behalf. In addition, we will be
required to pay our pro rata portion of rent, telephone,
utilities, office furniture, equipment, machinery and other
office, internal and overhead expenses of our manager and its
affiliates required for our operations. Except as noted above,
our manager is responsible for all costs incident to the
performance of its duties under the Management Agreement,
including compensation of our managers employees and other
related expenses.
Conflicts
of Interest
The Company is subject to certain conflicts of interest relating
to Tricadia and its affiliates, including our manager. All of
our officers also serve as officers
and/or
directors of other affiliates of our manager. Accordingly, they
will not be exclusively dedicated to our business. Affiliates of
Tricadia manage a wide variety of hedge funds, managed accounts,
real estate-related portfolios and permanent capital businesses,
including some funds and accounts that invest in similar assets
as us. Our management agreement with our manager (i) is
between related parties, and its terms, including fees payable,
may not be as favorable to us as if it had been negotiated with
an unaffiliated third party and (ii) does not prevent our
manager and its affiliates from engaging in additional
management or investment opportunities that compete with us. Our
manager has and may in the future engage in additional
management or investment opportunities that have overlapping
objectives with ours, and will face conflicts in the allocation
of opportunities between us and its other businesses. Such
allocation is at the discretion of our manager, and there is no
guarantee that this allocation will be made in the best interest
of our shareholders. The ability of our manager and its officers
and employees to engage in other business activities also will
reduce the time those individuals spend managing us.
Furthermore, the Assignment and Assumption Agreement entered
into by Tricadia and our Former Manager does not contain any
non-competition, non-contravention or exclusivity provisions. As
such, the Former Manager may engage in additional management or
investment opportunities that compete with us.
For a further discussion of conflicts of interest to which our
company may be subject, see Risk Factors Risks
Relating to Our Management and Our Relationship with Our
Manager and Business Competition
PRINCIPAL
SHAREHOLDERS
The following table sets forth information regarding beneficial
ownership of our common shares by:
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each person who is known by us to beneficially own 5% or more of
the outstanding common shares;
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each of our named executive officers;
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each of our directors; and
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all executive officers and directors as a group.
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As of the date of this prospectus, we
have
Class A common shares
and
Class B common shares outstanding, including 281,458
restricted common shares issued under our 2007 Equity Incentive
Plan and one Performance Share held by Muni Capital Management.
The amounts and percentage of common shares beneficially owned
are reported on the basis of regulations of the SEC governing
the determination of beneficial ownership of securities. Under
these rules, a person is deemed to be a beneficial
owner of a security if that person has or shares
voting power, which includes the power to vote or to
direct the voting of such security, or investment
power, which includes the power to dispose of or to direct
the disposition of such security. A person is also deemed to be
a beneficial owner of any securities of which that person has a
right to acquire beneficial ownership within 60 days. Under
these rules, more than one person
93
may be deemed a beneficial owner of the same securities, and a
person may be deemed to be a beneficial owner of securities as
to which such person has no economic interest.
Unless otherwise indicated, we believe that all persons named in
the table have sole voting and investment power with respect to
all common shares beneficially owned by them.
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Shares Beneficially Owned Prior to the
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Beneficial Ownership
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Offering(1)
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After the Offering(3)
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Class A
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Class B
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%
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Class A
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Class B
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%
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Common
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Common
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Total
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Common
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Common
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Total
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Shares
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Shares
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Voting
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Shares
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Shares
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Voting
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Name and Address of Beneficial Owner(2)
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Shares
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%
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Shares
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%
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Power
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Shares
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%
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Shares
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%
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Power
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Tiptree Financial Partners, L.P.(4)
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27,617,687
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73.81
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%
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73.81
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%
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Michael Barnes(5)
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1,304,546
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3.49
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%
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3.31
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%
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Geoffrey Kauffman
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200,000
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0.53
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%
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0.53
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%
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Christopher Conley
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92,500
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0.25
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%
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0.25
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%
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Julia Wyatt
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10,188
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0.03
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%
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0.03
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%
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Daniel G. Cohen(6)
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150,000
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0.40
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%
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0.40
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%
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Andrew Gordon(7)
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15,000
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0.04
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%
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0.04
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%
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Thomas J. Reilly, Jr.(8)
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22,500
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0.06
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%
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0.06
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%
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All executive officers and directors as a group (7 individuals)
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1,729,051
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4.62
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%
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4.62
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%
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* |
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Less than 1% |
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(1) |
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Percentage of total voting power represents combined voting
power with respect to all of our Class A common shares and
Class B common shares. Each holder of a Class B common
share will be entitled to ten votes per share of a Class B
common share and each holder of a Class A common share will
be entitled to one vote per share of a Class A common
share, in each case on all matters submitted to our shareholders
for a vote. The holder of the Class A common shares and the
Class B common shares vote together as a single class on
all matters submitted to a vote of our shareholders, except as
may otherwise be required by law. Each Class B common share
is convertible at any time into one Class A common share.
See Description of Securities. |
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(2) |
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Unless otherwise indicated, the business address of each of the
beneficial owners is 780 Third Avenue, 29th Floor, New York, New
York 10017. Each beneficial owner directly holds such
persons common shares. |
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(3) |
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Assumes the sale
of
Class A common shares in this offering, but not the
exercise of the underwriters over-allotment option. |
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(4) |
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Michael Barnes, our Chairman and Chief Executive Officer, and
Arif Inayatullah have voting and investment power over the
securities held by Tiptree Financial Partners, L.P. |
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(5) |
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Includes (i) 1,238,863 Class B common shares, or 3.31%
of the issued and outstanding Class B common shares as of
the date hereof, beneficially owned by Michael Barnes and
(ii) 65,683 Class B common shares, or 0.18% of the
issued and outstanding Class B common shares as of the date
hereof, owned by the JC Family Trust under agreement dated
February 3, 2009, for which Michael Barnes children
are primary beneficiaries. |
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(6) |
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The business address of Daniel G. Cohen is
c/o Taberna
Capital, 450 Park Avenue, 11th Floor, New York, New York 10022. |
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(7) |
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Includes 5,000 vested Class B common shares and 10,000
unvested Class B common shares. The business address of
Andrew Gordon is
c/o GFA
LLC, 205 Third Avenue, 19th Floor, New York, New York 10003. |
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(8) |
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Includes 17,500 vested Class B common shares and 5,000
unvested Class B common shares. The business address of
Thomas J. Reilly, Jr. is 3910 Dempsey Lane, Huntingdon Valley,
Pennsylvania 19006. |
94
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Management
Agreement
As previously described, we are managed by Muni Capital
Management under the Management Agreement, pursuant to which,
among other things, Muni Capital Management receives a base fee,
is eligible to receive an incentive allocation and is entitled
to the reimbursement of certain expenses. See
Management The Management Agreement for
more information concerning the terms of the Management
Agreement and the management fees. Muni Capital Management is a
wholly-owned subsidiary of Tricadia Holdings. Tricadia Holdings
also wholly-owns Tiptree Capital, the manager of Tiptree, which
owns approximately 73.81% of our outstanding Class B common
shares, representing % of our
combined voting power immediately after this offering, and may
purchase Class A common shares pursuant to this offering.
In 2009, we paid our Manager base management fees of $730,215
and an incentive allocation of $5,920,448, $2,083,000 of which
incentive allocation was paid in cash, and the remainder was
paid in common shares (as determined by the then-applicable net
asset value). We paid the Former Manager base management fees of
$155,140 in 2009.
Indemnification
Agreements
We have entered into indemnification agreements with our
directors and officers that obligate us to indemnify them to the
maximum extent permitted by Delaware law and pay such
persons expenses in defending any civil or criminal
proceedings in advance of final disposition of such proceeding.
Tiptree
Tender Offer and Company Rights Offering
On May 12, 2009, Tiptree commenced a tender offer to
purchase all of our outstanding common shares for the purchase
price of $1.00 per share. The tender offer expired on
June 19, 2009. Tiptree purchased 2,443,550 common shares
through the tender offer.
Also on May 12, 2009, we issued subscription rights to the
then holders of our common shares and LTIP shares to purchase up
to an aggregate of 18,116,964 new common shares at the price of
$1.20 per share. We completed the rights offering on
June 26, 2009, issuing 18,116,964 new common shares and
raising $21.7 million before taking into account the
expenses of the offering. We used the net proceeds from the
rights offering for working capital and general corporate
purposes. Tiptree purchased 14,901,307 common shares in
connection with the rights offering. As of December 31,
2009, all outstanding LTIP shares were converted to common
shares.
Registration
Rights
Upon the consummation of this offering, we intend to enter into
a registration rights agreement with Tiptree pursuant to which
Tiptree will have certain demand and piggyback registration
rights. Under the terms of this agreement, we will be required
to pay all registration expenses in connection with any demand
or piggyback registration.
Interest
Rate Swap
On July 14, 2009, we entered into an interest rate swap for
the purpose of hedging portfolio-wide interest rate risk with
Tiptree, as a
back-to-back
swap with Morgan Stanley Capital Services Inc. Twice each year,
on January 16 and July 16, beginning on January 16,
2010 and continuing through July 16, 2019, we will pay to
Tiptree, as the swap counterparty (and Tiptree will remit to
Morgan Stanley), a fixed rate of 3.6475% based on a notional
amount of $5.0 million, and four times each year, on
January 16, April 16, July 16 and October 16,
beginning on October 16, 2009 and continuing through
July 16, 2019, the swap counterparty will pay to us an
amount equal to a floating rate of three-month LIBOR based on
the notional amount. As of July 19, 2010, we have paid
$614,375 in an aggregate amount to the swap counterparty (with
$432,000 consisting of margin payments and $182,375 consisting
of interest payments) and received swap interest
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payments in an aggregate amount of $17,180 from the swap
counterparty pursuant to the interest rate swap. All amounts we
paid to Tiptree pursuant to the interest rate swap were
thereafter remitted by Tiptree to Morgan Stanley.
Lease
Arrangement with the Former Manager
We are party to a lease arrangement with the Former Manager
pursuant to which we lease our principal executive offices in
return for a monthly payment of $1,500. This arrangement is
subject to termination at any time by either us or by the Former
Manager.
Loan to
Tipree
On August 11, 2010, we made a loan to Tiptree, the holder
of approximately 73.81% of our outstanding Class B common
shares and an affiliate of our manager, in the original
principal amount of $23,000,000. The purpose of the loan was to
partially finance an escrow deposit in connection the
Tiptrees acquisition of at least a majority of issued and
outstanding common stock of a publicly-traded real estate
investment trust focused on health care-related real estate
interests. The loan is secured by a pledge of all the assets of
Tiptree and is fully recourse to Tiptree, but not the partners
of Tiptree. The loan bears interest at an initial rate of 5% per
annum and initially matures on December 11, 2010; provided,
that Tiptree has the sole option to extend the loan for an
additional four-month period, with the interest rate increasing
to 9% per annum. The current principal balance outstanding of
the loan is $18,234,518.
Review,
Approval or Ratification of Transactions with Related
Persons
Transactions between us and any related party, such as an
affiliate, officer or employee, require the affirmative vote by
a majority of our independent directors. Such transactions may
include, among other things, the sale or acquisition of any
asset to or from an affiliate. In evaluating such transactions,
the independent directors will determine, among other things,
whether such transactions contain terms materially comparable to
a similar commercially reasonable, arms length transaction
between two unaffiliated third parties.
DESCRIPTION
OF SECURITIES
The following is a summary description of our common shares,
certain provisions of Delaware law and certain provisions of our
certificate of formation, operating agreement and bylaws.
Because it is only a summary, it may not contain all the
information that is important to you. For a description you
should refer to our certificate of formation, operating
agreement and bylaws, which are filed as exhibits to the
registration statement of which this prospectus is a part, and
to the applicable provisions of the Delaware LLC Act.
General
Immediately prior to this offering, we will effect a
recapitalization to convert all of our outstanding common shares
into newly designated Class B common shares on a
one-for-five
basis (rounded up to the next whole share). After giving effect
to the recapitalization, we will have outstanding no
Class A common shares and 7,483,334 shares of our
Class B common shares. All shares to be sold in this
offering will be Class A common shares.
Our operating agreement provides that our board of directors
(without any further vote or action by our shareholders) may
cause us to issue an unlimited amount of common shares, an
unlimited amount of LTIP shares, one Performance Share and an
unlimited amount of preferred shares.
Upon consummation of this offering, there will
be
Class A common shares, assuming no exercise of the
underwriters option to purchase up to an additional
Class A common shares, 187,083,345 Class B common
shares, restricted common shares,
one Performance Share, no LTIP shares and no preferred shares
outstanding.
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Common
Shares
Each Class A common share is equivalent to a Class B
common share for purposes of economic rights. Our operating
agreement provides that each Class B common share is
convertible at any time, at the option of the holder, into one
Class A common share. Our Class A common shares are
not convertible into any other shares.
Upon consummation of this offering and payment in full of the
consideration payable with respect to the Class A common
shares, the holders of such shares shall not be liable to us to
make any additional capital contributions with respect to such
shares, except to the extent that a shareholder receives a
distribution in violation of the Delaware LLC Act. See
Limited Liability.
No holder of common shares will be entitled to preemptive,
redemption or conversion rights, sinking fund or cumulative
voting rights.
Voting
Rights
The holders of our Class A common shares and Class B
common shares have identical voting rights except that each
Class A common share, which will be the only class of
shares publicly traded, is entitled to one vote per share while
each Class B common share is entitled to 10 votes per
share, in each case on all matters submitted to a vote of our
shareholders. Generally, except with respect to extraordinary
corporate transactions, certain amendments to our operating
agreement, liquidation and the election and removal of
directors, all matters to be voted on by our shareholders must
be approved by a majority (or, in the case of election of
directors, by a plurality) of the votes cast by all common
shares present in person or represented by proxy. Extraordinary
corporate transactions, liquidation and the removal of directors
for cause must be approved by at least a majority of the votes
entitled to be cast by our shareholders generally in the
election of directors. See Amendment of Our
Operating Agreement and Bylaws for a discussion of
approval rights with regard to such amendments.
Dividend
Rights
Holders of Class A common shares and Class B common
shares will share ratably (based on the number of common shares
held) in any distribution declared by our board of directors out
of funds legally available therefor, subject to any statutory or
contractual restrictions on the payment of dividends or other
distributions, the dividend rights of the Performance Share and
to any restrictions on the payment of dividends or other
distributions imposed by the terms of any preferred shares we
may issue in the future.
Liquidation
Rights
Upon our dissolution, liquidation or winding up, after payment
in full of all amounts required to be paid to creditors and to
the holders of preferred shares having liquidation preferences,
if any, the holders of our Class A common shares and
Class B common shares will be entitled to receive our
remaining assets available for distribution ratably in
accordance with and to the extent of positive balances in their
respective capital accounts after taking into account certain
adjustments.
Other
Matters
In the event of our merger or consolidation with or into another
entity in connection with which our common shares are converted
into or exchangeable for shares of stock, other securities or
property (including cash), all holders of common shares will
thereafter be entitled to receive the same kind and amount of
shares of stock and other securities and property (including
cash). Under our operating agreement, in the event of an
inadvertent partnership termination in which the IRS has granted
us limited relief, each holder of our common shares also is
obligated to make such adjustments as are required by the IRS to
maintain our status as a partnership.
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LTIP
Shares
LTIP shares are a special class of limited liability company
interest in our company. The rights of holders of LTIP shares
are subject to our operating agreement. As of December 31,
2009, all outstanding LTIP shares were converted to common
shares.
Dividend,
Liquidation and Conversion Rights
Quarterly cash distributions on each LTIP share, whether vested
or not, will be the same as those made on our common shares.
LTIP shares have full parity with our common shares with respect
to the payment of regular and special periodic or other
distributions and distribution of assets upon liquidation,
dissolution or winding up. Under the terms of the LTIP shares,
each LTIP share shall be revalued to maintain parity with our
common shares upon the occurrence of certain adjustment events.
These events consist of: (i) a distribution by us on all
outstanding common shares in equity securities, (ii) a
subdivision of our outstanding common shares into a greater or
smaller number of equity securities or (iii) the
reclassification or recapitalization of our outstanding common
shares. Upon the occurrence of one of these adjustment events,
any increase in valuation from the time of grant until such
event will be allocated first to the holders of the LTIP shares
to equalize the capital accounts of each LTIP share with the
capital account of a common share to reflect a
one-to-one
correspondence between the LTIP shares and the common shares.
Upon equalization of the capital accounts, the LTIP shares will
achieve full parity with the common shares for all purposes,
including with respect to subsequent allocations and
distributions, including, to the extent vested, liquidating
distributions. If such parity is reached, vested LTIP shares may
be converted into an equal number of common shares, and may
thereafter enjoy all the rights of common shares. Until and
unless such parity is reached, the value that will be realized
upon a liquidation of our company for a given number of vested
LTIP shares will be less than the value of an equal number of
our common shares.
Voting
Rights
The holders of LTIP shares have the same voting rights as a
holder of common shares, as well as certain additional voting
rights with respect to certain amendments to the operating
agreement that will affect them adversely as a class, unless the
holders of common shares are similarly affected by such
amendment.
Performance
Share
The Performance Share held by our manager is a special limited
liability company interest in our company. No further
Performance Share will be authorized for issuance to our
manager, although we may issue Performance Shares to a successor
manager, if any.
A holder of a Performance Share may not transfer any of its
rights with respect to the Performance Share without the consent
of our board of directors, which consent the board may withhold
in its sole discretion. However, no consent of the board is
required for a transfer or assignment by our manager of its
Performance Share or the right to receive distributions pursuant
to its Performance Share to its affiliates.
Dividend
Rights
The Performance Share will entitle our manager to an allocation
of profits, and cash distributions payable quarterly in arrears,
in an amount equal to 20% of any increase in the Companys
Book Value, after giving effect to the recovery of any previous
reduction in the Companys Book Value, if the
Companys net appreciation for the applicable quarter
exceeds an annualized hurdle rate of 5% (on an annualized basis)
and to the extent the distribution does not cause the
Companys net appreciation to fall below the hurdle rate.
To the extent distributions are payable on the Performance
Share, those distributions shall have a priority over the
payment of dividends on our common shares. Book
Value is determined by calculating shareholders
equity of the Company determined in accordance with
U.S. GAAP, adjusted to exclude (i) the effects of
one-time events pursuant to changes in U.S. GAAP,
(ii) distributions, including Performance Share
distributions, (iii) non-cash charges (including, without
limitation, changes in goodwill and incentive compensation
expenses), and (iv) the direct impact of the issuance or
cancellation of Shares of the Company (but not
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adjusted to exclude indirect effects attributable to the
increase or decrease in shareholders equity). As
consideration for the acquisition of the right to manage our
company from the Former Manager, our manager will, beginning on
March 18, 2012 and until March 18, 2022, remit to the
former manager payments in respect of our managers revenue
in excess of $1 million (including the above-discussed
Performance Share, and less certain adjustments).
Voting
Rights
The Performance Share will generally not be entitled to vote on
matters submitted to our shareholders, except with respect to
certain amendments to the operating agreement that will affect
it adversely as a class.
Redemption
If we terminate the Management Agreement without cause or as a
result of a non-renewal by us of the Management Agreement or if
our manager terminates the Management Agreement due to our
default, we are required to redeem the Performance Share held by
our manager for an amount equal to three times the average
annual distributions paid in respect of such Performance Share
for the two
12-month
periods immediately preceding the date of termination.
Preferred
Shares
Under our operating agreement, our board of directors (without
any further vote or action by our shareholders) is authorized to
provide for the issuance from time to time of an unlimited
amount of one or more classes or series of preferred shares.
Unless required by law or by any stock exchange, if applicable,
any such authorized preferred shares will be available for
issuance without further action by our common shareholders. Our
board of directors is authorized to fix the number of shares,
the relative powers, preferences and rights, and the
qualifications, limitations or restrictions applicable to each
class or series thereof by resolution authorizing the issuance
of such class or series. As of the date of this prospectus, no
preferred shares are outstanding and we have no current plans to
issue any preferred shares.
We could issue a series of preferred shares that could,
depending on the terms of the series, impede or discourage an
acquisition attempt or other transaction that some, or a
majority, of holders of common shares might believe to be in
their best interests or in which holders of common shares might
receive a premium for their common shares.
Transfer
Agent and Registrar
The transfer agent and registrar for our Class A common
shares is American Stock Transfer &
Trust Company, LLC.
Listing
We intend to apply to have our Class A common shares listed
on The Nasdaq Stock Market LLC under the symbol
MUNF. We cannot assure you that our Class A
common shares will be, or will continue to be, listed on The
Nasdaq Stock Market LLC. Our Class B common shares will not
be listed on any established public trading market.
Operating
Agreement and Bylaws
Organization
and Duration
We were formed on April 23, 2007, and will remain in
existence until dissolved in accordance with our operating
agreement. See Termination and
Dissolution.
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Purpose
Under our operating agreement, we are permitted to engage in any
business activity that lawfully may be conducted by a limited
liability company organized under Delaware law and, in
connection therewith, to exercise all of the rights and powers
conferred upon us pursuant to the operating agreement relating
to such business activity; provided, however, that, except if
our board of directors determines that it is no longer in our
best interests, our management shall not cause us to engage,
directly or indirectly, in any business activity that our board
of directors determines would cause us to be treated as an
association taxable as a corporation or otherwise taxable as an
entity for U.S. federal income tax purposes.
Agreement
to be Bound by our Operating Agreement; Power of
Attorney
By purchasing a Class A common share, you will be admitted
as a member of our limited liability company and will be bound
by the provisions of, and deemed to be a party to, our operating
agreement. Pursuant to this agreement, each shareholder and each
person who acquires a common share from a shareholder grants to
our chief executive officer and our secretary a power of
attorney to, among other things, execute and file documents
required for our qualification, continuance or dissolution. The
power of attorney also grants our chief executive officer and
our secretary the authority to make certain amendments to, and
to execute and deliver such other documents as may be necessary
or appropriate to carry out the provisions or purposes of, our
operating agreement.
Duties
of Officers and Directors
Our operating agreement provides that, except as may otherwise
be provided by the operating agreement or by our bylaws, our
property, affairs and business shall be managed under the
direction of our board of directors. Pursuant to our bylaws, our
board of directors has the power to appoint our officers and
such officers have the authority to exercise the powers and
perform the duties specified in our bylaws or as may be
specified by our board of directors. See Management.
Our operating agreement further provides that the authority and
function of our board of directors and officers shall be
identical to the authority and functions of a board of directors
and officers of a corporation organized under the Delaware
General Corporation Law, or DGCL, except as expressly modified
by the terms of the operating agreement. Finally, our operating
agreement provides that except as specifically provided therein
or as required by the Delaware LLC Act, the fiduciary duties and
obligations owed to our members shall be the same as the
respective duties and obligations owed by officers and directors
of a corporation organized under the DGCL to their corporation
and shareholders, respectively.
Our operating agreement does not expressly modify the duties and
obligations owed by officers and directors under the DGCL.
However, there are certain provisions in our operating agreement
regarding exculpation and indemnification of our officers and
directors that differ from the DGCL. First, our operating
agreement provides that to the fullest extent permitted by
applicable law our directors or officers will not be liable to
us. Under the DGCL, a director or officer would be liable to us
for (i) breach of duty of loyalty to us or our
shareholders, (ii) intentional misconduct or knowing
violations of the law that are not done in good faith,
(iii) improper redemption of shares or declaration of a
dividend or (iv) a transaction from which the director
derived an improper personal benefit.
Second, our operating agreement provides that we indemnify our
directors and officers for acts or omissions to the fullest
extent permitted by law. Under the DGCL, a corporation can only
indemnify directors and officers for acts or omissions if the
director or officer acted in good faith, in a manner he
reasonably believed to be in the best interests of the
corporation, and, in a criminal action, if the officer or
director had no reasonable cause to believe his conduct was
unlawful. See Limitations on Liability and Indemnification
of Our Directors and Officers.
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Size
and Election of Board of Directors
Our operating agreement and bylaws provide that the number of
directors may be established, increased or decreased by our
board of directors but may not be fewer than one. Our operating
agreement and bylaws currently provide that our directors will
be elected at each annual meeting of shareholders to serve until
the next annual meeting of shareholders and until their
successors are duly elected and qualify. Except as may be
provided by the board of directors in setting the terms of any
class or series of preferred shares, any and all vacancies on
the board of directors may be filled only by the affirmative
vote of a majority of the remaining directors in office, even if
the remaining directors do not constitute a quorum, and any
director elected to fill a vacancy shall serve for the remainder
of the full term of the directorship in which such vacancy
occurred and until a successor is elected and qualifies.
Removal
of Members of Our Board of Directors
Our operating agreement provides that a director may be removed,
but only for cause, by the affirmative vote of at least a
majority of the votes entitled to be cast by our shareholders
generally in the election of our directors.
Special
Meetings of Shareholders; Advance Notice of Director Nominations
and New Business
Our bylaws provide that special meetings of shareholders may be
called by our board of directors, the chairman of our board, our
chief executive officer or president. Additionally, our bylaws
provide that, subject to the satisfaction of certain procedural
and information requirements by the shareholders requesting the
meeting, a special meeting of shareholders must be called by our
secretary upon the written request of shareholders entitled to
cast not less than a majority of all the votes entitled to be
cast at such meeting.
Our bylaws provide that with respect to an annual meeting of
shareholders, nominations of persons for election to our board
of directors and the proposal of business to be considered by
shareholders may be made only (i) pursuant to our notice of
the meeting, (ii) by or at the direction of our board of
directors, or (iii) by any shareholder who is entitled to
vote at the meeting and has complied with the advance notice
procedures set forth in our bylaws. Our bylaws provide that,
with respect to special meetings of our shareholders, only the
business specified in our notice of meeting may be brought
before the meeting, and nominations of persons for election to
our board of directors may be made only (a) pursuant to our
notice of the meeting, (b) by or at the direction of our
board of directors, or (c) provided that our board of
directors has determined that directors shall be elected at the
meeting, by any shareholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set
forth in our bylaws.
The purpose of requiring shareholders to give advance notice of
nominations and other proposals is to afford our board of
directors the opportunity to consider the qualifications of the
proposed nominees or the advisability of the other proposals
and, to the extent considered necessary by our board of
directors, to inform shareholders and make recommendations
regarding the nominations or other proposals. The advance notice
procedures also permit a more orderly procedure for conducting
our shareholder meetings.
Limited
Liability
Section 18-607(c)
of the Delaware LLC Act provides that a member who receives a
distribution from a Delaware limited liability company and knew
at the time of the distribution that the liabilities of the
company exceeded the fair value of its assets shall be liable to
the company for the amount of the distribution for three years.
Section 18-607(a)
of the Delaware LLC Act provides that a limited liability
company may not make a distribution to a member if, after the
distribution, all liabilities of the company, other than
liabilities to members on account of their shares and
liabilities for which the recourse of creditors is limited to
specific property of the company, would exceed the fair value of
the assets of the company. For the purpose of determining the
fair value of the assets of a company,
Section 18-607(a)
of the Delaware LLC Act provides that the fair value of property
subject to liability for which recourse of creditors is limited
shall be included in the assets of the company only to the
extent that the fair value of that property exceeds the
nonrecourse liability. Under
Section 18-704(b)
of the Delaware LLC Act, an assignee who becomes a substituted
member
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of a company is liable for the obligations of his assignor to
make contributions to the company, except the assignee is not
obligated for liabilities unknown to him at the time the
assignee became a member and that could not be ascertained from
the operating agreement.
Limitations
on Liability and Indemnification of Our Directors and
Officers
Pursuant to our operating agreement, we have agreed to indemnify
each of our directors and officers, to the fullest extent
permitted by law, against all expenses and liabilities
(including judgments, fines, penalties, interest, amounts paid
in settlement with our approval and counsel fees and
disbursements on a solicitor and client basis) arising from the
performance of any of their obligations or duties in connection
with their service to us or the operating agreement, including
in connection with any civil, criminal, administrative,
investigative or other action, suit or proceeding to which any
such person may hereafter be made party by reason of being or
having been one of our directors or officers.
Amendment
of Our Operating Agreement and Bylaws
Amendments to our operating agreement may be proposed only by or
with the consent of our board of directors. To adopt a proposed
amendment, our board of directors is required to seek written
approval of the holders of the number of shares required to
approve the amendment or call a meeting of our shareholders to
consider and vote upon the proposed amendment. Except as set
forth below, an amendment must be approved by at least a
majority of the votes entitled to be cast by our shareholders
generally in the election of directors and, in general, to the
extent that such amendment would have a material adverse effect
on the holders of any class or series of shares, by the holders
of a majority of the holders of such class or series.
Prohibited Amendments. No amendment may be
made that would:
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increase the obligations of any shareholder without such
shareholders consent, unless approved by at least a
majority of the type or class of shares so affected;
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provide that we are not dissolved upon an election to dissolve
our limited liability company by our board of directors that is
approved by at least a majority of the votes entitled to be cast
by our shareholders generally in the election of directors;
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change the term of our existence; or
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give any person the right to dissolve our limited liability
company other than our board of directors right to
dissolve our limited liability company with the approval by at
least a majority of the votes entitled to be cast by our
shareholders generally in the election of directors.
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The provision of our operating agreement preventing the
amendments having the effects described in any of the clauses
above can be amended upon the approval by at least two-thirds of
the votes entitled to be cast by our shareholders generally in
the election of directors.
No Shareholder Approval. Our board of
directors may generally make amendments to our operating
agreement without the approval of any shareholder or assignee to
reflect:
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a change in our name, the location of our principal place of our
business, our registered agent or our registered office;
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the admission, substitution, withdrawal or removal of
shareholders in accordance with our operating agreement;
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the merger of our company or any of its subsidiaries into, or
the conveyance of all of our assets to, a newly-formed entity if
the sole purpose of that merger or conveyance is to effect a
mere change in our legal form into another limited liability
entity;
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a change that our board of directors determines to be necessary
or appropriate for us to qualify or continue our qualification
as a company in which our members have limited liability under
the laws of
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any state or to ensure that we will not be treated as an
association taxable as a corporation or otherwise taxed as an
entity for U.S. federal income tax purposes other than as
we specifically so designate;
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an amendment that our board of directors determines, based upon
the advice of counsel, to be necessary or appropriate to prevent
us, members of our board, or our officers, agents or trustees
from in any manner being subjected to the provisions of the
Investment Company Act, the Investment Advisers Act of 1940, or
plan asset regulations adopted under the Employment
Retirement Income Security Act, as amended, whether or not
substantially similar to plan asset regulations currently
applied or proposed;
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an amendment that our board of directors determines to be
necessary or appropriate for the authorization or issuance of
additional securities;
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any amendment expressly permitted in our operating agreement to
be made by our board of directors acting alone;
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an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our
operating agreement;
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any amendment that our board of directors determines to be
necessary or appropriate for the formation by us of, or our
investment in, any corporation, partnership or other entity, as
otherwise permitted by our operating agreement;
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a change in our fiscal year or taxable year and related
changes; and
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any other amendments substantially similar to any of the matters
described in the clauses above.
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In addition, our board of directors may make amendments to our
operating agreement without the approval of any shareholder if
our board of directors determines that those amendments:
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do not adversely affect the shareholders (including any
particular class or series of shares as compared to other
classes or series of shares) in any material respect;
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are necessary or appropriate to satisfy any requirements,
conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute;
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are necessary or appropriate to facilitate the trading of shares
or to comply with any rule, regulation, guideline or requirement
of any securities exchange on which the shares are or will be
listed for trading, compliance with any of which our board of
directors deems to be in the best interests of us and our
shareholders;
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are necessary or appropriate for any action taken by our board
of directors relating to splits or combinations of shares under
the provisions of our operating agreement; or
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are required to effect the intent of the provisions of our
operating agreement or are otherwise contemplated by our
operating agreement.
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Our bylaws provide that our board of directors has the exclusive
power to adopt, alter or repeal the bylaws or make new bylaws.
Merger,
Sale or Other Disposition of Assets
Our board of directors is generally prohibited, without the
prior approval of at least a majority of the votes entitled to
be cast by our shareholders generally in the election of
directors, from causing us to, among other things, sell,
exchange or otherwise dispose of all or substantially all of our
assets in a single transaction or a series of related
transactions, or approving on our behalf the sale, exchange or
other disposition of all or substantially all of our assets,
provided that our board of directors may mortgage, pledge,
hypothecate or grant a security interest in all or substantially
all of our assets without the approval of any shareholder. Our
board of directors may also sell all or substantially all of our
assets under a foreclosure or other realization upon the
encumbrances above without that approval.
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If the conditions specified in our operating agreement are
satisfied, our board of directors may merge our company or any
of its subsidiaries into, or convey all of our assets to, a
newly-formed entity if the sole purpose of that merger or
conveyance is to effect a mere change in our legal form into
another limited liability entity, in each case without any
approval of our shareholders. The shareholders are not entitled
to dissenters rights of appraisal under the operating
agreement or applicable Delaware law in the event of a merger or
consolidation, a sale of all or substantially all of our assets
or any other similar transaction or event, which means that
shareholders do not have the right to petition a court to
determine the value of their shares in the event they vote their
shares against any such transaction.
Termination
and Dissolution
We will continue as a limited liability company until terminated
under our operating agreement. We will dissolve upon:
(i) the election of our board of directors to dissolve us,
if approved by at least a majority of the votes entitled to be
cast by our shareholders generally in the election of directors;
(ii) the sale, exchange or other disposition of all or
substantially all of our assets; (iii) the entry of a
decree of judicial dissolution of our limited liability company;
or (iv) at any time that we no longer have any
shareholders, unless our business is continued in accordance
with the Delaware LLC Act.
Tax
Elections
Our operating agreement provides our board of directors with the
power to decide whether to make various tax elections on behalf
of our company. In this regard, if our board of directors
determines that it is no longer in our best interests to
continue as a partnership for U.S. federal income tax
purposes, our board of directors may elect to treat us as an
association or as a publicly traded partnership taxable as a
corporation for U.S. federal (and applicable state) income
tax purposes. See Risk Factors Tax Risks
for a discussion of certain risks to our classification as a
publicly traded partnership not taxable as a corporation.
Books
and Reports
We are required to keep appropriate books of our business at our
principal offices. The books will be maintained for both tax and
financial reporting purposes or a basis that permits the
preparation of financial statements in accordance with generally
accepted accounting principals. For financial reporting purposes
and tax purposes, our fiscal year and our tax year are the
calendar year, unless otherwise determined by our board of
directors in accordance with the Code. We have agreed to use
reasonable efforts to furnish holders of Class A common
shares with tax information (including
Schedule K-1)
as promptly as possible, which describes allocable share of our
income, gain, loss and deduction for our preceding taxable year.
In preparing this information, we will use various accounting
and reporting conventions to determine their allocable share of
income, gain, loss and deduction. Delivery of this information
by us may be subject to delay as a result of the late receipt of
any necessary tax information from an investment in which we
hold an interest. It is therefore possible that, in any taxable
year, our shareholders will need to apply for extensions of time
to file their tax returns.
Potential
Anti-Takeover Effects of Our Operating Agreement and
Bylaws
The following is a summary of certain provisions of our
operating agreement and bylaws that may be deemed to have an
anti-takeover effect and may delay, deter or prevent a tender
offer or takeover attempt that a shareholder might consider to
be in its best interest, including those attempts that might
result in a premium over the market price for the interests held
by shareholders.
Authorization
to Issue an Unlimited Number of Shares
Our operating agreement authorizes us to issue an unlimited
number of shares for the consideration and on the terms and
conditions established by our board of directors without the
approval of any holders of our shares. Future issuances of
shares or equity securities may be utilized for a variety of
purposes, including future public offerings to raise additional
capital, acquisitions and employee benefit plans. Our ability to
issue
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additional shares and other equity securities could render more
difficult or discourage an attempt to obtain control over us by
means of a proxy contest, tender offer, merger or otherwise.
Dual
class structure
Our Class B common shares have ten votes per share, while
Class A common shares, which is the class of common shares
being sold in this offering and which will be the only class of
shares publicly traded, have one vote per share. After the
offering, our manager, its officers and Tiptree, an affiliate of
our manager, collectively will own 78.22% of the outstanding
Class B common shares. Because of our dual class structure,
our Class B shareholders will continue to be able to
control all matters submitted to our shareholders for approval
even if they come to own significantly less than 50% of the
shares of our outstanding common shares. This concentrated
control could discourage others from initiating any potential
sale of all or substantially all of our assets, merger, or other
change of control transaction that other shareholders may view
as beneficial.
Delaware
Business Combination Statute
Section 203
We are a limited liability company organized under Delaware law.
Some provisions of Delaware law may delay or prevent a
transaction that would cause a change in our control.
Section 203 of the DGCL, which restricts certain business
combinations with interested shareholders in certain situations,
does not apply to limited liability companies unless they elect
to utilize it. Our operating agreement does not currently elect
to have Section 203 of the DGCL apply to us. In general,
this statute prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested
shareholder for a period of three years after the date of the
transaction by which that person became an interested
shareholder, unless the business combination is approved in a
prescribed manner. For purposes of Section 203, a business
combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested shareholder,
and an interested shareholder is a person who, together with
affiliates and associates, owns, or within three years prior,
did own, 15% or more of voting shares.
Other
Provisions of Our Operating Agreement and Bylaws
Certain other provisions of our operating agreement and bylaws
may make a change in control of our company more difficult to
effect. For example, the provision in our operating agreement
regarding the removal of directors, when coupled with the
provision in our bylaws authorizing our board of directors to
fill vacant directorships, will preclude shareholders from
removing incumbent directors and filling the vacancies created
by such removal with their own nominees except upon a
substantial affirmative vote. In addition, the advance notice
provisions for shareholder nominations and proposals in our
bylaws may also delay a change of control. Although the bylaws
do not give our board of directors the power to disapprove
timely shareholder nominations and proposals, they may have the
effect of precluding a contest for the election of directors or
proposals for other action if the proper procedures are not
followed, and of discouraging or deterring a third party from
conducting a solicitation of proxies to elect its own slate of
directors to our board of directors or to approve its own
proposal.
COMMON
SHARES ELIGIBLE FOR FUTURE SALE
There currently is no public market for our Class A common
shares. We cannot predict the effect, if any, that sales of
Class A common shares or the availability of Class A
common shares for sale will have on the market price of our
common shares prevailing from time to time. Sales of substantial
amounts of our Class A common shares in the public market,
or the perception that such sales could occur, could adversely
affect the prevailing market price of our Class A common
shares. See Risk Factors Risks Related to this
Offering. There currently is no public market for our
Class A common shares, an active trading market may never
develop and the market price of the Class A common shares
may be volatile.
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Upon the completion of this offering, a total
of
common shares will be outstanding,
including
Class A common shares and 7,483,334 Class B common
shares, including 22,500 restricted common shares subject to a
vesting period of three years from issuance. 7,500 of these
restricted common shares vest and become transferable in each of
2010, 2011 and 2012, subject to compliance with applicable
securities laws. All Class A
common shares sold in this offering, plus any Class A
common shares sold upon exercise of the underwriters
option to purchase additional shares, will be freely tradable in
the public market without restriction or further registration
under the Securities Act, except that any shares purchased by
our affiliates, as that term is defined in Rule 144 under
the Securities Act, may generally only be sold in compliance
with the limitations of Rule 144, which is summarized below.
The
remaining
common shares, consisting of all of our Class B shares,
will be restricted securities, as that term is
defined in Rule 144. These restricted securities are
eligible for public sale only if they are registered under the
Securities Act or if they qualify for an exemption from
registration under Rule 144 under the Securities Act, which
is summarized below.
The SEC adopted amendments to Rule 144 effective on
February 15, 2008 applicable to securities acquired both
before and after that date. Under these amendments, if six
months has elapsed since the date of acquisition of restricted
common shares by persons who are not our affiliates at the time
of, or at any time during the three months preceding, a sale,
and we have been a public reporting partnership under the
Exchange Act for at least three months before the sale, the
holder of such restricted common shares will be entitled to
freely sell the common shares.
Persons who have held our restricted common shares for at least
six months but who are affiliates at the time of, or at any time
during the three months preceding, a sale, and provided we have
been a public reporting company under the Exchange Act for at
least three months before the sale, will be entitled to sell
common shares, but subject to an additional restriction
requiring that the number of common shares sold by such persons
within any three-month period does not exceed 1% of the total
number of common shares then outstanding.
Sales under Rule 144 also may be subject to certain manner
of sale provisions, notice requirements and the availability of
current public information about us.
UNITED
STATES FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS
CIRCULAR 230 NOTICE. THE FOLLOWING NOTICE IS BASED ON
U.S. TREASURY REGULATIONS GOVERNING PRACTICE BEFORE THE
U.S. INTERNAL REVENUE SERVICE: (1) ANY
U.S. FEDERAL TAX ADVICE CONTAINED HEREIN, INCLUDING ANY
OPINION OF COUNSEL REFERRED TO HEREIN, IS NOT INTENDED OR
WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE
PURPOSE OF AVOIDING U.S. FEDERAL TAX PENALTIES THAT MAY BE
IMPOSED ON THE TAXPAYER; (2) ANY SUCH ADVICE IS WRITTEN TO
SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS DESCRIBED
HEREIN (OR IN ANY SUCH OPINION OF COUNSEL); AND (3) EACH
TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYERS
PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
The following is a general summary of certain U.S. federal
income tax considerations relating to the acquisition, holding
and disposition of our Class A common shares. For purposes
of this section, under the heading Certain
U.S. Federal Income Tax Considerations, references to
we, us or our mean only Muni
Funding Company of America, LLC and not our subsidiaries or
other lower-tier entities, except as otherwise indicated. The
following summary is based upon the Code, Treasury Regulations,
current administrative interpretations and practices of the IRS
(including administrative interpretations to and practices
expressed in private letter rulings which are binding on the IRS
only with respect to the particular taxpayers who requested and
received these rulings) and judicial decisions, all as currently
in effect and all of which are subject to differing
interpretations or to change, possibly with retroactive effect.
No assurance can be given that the IRS would not assert, or that
a court would not sustain, a position contrary to any of the tax
consequences
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described below. No advance ruling has been or will be sought
from the IRS regarding the tax-exempt character of interest on
our tax-exempt 501(c)(3) bonds or other investments, our
classification as a partnership for U.S. federal income tax
purposes or any other matter discussed in this summary. The
summary is also based upon the assumption that our operation,
and the operations of our subsidiaries and other lower-tier and
affiliated entities, will, in each case, be in accordance with
its applicable organizational documents and any representations
and/or
covenants to our tax advisors have been and will be complied
with. This summary is for general information only, and does not
purport to discuss all aspects of U.S. federal income
taxation that may be important to a particular shareholder in
light of its investment or tax circumstances or to shareholders
subject to special tax rules, such as:
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U.S. expatriates;
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persons who
mark-to-market
our Class A common shares;
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subchapter S corporations;
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U.S. shareholders (as defined below) whose functional
currency is not the U.S. dollar;
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financial institutions;
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insurance companies;
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broker-dealers;
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regulated investment companies;
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real estate investment trusts;
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trusts and estates;
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holders who receive our shares through the exercise of employee
share options or otherwise as compensation;
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persons holding our Class A common shares as part of a
straddle, hedge, conversion
transaction, synthetic security, or other
integrated investment;
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persons subject to the alternative minimum tax provisions of the
Code;
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persons holding their interest through a partnership or similar
pass-through entity;
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persons holding a 10% or more (by vote or value) beneficial
interest in us;
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tax-exempt organizations; and
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non-U.S. shareholders
(as defined below).
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If an entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds our shares, the
U.S. federal income tax treatment of a partner in such
partnership generally will depend upon the status of the partner
and the activities of such partnership. A partner of a
partnership holding our shares should consult its tax advisor
regarding the U.S. federal income tax consequences to the
partner of the acquisition, ownership and disposition of our
shares by the partnership.
This summary assumes that shareholders will hold our
Class A common shares as capital assets, which generally
means as property held for investment.
For purposes of the following discussion, a
U.S. shareholder is a shareholder that is (i) a
citizen or resident of the United States, (ii) a
corporation (or other entity taxable as a corporation) created
or organized under the laws of the United States or any state
thereof or the District of Columbia, (iii) an estate, the
income of which is subject to U.S. federal income taxation
regardless of its source, or (iv) a trust (a) the
administration over which a U.S. court can exercise primary
supervision and (b) all of the substantial decisions of
which one or more U.S. persons have the authority to
control. A
non-U.S. shareholder
is a person that is not a U.S. shareholder.
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THE U.S. FEDERAL INCOME TAX TREATMENT OF OUR
SHAREHOLDERS DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT
AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL
INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY IS
AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF HOLDING OUR
SHARES TO ANY PARTICULAR SHAREHOLDER WILL DEPEND ON THE
SHAREHOLDERS PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED
TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL,
STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO
YOU, IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES, OF ACQUIRING,
HOLDING, AND DISPOSING OF OUR SHARES.
Partnership Classification. We believe that we
have operated, and intend to continue to operate as a
partnership for U.S. federal income tax purposes. We have
solely relied on the opinion of Ashurst LLP, special tax counsel
to the Company, in making this determination.
You should be aware that our determination of partnership status
and any tax advice of external advisors are not binding on the
IRS, and no assurance can be given that the IRS will not
challenge our determination. Any opinion or other advice we have
received has also been based on various assumptions relating to
our organization, operation, assets and activities, and that all
factual representations and statements set forth in all relevant
documents, records and instruments are true and correct, that
all actions described in this prospectus will be completed in a
timely fashion and that we will at all times operate in
accordance with the method of operation described in our
operating agreement and this prospectus, and is conditioned upon
the factual representations and covenants that have been made by
us, MFCA Funding, Inc., and our former and current manager
regarding our and MFCA Funding, Inc.s organization,
operation, assets and activities (past, present and
contemplated).
While we believe that we have operated and we intend to continue
to operate so that we will qualify to be treated for
U.S. federal income tax purposes as a partnership, and not
as an association or a publicly traded partnership taxable as a
corporation, given the highly complex nature of the rules
governing partnerships, the ongoing importance of factual
determinations, the lack of direct guidance with respect to the
application of tax laws to the activities we are undertaking and
the possibility of future changes in our circumstances, we
cannot give any assurance that we have qualified or we will
qualify as a partnership for any particular year. Our taxation
as a partnership depends on our continuing ability to meet,
through actual operating results, the qualifying income
exception (as described below).
Under Section 7704 of the Code, publicly traded
partnerships are generally treated and taxed as
corporations for U.S. federal income tax purposes. A
publicly traded partnership is any partnership the interests in
which are traded on an established securities market or which
are readily tradable on a secondary market (or the substantial
equivalent thereof). The listing of our shares on The NASDAQ
Stock Market LLC causes us to be treated as a publicly traded
partnership. However, if 90% or more of the income of a publicly
traded partnership during each taxable year consists of
qualifying income and the partnership is not
registered under the Investment Company Act, it will be treated
as a partnership, and not as an association or publicly traded
partnership taxable as a corporation, for U.S. federal
income tax purposes (the qualifying income
exception). Qualifying income generally includes rents,
dividends, interest and capital gains from the sale or other
disposition of stocks, bonds and real property. In addition,
qualifying income generally also includes income from a notional
principal contract (such as a total return swap) if the income
from the reference obligation would be qualifying income. In
determining whether interest is treated as qualifying income for
purposes of these rules, interest income derived from a
financial business and income and gains derived by a
dealer in securities are not treated as qualifying
income.
We have taken the position that for purposes of determining
whether we are engaged in a financial business, portfolio
investing activities that we engage in will not cause us to be
engaged in a financial business or to be considered a
dealer in securities. However, there is no clear
guidance as to what constitutes a financial business for
purposes of the publicly traded partnership regulations and it
is possible that the IRS could assert that our activities
constitute a financial business. Prospective investors should
carefully note that we could also be treated as engaged in a
financial business if the activities of our taxable
subsidiaries, such as
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MFCA Funding, Inc., were attributed to us and we were deemed to
conduct a financial business. It should be noted, however, that
as taxable C corporations, our taxable subsidiaries, such as
MFCA Funding, Inc., are subject to corporate income tax on their
net income, and are intended to engage in significant
transactions with third parties in the operation of their
businesses. Notwithstanding our belief to the contrary, there
can be no assurance that the IRS would not successfully
challenge our compliance with the qualifying income requirements
and assert that we are a publicly traded partnership taxable as
a corporation for U.S. federal income tax purposes.
Section 7701(i) of the Code generally provides that any
entity (or portion of an entity) that is a taxable
mortgage pool (a TMP) will be treated as a
corporation subject to U.S. federal income tax. Under such
Section 7701(i), any entity (or portion of an entity) will
be a TMP if (i) substantially all of its assets consist of
debt obligations, more than 50% of which are real estate
mortgages (including mortgage-backed securities) (ii) such
entity is an obligor under debt obligations (and possibly,
certain types of equity) with two or more maturities, and
(iii) under the terms of the entitys debt obligations
(or an underlying arrangement), the payments on such debt
obligations bear a relationship to the debt
instruments held by the entity. These rules are intended to
prevent income from escaping U.S. federal income tax when a
mortgage pool is used to issue multiple mortgage backed
securities through the use of an entity other than a real estate
mortgage investment conduit or REMIC. We do not expect that
greater than 40% of our (or any of our pass-through
subsidiaries) assets will be mortgages unless we have received
advice of counsel that the TMP rules are not applicable. In
addition, because of the absence of any relationship between the
timing of payments on the tax-exempt bonds we hold and the
timing of distributions on our shares we believe that neither we
nor any of our pass-through subsidiaries will be treated as a
TMP.
If, for any reason (including by being treated as engaged in a
financial business that a taxable subsidiary is engaged in), we
become taxable as a corporation for U.S. federal income tax
purposes, our items of income and deduction would not pass
through to our shareholders and our shareholders would be
treated for U.S. federal income tax purposes as
stockholders in a corporation. We would be required to pay
income tax at corporate rates on any portion of our net income
that did not constitute tax-exempt income. In addition, a
portion of our federally tax-exempt income may be included in
determining our alternative minimum tax (AMT)
liability. Distributions by us to our shareholders would
constitute dividend income taxable to such shareholders as
portfolio income, to the extent of our current and accumulated
earnings and profits, which would include tax-exempt income as
well as any taxable income we might have, and the payment of
these distributions would not be deductible by us. These
consequences would have a significant adverse effect on us, our
shareholders and the value of our shares. Prospective investors
should consult their own tax advisors regarding these potential
material adverse tax consequences.
If at the end of any taxable year we fail to meet the qualifying
income exception, we may still qualify as a partnership if we
are entitled to relief under the Code for an inadvertent
termination of partnership status. This relief will be available
if (i) the failure is cured within a reasonable time after
discovery, (ii) the failure is determined by the IRS to be
inadvertent, and (iii) we agree to make such adjustments
(including adjustments with respect to our shareholders) or to
pay such amounts as are determined by the IRS. It is not
possible to state whether we would be entitled to this relief in
any or all circumstances. It also is not clear under the Code
whether this relief is available for our first taxable year as a
publicly traded partnership. If this relief provision is not
applicable to a particular set of circumstances involving us, we
will not qualify as a partnership for U.S. federal income
tax purposes. Even if this relief provision applies and we
retain our partnership qualification, we or our shareholders
(during the failure period) will be required to pay such amounts
as determined by the IRS.
The remainder of this discussion assumes that we will qualify to
be taxed as a partnership for U.S. federal income tax
purposes.
Taxation of Our Shareholders on our Profits and
Losses. By reason of our taxation as a
partnership for U.S. federal income tax purposes, we will
not be subject to U.S. federal income tax. We will file an
annual partnership information return with the IRS, which
reports the results of our operations. Each shareholder, in
computing its U.S. federal income tax liability for a
taxable year, will be required to take into account its
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allocable share of items of our income, gain, loss, deduction
and credit for our taxable year ending within or with the
taxable year of such shareholder, regardless of whether the
shareholder has received any distributions. It is possible that
the U.S. federal income tax liability of a shareholder with
respect to its allocable share of our earnings in a particular
taxable year could exceed the cash distributions to the
shareholders for the year, thus requiring an
out-of-pocket
tax payment by the shareholder. The characterization of an item
of our income, gain, loss, deduction or credit will generally be
determined at the partnership level (rather than at the
shareholder level).
The amount of phantom income a shareholder may
recognize would likely significantly increase to the extent a
shareholder elects not to opt out of any distribution
reinvestment plan in respect of its shares.
We expect that a significant portion of our revenues will
consist of tax-exempt income. There are risks that certain
amounts of income that we report as tax-exempt income may not
qualify for such treatment. See Nature of our
Business Activities Tax-Exempt Bonds and
Risk Factors Tax Risks Our ability
to allocate and distribute to our shareholders income that is
exempt from U.S. federal income tax will depend on the
exclusion from gross income of the interest income that we
receive on the bonds in which we invest. A portion of the
interest income we earn will likely be taxable in many states
and localities and may be includable in our shareholders
calculation of AMT.
As part of our future investment strategy, prospective
shareholders should note that we also expect to invest in fully
taxable bonds and other fixed income securities.
Allocation of Profits and Losses. Under our
operating agreement, the Companys net capital appreciation
or net capital depreciation for each accounting period is
allocated among the shareholders and to their capital accounts
without regard to the amount of income or loss actually
recognized by us for U.S. federal income tax purposes. The
operating agreement provides that for each of our fiscal years,
items of income, gain, loss, deduction or credit recognized by
us will be allocated among our shareholders in accordance with
their allocable shares of our items of income, gain, loss,
deduction and credit. A shareholders allocable share of
such items will be determined by our operating agreement,
provided such allocations either have substantial economic
effect or are determined to be in accordance with the
shareholders interests. There can be no assurance however,
that the particular methodology of allocations used by us will
be accepted by the IRS. If such allocations are successfully
challenged by the IRS, the allocation of our tax items among the
shareholders may be affected.
Section 706 of the Code generally requires that items of
partnership income and deductions be allocated between
transferors and transferees of partnership interests on a daily
basis. We will apply certain assumptions and conventions in
allocating income and deductions with respect to share transfers
in an attempt to comply with applicable rules and report income,
gain, deduction, loss and credit to shareholders in a manner
that reflects such shareholders beneficial shares of our
items. It is possible that transfers of shares could be
considered to occur for U.S. federal income tax purposes
when the transfer is completed without regard to our
conventions. As a result of such allocation method, you may be
allocated income even if you do not receive any distributions.
If our conventions are not allowed by the Treasury Regulations
(or only apply to transfers of less than all of a
shareholders shares) or if the IRS otherwise does not
accept our conventions, the IRS may contend that our taxable
income or losses must be reallocated among our shareholders. If
such a contention were sustained, our shareholders
respective tax liabilities would be adjusted possibly to the
detriment of certain shareholders.
Adjusted Tax Basis of Our Shares. Our
distributions generally will not be taxable to a shareholder to
the extent of such shareholders adjusted tax basis in its
shares. In addition, a shareholder is allowed to deduct its
allocable share of our losses (if any) only to the extent of
such shareholders adjusted tax basis in its shares in the
year in which the losses occur. A shareholders adjusted
tax basis is generally equal to the shareholders aggregate
purchase price for shares and is generally increased by the
shareholders allocable share of our items of income,
including tax-exempt income, and gain. A shareholders
adjusted tax basis is generally decreased by (a) the
shareholders allocable share of our items of loss and
deduction, including any nondeductible expenses, (b) the
amount of cash distributed by us to the shareholder, and
(c) our tax basis in property (other
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than cash) distributed by us to the shareholder. Moreover, a
shareholders adjusted tax basis will include the
shareholders allocable share of our liabilities, if any,
and cash distributions will include the amount of any reduction
in our liabilities that is allocated to the shareholder.
To the extent that a shareholders allocable share of our
losses is not allowed because the shareholder has insufficient
adjusted tax basis in our shares, such disallowed losses may be
carried over by the shareholder to subsequent taxable years and
will be allowed if and to the extent of the shareholders
adjusted tax basis in our shares in subsequent taxable years.
Mandatory Basis Adjustments. We are generally
required to adjust our tax basis in our assets in respect of all
shareholders in cases of distributions that result in a
substantial basis reduction (i.e., in excess
of $250,000) in respect of our property. We are also required to
adjust the tax basis in our assets in respect of a transferee,
in the case of a sale or exchange of an interest, or a transfer
upon death, when there exists a substantial built-in
loss (i.e., in excess of $250,000) in respect of
our property immediately after the transfer. For this reason, we
will require (i) a shareholder who receives a distribution
from us in connection with a complete withdrawal, (ii) a
transferee of our shares (including a transferee in case of
death) and (iii) any other shareholder in appropriate
circumstances to provide us with information regarding its
adjusted tax basis in our shares.
Treatment of Distributions. Cash distributions
by us with respect to shares or in redemption of less than all
of a shareholders shares generally will not be taxable to
such shareholder. Instead, such distributions will reduce, but
not below zero, the adjusted tax basis in all of such
shareholders shares immediately before the distribution.
If such distributions to a shareholder exceed the
shareholders adjusted tax basis in such shareholders
shares, the excess will be taxable to the shareholder as gain
from a sale or exchange of shares (as described in
Disposition of Shares below). The same
treatment will apply to a shareholder who elects not to opt out
of the distribution reinvestment plan where such shareholder
will be treated for tax purposes as if the shareholder had
chosen to receive such cash distributions outright. It is
possible that partial redemptions made during the taxable year
could result in taxable gain to a shareholder where no gain
would otherwise have resulted if the same partial redemption
were made at the end of the taxable year. A reduction in a
shareholders allocable share of our liabilities, and
certain distributions of marketable securities by us, are
treated as cash distributions for U.S. federal income tax
purposes.
Disposition of Shares. A sale or other taxable
disposition of all or a part of a shareholders shares
(including in redemption for cash of all of the
shareholders shares) will be treated as a disposition of
all or part, as the case may be, of such shareholders
shares. Such sale or other disposition generally will result in
the recognition of gain or loss in an amount equal to the
difference, if any, between the amount realized on the
disposition (including the shareholders share of any
indebtedness, if any, of ours) and the shareholders
adjusted tax basis in its shares (as described in
Adjusted Tax Basis of Our Shares above).
A shareholders adjusted tax basis will be adjusted for
this purpose by its allocable share of our income or loss for
the year of such sale or other disposition. Any gain or loss
recognized with respect to such sale or other disposition will
generally be treated as capital gain or loss and will be
long-term capital gain or loss if the shareholders holding
period for its shares exceeds one year. A portion of such gain,
however, may be treated as ordinary income under the Code to the
extent attributable to the shareholders allocable share of
unrealized gain or loss in our assets to the extent described in
Section 751 of the Code.
Shareholders who purchase shares at different times and intend
to sell all or part of the shares within a year of their most
recent purchase are urged to consult their tax advisors
regarding the application of certain split holding
periods rules to them and the treatment of any gain or
loss as long-term or short term capital gain or loss. For
example, a selling shareholder may use the actual holding period
of the portion of such shareholders transferred shares,
provided such shares are divided into identifiable shares with
ascertainable holding periods, the selling shareholder can
identify the portion of the shares transferred, and the selling
shareholder elects to use the identification method for all
sales or exchanges of our shares.
Limitation on Deductibility of Capital
Losses. Any capital losses generated by us (or
upon a disposition of our shares) will generally be deductible
by shareholders who are individuals only to the extent of such
shareholders capital gains for the taxable year plus up to
$3,000 of ordinary income ($1,500 in the case of a
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married individual filing a separate return). Capital losses of
an individual taxpayer may generally be carried forward to
succeeding tax years to offset capital gains and then ordinary
income (subject to the $3,000 annual limitation). Capital losses
of a corporate taxpayer may be offset only against capital
gains, but unused capital losses may be carried back three years
(subject to certain limitations) and carried forward five years.
Prospective shareholders should consult their tax advisors
regarding the deductibility of capital losses.
Application of At Risk and Passive Activity
Limitations on Deductions. Individuals and
certain closely held C corporations are allowed to deduct their
allocable share of our losses (if any) only to the extent of
each such shareholders at risk amount in us at
the end of the taxable year in which the losses occur. The
amount for which a shareholder is at risk with
respect to its interest generally is equal to its adjusted tax
basis for such interest, less any amounts borrowed (x) in
connection with its acquisition of such interest for which it is
not personally liable and for which it has pledged no property
other than its interest; (y) from persons who have a
proprietary interest in us and from certain persons related to
such persons; and (z) for which the shareholder is
protected against loss through nonrecourse financing, guarantees
or similar arrangements. To the extent that a shareholders
allocable share of our losses is not allowed because the
shareholder has an insufficient amount at risk in us, such
disallowed losses may be carried over by the shareholder to
subsequent taxable years and will be allowed if and to the
extent of the shareholders at risk amount in subsequent
years.
The Code restricts the deductibility of losses from a
passive activity against certain income which is not
derived from a passive activity. This restriction applies to
individuals, personal service corporations and certain closely
held corporations. It is not expected that we will generate any
material amount of income or losses from passive
activities for purposes of Section 469 of the Code.
Accordingly, income allocated by us to a shareholder generally
may not be offset by the passive losses of such shareholder and
losses allocated to a shareholder generally may not be used to
offset passive income of such shareholder. Shareholders also
should consult their tax advisors regarding the possible
application to them of the limitations on the deductibility of
losses from certain passive activities contained in
Section 469 of the Code.
Limitation on Interest Deductions. We will
likely incur interest expense in connection with our operation
of investing in tax-exempt obligations. Section 265(a)(2)
of the Code generally disallows any deduction for interest paid
by a taxpayer on indebtedness incurred or continued for the
purpose of purchasing or carrying a tax-exempt obligation. A
purpose to carry tax-exempt obligations will be inferred
whenever a taxpayer owns tax-exempt obligations and has
outstanding indebtedness which is neither directly connected
with personal expenditures nor incurred in connection with the
active conduct of a trade or business. The IRS may take the
position that a shareholders allocable portion of any
interest that we pay on our borrowings
and/or any
interest paid by a shareholder on indebtedness incurred to
purchase our shares should be viewed in whole or in part as
incurred to enable such shareholder to continue carrying
tax-exempt obligations and, therefore, the deduction of any such
interest by a shareholder should be disallowed in whole or in
part.
Further, a risk exists that the IRS may take the position that
short term or longer term interests in our STEP subsidiaries or
tender option bond programs are debt. We expect to receive or
have received opinions from deal counsel in connection with such
transactions to the effect that such interests are not debt for
U.S. federal income tax purposes. If the IRS takes the
position that such interests are debt and is successful in
maintaining this position, however, interest paid to the holders
of such interests would not be deductible by us as the holder of
the residual interest.
In the event that any of our interest expense is not
attributable to tax-exempt interest income, individuals and
other noncorporate shareholders are allowed to deduct their
allocable share of our investment interest (within
the meaning of Section 163(d) of the Code and the Treasury
Regulations) only to the extent of each such shareholders
net investment income for the taxable year. A shareholders
net investment income generally is the excess, if any, of the
shareholders investment income from all sources (which is
gross income from property held for investment) over investment
expenses from all sources (which are deductions allowed that are
directly connected with the production of investment income).
Investment income excludes net capital gain attributable to the
disposition of property held for investment, as well as
qualified dividend income that is currently taxable
at long-term capital gains, unless the shareholder elects to pay
tax on such gain or income at ordinary income rates. To the
extent that a shareholders allocable share of our
investment interest is not
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allowed as a deduction because the shareholder has insufficient
net investment income, such disallowed investment interest may
be carried over by the shareholder to subsequent taxable years
and will be allowed if and to the extent of the
shareholders net investment income in subsequent years.
If a shareholder borrows to finance the purchase of the
Class A common shares, any interest paid or accrued on the
borrowing subject to the discussion above regarding the
disallowance of deductions for interest incurred or continued
for the purchase or carrying of tax-exempt obligations, will be
allocated among our assets for purposes of determining the
portion of such interest that is investment interest subject to
the foregoing limitations or passive interest subject to the
passive activity rules under Section 469 of the Code. The
portion of such interest allocated to property held for
investment (such as stock in a corporation) will be treated as
investment interest. Shareholders should consult their tax
advisors regarding the application to them of the allocation of
such interest among our assets. Since the amount of a
shareholders allocable share of our investment interest
that is subject to this limitation will depend on the
shareholders aggregate investment interest and net
investment income from all sources for any taxable year, the
extent, if any, to which our investment interest will be
disallowed under this rule will depend on each
shareholders particular circumstances each year.
Limitation on Deduction of Certain Other
Expenses. We will incur various expenses in
connection with our ongoing administration and operation.
Payments for services generally are deductible if the payments
are ordinary and necessary expenses, are reasonable in amount,
and are for services performed during the year in which paid or
accrued. Expenses which are allocable to tax-exempt interest
income, however, are nondeductible to individual shareholders.
We expect to adopt accounting policies for allocating our
expenses, including the management fee paid to our manager,
among the various segments of our business. There is no
assurance that such policies will not be successfully challenged
by the IRS.
To the extent our expenses are not disallowed as described in
the previous paragraph, an individual, estate or trust may
deduct so-called miscellaneous itemized deductions,
which include fees and other expenses of ours, only to the
extent that such deductions exceed 2% of the adjusted gross
income of the taxpayer. The amount of a shareholders
allocable share of such expenses that is subject to this
disallowance rule will depend on the shareholders
aggregate miscellaneous itemized deductions from all sources and
adjusted gross income for any taxable year. Thus, the extent, if
any, to which such fees and expenses will be subject to
disallowance will depend on each shareholders particular
circumstances each year. In addition, barring legislative action
for taxable years beginning during or after 2011, the Code
further restricts the ability of an individual with an adjusted
gross income in excess of a specified amount to deduct such
investment expenses. Under such provision, there is a limitation
on the deductibility of investment expenses in excess of 2% of
adjusted gross income to the extent such excess expenses (along
with certain other itemized deductions) exceed the lesser of
(i) 3% of the excess of the individuals adjusted
gross income over the specified amount or (ii) 80% of the
amount of certain itemized deductions otherwise allowable for
the taxable year. Moreover, such investment expenses are
miscellaneous itemized deductions which are not deductible by a
noncorporate taxpayer in calculating its AMT liability. A
shareholders share of our management fee and certain other
expenses attributable to us will constitute miscellaneous
itemized deductions for these purposes.
It is intended that the allocation of profits and cash
distributions made to our manager with respect to the
performance share is an allocable share of our earnings and not
a fee. No assurance can be given however that the IRS could not
recharacterize successfully the incentive allocations as a fee,
in which case shareholders could be subject to the limitation on
deductibility relating to miscellaneous itemized deductions and
certain other itemized deductions of high income individuals
with respect to such amount, as described above. Prospective
shareholders are urged to consult their tax advisors regarding
their ability to deduct expenses incurred by us.
Our organizational expenses from 2007 are being amortized
ratably over a period of 15 years. Our syndication expenses
(i.e., expenditures made in connection with the marketing and
issuance of the shares, including placement fees) are neither
deductible nor amortizable.
Alternative Minimum Tax. Interest on
tax-exempt bonds generally is an item of tax preference for
purposes of the AMT, however interest on qualified 501(c)(3)
bonds is generally only includable in the
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determination of AMT for our corporate shareholders. To the
extent interest on any of the tax-exempt bonds that we own is
such an item of tax preference, a portion of the interest income
allocated to our shareholders also will be a tax preference
item. Shareholders should consult their tax advisors concerning
the AMT consequences of holding our shares.
Other U.S. Federal Income Tax
Considerations. Ownership of tax-exempt
obligations may result in collateral tax consequences to certain
taxpayers, including, without limitation, financial
institutions, property and casualty insurance companies, certain
foreign corporations doing business in the United States,
certain S corporations with excess passive income,
individual recipients of social security or railroad retirement
benefits and individuals otherwise eligible for the earned
income credit. Prospective purchasers of our shares should
consult a tax advisor as to the applicability of any such
collateral consequences.
Unrelated Business Taxable Income. A
shareholder that is a tax-exempt organization for
U.S. federal income tax purposes and, therefore, generally
exempt from U.S. federal income taxation, may nevertheless
be subject to unrelated business income tax to the
extent, if any, that its allocable share of our income consists
of unrelated business taxable income, or UBTI. A tax-exempt
partner in a partnership (or an entity treated as a partnership
for U.S. federal income tax purposes) that regularly
engages in a trade or business which is unrelated to the exempt
function of the tax-exempt partner must include in computing its
UBTI, its pro rata share (whether or not distributed) of such
partnerships gross income derived from such unrelated
trade or business. Moreover, such tax-exempt partner could be
treated as earning UBTI to the extent that such entity derives
income from debt-financed property, or if the
partnership interest itself is debt financed. Debt-financed
property means property held to produce income with respect to
which there is acquisition indebtedness (i.e.,
indebtedness incurred in acquiring or holding property).
Because we are under no obligation to minimize UBTI,
tax-exempt shareholders are urged to consult their tax advisors
concerning the possible U.S. federal, state, local and
non-U.S. tax
consequences arising from an investment in our shares.
Nature of our Business Activities. We have
invested and anticipate that we will invest directly and
indirectly in a variety of assets, including, but not limited
to, tax-exempt bonds, taxable bonds, and equity interests in
taxable subsidiaries, such as MFCA Funding, Inc.
Tax-Exempt Bonds. Prospective investors should
be aware that while most tax-exempt bonds are issued in reliance
on an opinion of nationally recognized bond counsel that
interest on such securities will be exempt from regular
U.S. federal income taxation, in some cases, we may invest
in bonds we believe are tax-exempt but do not benefit from any
such tax opinion. In addition, we are not relying on any other
external advisor in respect of the continuing correctness of,
the opinions of bond counsel relating to the exclusion of
interest income from gross income for U.S. federal income
tax purposes and have merely assumed that such opinions received
(or to be received) remain (or will remain) correct.
Events occurring after the date of issuance of a tax-exempt
bond, however, may cause the interest on such tax-exempt bond to
be includable in gross income for U.S. federal income tax
purposes. For example, the IRS establishes certain requirements,
such as restrictions on the investment of the proceeds of the
bond issue, limitations on the use of proceeds of such issue and
the property financed by such proceeds, and the payment of
certain excess earnings to the federal government, that must be
met after the issuance of a tax-exempt bond for interest on such
tax-exempt bond to remain excludible from gross income for
U.S. federal income tax purposes. The issuers and the
underlying obligors of the tax-exempt bonds generally covenant
to comply with such requirements and the opinion of bond counsel
generally assumes continuing compliance with such requirements.
In addition, for tax-exempt bonds the proceeds of which are
loaned to a charitable organization described in
section 501(c)(3) of the Code, the continued exclusion of
interest from gross income for U.S. federal income tax
purposes depends on the continuing exempt status of the
charitable organization borrower. Neither we nor our counsel
will monitor compliance with such requirements. Failure to
comply with these continuing requirements, however, may cause
the interest on a tax-exempt bond to be includable in gross
income for U.S. federal income tax purposes retroactive to
its date of issue.
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In addition, the IRS has an ongoing enforcement program that
involves the audit of tax-exempt bonds to determine whether an
issue of bonds satisfies all of the requirements that must be
met for the interest on such bonds to be excludible from gross
income for U.S. federal income tax purposes. From time to
time, some of the tax-exempt bonds we own directly or indirectly
may become the subject of such an audit by the IRS, and the IRS
may determine that the interest on such securities is includable
in gross income for U.S. federal income tax purposes either
because the IRS has taken a legal position adverse to the
conclusion reached by bond counsel in its opinion pertaining to
the bond issue or as a result of an action taken or not taken
after the date of the bond issue.
If interest paid on any tax-exempt bond in which we invest is
determined to be taxable subsequent to our acquisition of such
tax-exempt bond, the IRS may demand that our shareholders pay
U.S. federal income tax on the interest income allocated to
them, thereby adversely reducing our shareholders yield.
A determination that interest on a tax-exempt bond we own is
includable in gross income for U.S. federal income tax
purposes retroactively to its date of issue may, likewise, cause
a portion of prior years interest allocations received by
our shareholders to be taxable to those shareholders in the year
of allocation.
Tax-exempt interest earned by us will generally be tax-exempt
income to our shareholders. If any sale or other disposition of
a tax-exempt bond produces a gain our shareholders would
recognize taxable income. We believe that such gains will be
capital gains because we intend to treat our interest in
tax-exempt bonds as investments, and do not believe that we will
be considered to be a dealer in tax-exempt bonds.
Interest on a mortgage revenue bond we own, other than a bond
the proceeds of which are loaned to a charitable organization
described in Section 501(c)(3) of the Code, will not be
excluded from gross income during any period in which we are a
substantial user of the properties financed with the
proceeds of such mortgage revenue bond or a person related to
such a substantial user.
A substantial user generally includes any underlying
borrower and any person or entity that uses the financed
properties on other than a de minimis basis. We would be related
to a substantial user for this purpose if, among
other things,
(i) the same person or entity owned more than a 50%
interest in both us and in the properties financed with the
proceeds of a bond owned by us or one of our
subsidiaries; or
(ii) we owned a partnership or similar equity interest in
the owner of a property financed with the proceeds of a bond
owned by us or one of our subsidiaries.
We do not expect to be a substantial user of the
properties financed with the proceeds of the mortgage revenue
bonds or related parties thereto. There can be no assurance,
however, that the IRS would not challenge such conclusion. If
such challenge were successful, the interest received on any
bond for which we were treated as a substantial user
or a related party thereto would be includable in
federally taxable gross income.
Amortization of Bond Premium. Section 171
of the Code requires amortization of any bond premium paid in
connection with the acquisition of a tax-exempt bond. As bond
premium is amortized, it reduces the holder of such bonds
basis in the bond. Under the Treasury Regulations, bond premium
is amortized on a constant yield basis in a manner consistent
with the accrual of original issue discount. If tax-exempt bonds
are acquired by us at a premium, the amortization of bond
premium will affect our basis in the tax-exempt bonds, which in
turn, will affect the computation of gain or loss upon the sale
or other disposition of the tax-exempt bonds.
Market Discount. In general, market discount
with respect to a taxable or tax-exempt bond is the amount (if
any) by which the stated redemption price at maturity exceeds an
investors purchase price (except to the extent that such
difference, if any, is attributable to original issue discount
not yet accrued). Under current law, the accretion of market
discount is taxable as ordinary income. Accrued market discount
would be recognized by us as ordinary income when principal
payments are received on the tax-exempt bonds or upon the sale
or at redemption (including early redemption) of the tax-exempt
bonds.
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Equity interests in our taxable subsidiaries including MFCA
Funding, Inc. We will own interests in entities
that are taxable as corporations for U.S. federal income
tax purposes, including our interests in MFCA Funding, Inc. We
will not be taxed directly on the earnings of such taxable
corporations. Distributions of cash or other property from such
a taxable corporate subsidiary will constitute dividends for
U.S. federal income tax purposes to the extent paid from
the current or accumulated earnings and profits (as determined
under U.S. federal income tax principles) of such
subsidiary. If the amount of a distribution by a taxable
subsidiary exceeds its current and accumulated earnings and
profits, such excess will be treated as a tax-free return of
capital to the extent of our tax basis in our shares of such
subsidiary, and thereafter will be treated as capital gain.
Dividend income from our taxable subsidiaries, if any, will be
passed through to our shareholders and will be taxable ordinary
portfolio income. We may also elect to retain earnings at our
taxable subsidiaries and use their growing capital base to
support their activities. Currently, qualified dividend
income received by individuals from certain domestic
corporations is generally subject to a reduced U.S. federal
income tax rate of 15% (for taxable years through 2010). This
reduced rate will generally apply to dividend income received
from our taxable subsidiaries.
Our taxable subsidiaries will be subject to corporate level tax
on their net taxable income at the current maximum corporate
rate of 35%. The interest income from tax-exempt bonds held by
our taxable subsidiaries will generally not be included in their
taxable income. However, gains from the sale of tax-exempt
bonds, market discount recognized with respect to bonds and
amounts earned pursuant to derivatives will be included in our
taxable subsidiaries taxable income. In calculating their
taxable income, our taxable subsidiaries will generally not be
permitted to deduct expenses incurred in acquiring or carrying
its tax-exempt bonds. Our taxable subsidiaries tax-exempt
interest income, if any, will also be subject to the AMT.
In addition, it is possible that the IRS may not agree with our
determinations as to which expenses are allocable to our
corporate subsidiaries and which expenses are allocable to us or
our other subsidiaries. If all or a portion of the expenses that
we allocate to our corporate subsidiaries are determined not to
be deductible by those subsidiaries, they could be required to
pay additional tax, as well as interest and penalties. We may
acquire tax-exempt bonds from MFCA Funding, Inc. If the IRS
determined that the purchase prices that we paid to MFCA
Funding, Inc. were less than the amounts that would be payable
if such corporation were not related to us, additional tax, as
well as interest and penalties could be imposed on MFCA Funding,
Inc.
Total Return Swaps. Our taxable subsidiaries,
such as MFCA Funding, Inc., have entered into, and may enter
into, various total return swap transactions referencing
tax-exempt bonds. The law is not entirely clear in respect of
total return swaps and the tax treatment of a particular swap
depends on the overall facts and circumstances in respect of
such swap. We generally believe that a long position under a
total return swap in respect of tax-exempt bonds is not tax
ownership in respect of such underlying reference tax-exempt
bonds although the IRS could disagree with this position. Any
income from any total return swap is expected to be fully
taxable to a subsidiary such as MFCA Funding, Inc. to the extent
it engages in such transaction or will result in taxable income
being allocated to our shareholders to the extent we enter into
a total return swap respected as a notional principal contract
directly or through a pass-through subsidiary.
Tax Elections. Under Section 754 of the
Code, a partnership may elect to have the basis of its assets
adjusted in the event of a distribution of property to a partner
or in the event of a transfer of its shares by sale or exchange
or as a result of the death of a partner. Pursuant to the terms
of our operating agreement, our Tax Matters Partner (as defined
below), in its sole discretion, is authorized to make such an
election. Any such election, once made, cannot be revoked
without the IRSs consent. We have not made the election
permitted by Section 754 of the Code.
The calculations under Section 754 of the Code are complex,
and there is little legal authority concerning the mechanics of
the calculations, particularly in the context of publicly traded
partnerships. To help reduce the complexity of those
calculations and the resulting administrative costs to us, we
apply certain conventions in determining and allocating basis
adjustments. The use of such conventions may result in the basis
adjustments that do not exactly reflect a shareholders
purchase price for its shares. It is possible that the IRS will
successfully assert that the conventions utilized by us do not
satisfy the technical requirements of the
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Code or the Treasury Regulations and, thus, will require
different basis adjustments to be made. If the IRS were to
sustain such a position, a shareholder may have adverse tax
consequences.
Constructive Termination. Subject to the
electing large partnership rules described below, we will be
considered to have terminated for U.S. federal income tax
purposes, if there is a sale or exchange of 50% or more of the
total interest in our capital and profits within a
12-month
period. Our termination would result in the closing of our
taxable year for all of our shareholders. In the case of a
shareholder reporting on a taxable year other than the fiscal
year ending on our year end, the closing of our taxable year may
result in more than 12 months of our taxable income or loss
being includable in the shareholders taxable income for
the year of termination. We would be required to make new tax
elections after termination, including a new tax election under
Section 754 of the Code. A termination could also result in
penalties if we were unable to determine that the termination
had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation
enacted before the termination.
Tax Reporting. We currently use the calendar
year as our taxable year for U.S. federal income tax
purposes. Under certain circumstances which we currently believe
are unlikely to apply, a taxable year other than the calendar
year may be required. We have and will continue to file a
partnership return with the IRS, as required, for each calendar
year, with respect to income, gain, loss, deduction and other
items derived by us during such year. We will use our best
efforts to furnish to each shareholder, by as promptly as
possible after the close of each calendar year, specific tax
information, including a
Schedule K-1,
which describes such persons share of our income, gain,
loss and deduction for our preceding taxable year. Delivery of
this information may be subject to delay depending on the timing
of our receipt of such information from an investment in which
we hold an interest, and accordingly it is likely that
U.S. shareholders should anticipate the need to file
annually with the IRS (and certain states) a request for an
extension past April 15 or the otherwise applicable due date for
their income tax return for the taxable year.
In preparing this information, we will take various accounting
and reporting positions, some of which are described in this
summary, to determine such persons share of income, gain,
loss and deduction. We cannot assure you that those positions
will yield a result that conforms to the requirements of the
Code, the Treasury Regulations or administrative interpretations
of the IRS. In addition, we can not assure prospective
shareholders that the IRS will not successfully contend that
those positions are impermissible. Any successful challenge by
the IRS could negatively affect the value of an investors
Class A common shares.
A shareholder must file a statement with the IRS identifying the
treatment of any item on his U.S. federal income tax return
that is not consistent with the treatment of the item on our
return. Intentional or negligent disregard of this consistency
requirement may subject a shareholder to substantial penalties.
Persons who hold our shares as a nominee for another person are
required to furnish to us:
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the name, address and taxpayer identification number of the
beneficial owner and the nominee;
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whether the beneficial owner is:
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(1) a person that is not a United States person;
(2) a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing; or
(3) a tax-exempt entity;
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the amount and description of shares held, acquired or
transferred for the beneficial owner; and
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specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from
sales.
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Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on Class A common shares
they acquire, hold or transfer for their own account. A penalty
of $50 per failure, up to a maximum of $100,000 per calendar
year, is
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imposed by the Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of
the Class A common shares with the information furnished to
us.
Tax Audits. Under the Code, adjustments in tax
liability with respect to our items generally will be made at
our level in a partnership proceeding rather than in separate
proceedings with each shareholder. Tiptree (or another
shareholder designated by our Board of Directors) will represent
us as our Tax Matters Partner during any audit and
in any dispute with the IRS. Each shareholder will be informed
of the commencement of an audit of our company. In general, the
tax matters partner may enter into a settlement agreement with
the IRS on behalf of, and that is binding upon, the shareholders.
Adjustments resulting from an IRS audit may require each
shareholder to adjust a prior years liability, and
possibly may result in an audit of his return. Any audit of a
shareholders return could result in adjustments not
related to our returns as well as those related to our returns.
The Tax Matters Partner will make some elections on our behalf
and on behalf of our shareholders. In addition, the Tax Matters
Partner can extend the statute of limitations for assessment of
tax deficiencies against shareholders for items in our returns.
The Tax Matters Partner may bind a shareholder with less than a
1% profits interest in us to a settlement with the IRS unless
that shareholder elects, by filing a statement with the IRS, not
to give that authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review, by which all the
shareholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek
judicial review, judicial review may be sought by any
shareholder having at least a 1% interest in profits or by any
group of shareholders having in the aggregate at least a 5%
interest in profits. However, only one action for judicial
review will go forward, and each shareholder with an interest in
the outcome may participate.
Elective Procedures for Large
Partnerships. The Code allows large partnerships
to elect streamlined procedures for income tax reporting. This
election, if made, would reduce the number of items that must be
separately stated on the IRS Schedules K-1 that are issued to
shareholders, and such Schedules K-1 would have to be provided
on or before the first March 15 following the close of each
taxable year. In addition, this election would prevent us from
suffering a technical termination (which would close
our taxable year) if within a 12 month period there is a
sale or exchange of 50% or more of our total interests. If we
make such an election, IRS audit adjustments will flow through
to shareholders for the year in which such adjustments take
effect rather than the year to which the adjustment relates. In
addition, we, rather than our shareholders individually,
generally will be liable for any interest and penalties that
result from such audit adjustment.
Non-U.S.
Shareholders.
Class A
Common Shares are likely not be to be suitable investments for
Non-U.S.
shareholders.
Possible Withholding Taxes on Certain
Payments. Under recently enacted legislation, in
order to avoid a U.S. withholding tax of 30% on certain
payments (including payments of gross proceeds) made after
December 31, 2012 with respect to certain
U.S. investments, foreign persons will generally be
required to enter into an agreement with the IRS identifying
certain direct and indirect U.S. equityholders or otherwise
provide alternative certification. Prospective
non-U.S. investors
should consult their own tax advisors regarding the possible
implications of this legislation on their investment in our
shares.
Prospective shareholders who are
non-U.S. persons
are urged to consult their tax advisors with regard to the
U.S. federal income tax consequences to them of acquiring,
holding and disposing of the Class A common shares, as well
as the effects of state, local and
non-U.S. tax
laws.
Certain Reporting Obligations. Certain
shareholders that own (directly or indirectly) over 50% of the
capital or profits of us may be required to file Form TD
F90-22.1 (an FBAR) with respect to any
investments in foreign financial accounts, which may include
non-U.S. investment
entities. Failure to file a required FBAR may result in civil
and criminal penalties. Shareholders should consult with their
own advisors as to whether they are obligated to file an FBAR
with respect to an investment in our shares.
118
Tax Shelter Regulations. In certain
circumstances, a shareholder who disposes of an interest in a
transaction resulting in the recognition by such shareholder of
significant losses in excess of certain threshold amounts may be
obligated to disclose its participation in such transaction (a
reportable transaction) in accordance with recently
issued regulations governing tax shelters and other potentially
tax-motivated transactions (the Tax Shelter
Regulations). In addition, an investment in us may be
considered a reportable transaction if, for example,
we recognize certain significant losses in the future.
Shareholders should consult their tax advisors concerning any
possible disclosure obligation under the Tax Shelter Regulations
with respect to the disposition of our shares.
Certain State, Local and Foreign Income Tax
Matters. In addition to the U.S. federal
income tax considerations described above, shareholders should
consider potential state, local, and foreign tax consequences of
an investment in our shares and are urged to consult their tax
advisor in this regard. The rules for some states and localities
for computing
and/or
reporting taxable income may differ from the federal rules.
Interest income that is tax-exempt for federal purposes may be
taxable by some states and localities.
Under the tax laws of certain states, we (or the entities in
which we invest) may be subject to state income or franchise tax
or other taxes that may be applicable to us. Such taxes will
decrease the amount of income available to shareholders.
Shareholders are advised to consult their tax advisors
concerning the tax treatment of our company, and our effect on
the shareholders, under the tax laws of the states applicable to
us and such shareholders.
Both the substantive features and the filing requirements of
state income taxation of shareholders will vary according to
factors which include, but are not limited to the following:
(i) the status of the shareholder; (ii) whether the
state imposes personal or corporate income taxation or instead
imposes a form of franchise, unincorporated business or
occupational tax; (iii) whether the state will allow
credits or exemptions for income taxes to which a shareholder is
subject in the shareholders state or other jurisdiction of
residence; (iv) the level of personal exemptions or credits
allowed by the state and whether those exemptions or credits are
required to be prorated on the ratio of income from sources in
the taxing state to total income; (v) whether the
applicable tax rate structure is applied on the basis of income
from sources in the taxing jurisdiction or the basis of total
income of a nonresident taxpayer. We may be required to withhold
state taxes from distributions to shareholders in some instances.
Prospective shareholders are urged to consult their tax
advisors with respect to the state and local tax consequences of
acquiring, holding and disposing of the Class A common
shares.
Backup Withholding. We may be required in
certain circumstances to backup withhold on certain payments
paid to noncorporate holders of our shares who do not furnish us
with their correct taxpayer identification number (in the case
of individuals, their social security number) and certain
certifications, or who are otherwise subject to backup
withholding. If backup withholding were applicable to a
shareholder, we would be required to withhold 28% on each
distribution to such shareholder and to pay such amount to the
IRS on behalf of such shareholder. Backup withholding is not an
additional tax. Any amounts withheld from payments made to you
may be refunded or credited against your U.S. federal
income tax liability, if any, provided that the required
information is furnished to the IRS.
New Legislation or Administrative or Judicial
Action. The rules dealing with U.S. federal
income taxation are constantly under review by persons involved
in the legislative process, the IRS and the U.S. Treasury
Department, frequently resulting in unfavorable precedent or
authority on issues for which there was previously no clear
precedent or authority as well as revised interpretations of
established concepts, statutory changes, revisions to
regulations and other modifications and interpretations. No
assurance can be given as to whether, or in what form, any
proposals affecting us or our Class A common shares will be
enacted. The IRS pays close attention to the proper application
of tax laws to partnerships. The present U.S. federal
income tax treatment of an investment in our Class A common
shares may be modified by administrative, legislative or
judicial interpretation at any time, and any such action may
affect investments and commitments previously made. For example,
changes to the U.S. federal income tax laws and
interpretations thereof could make it more difficult or
impossible to meet the qualifying income exception for us to be
treated as a partnership that is not taxable as a corporation
for U.S. federal income tax purposes. We and our common
shareholders could be adversely affected by any such change in,
or any new, tax law, regulation or interpretation.
119
UNDERWRITING
Ladenburg Thalmann & Co. Inc. is acting as
representative of the underwriters named below. Subject to the
terms and conditions stated in the underwriting agreement dated
the date of this prospectus, each underwriter named below has
agreed to purchase, and we have agreed to sell to that
underwriter, the number of Class A common shares set forth
opposite the underwriters name.
|
|
|
|
|
|
|
Class A
|
|
Underwriter
|
|
Common Shares
|
|
|
Ladenburg Thalmann & Co. Inc.
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriting agreement provides that the obligations of the
underwriters to purchase the Class A common shares included
in this offering are subject to approval of legal matters by
counsel and to other conditions. The underwriters are obligated
to purchase all the Class A common shares (other than those
covered by the overallotment option described below) if they
purchase any of the Class A common shares.
The underwriters propose to offer some of the Class A
common shares directly to the public at the public offering
price set forth on the cover page of this prospectus and some of
the Class A common shares to dealers at the public offering
price less a concession not to exceed
$ per Class A common share.
The underwriting discount of $ per
Class A common share is equal
to % of the initial offering price.
If all of the Class A common shares are not sold at the
initial offering price, the representative may change the public
offering price and other selling terms. Investors must pay for
any Class A common shares purchased on
or
before ,
2010. The representative has advised us that the underwriters do
not intend to confirm any sales to any accounts over which they
exercise discretionary authority.
We have granted to the underwriters an option, exercisable for
45 days from the date of this prospectus, to purchase up to
an
additional
Class A common shares at the public offering price less the
underwriting discount. The underwriters may exercise the option
solely for the purpose of covering over-allotments, if any, in
connection with this offering. To the extent such option is
exercised, each underwriter must purchase a number of additional
Class A common shares approximately proportionate to that
underwriters initial purchase commitment.
We and our directors and officers and Tiptree and its directors
and officers have agreed that, for a period of 180 days
from the date of this prospectus, that they will not, without
the prior written consent of Ladenburg Thalmann & Co.
Inc., on behalf of the underwriters, offer, pledge, sell,
contract to sell or otherwise dispose of or agree to sell or
otherwise dispose of, directly or indirectly or hedge, any
Class A common shares or any securities convertible into or
exchangeable for Class A common shares, provided, however,
that we may issue and sell Class A common shares pursuant
to our distribution reinvestment plan. Ladenburg
Thalmann & Co. Inc. in its sole discretion may release
any of the securities subject to these
lock-up
agreements at any time without notice.
The 180-day
period in the preceding paragraph will be extended if
(i) during the last 17 days of the
180-day
period we issue an earnings release or material news or a
material event relating to us occurs or (ii) prior to the
expiration of the
180-day
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
180-day
period, in which case the restrictions described in the
preceding sentence will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or the occurrence of the
material event.
The Class A common shares offered by this prospectus,
subject to notice of issuance, will be listed on the Nasdaq
Stock Market LLC under the symbol MUNF.
The following table shows the underwriting discounts to be paid
to the underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of
the underwriters option to purchase additional
Class A common shares.
|
|
|
|
|
|
|
|
|
|
|
No Exercise
|
|
Full Exercise
|
|
Per Class A common share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
120
We and Tiptree have each agreed to indemnify the underwriters
against certain liabilities, including liabilities under the
Securities Act or to contribute to payments the underwriters may
be required to make because of any of those liabilities.
Certain underwriters may make a market in the Class A
common shares. No underwriter is, however, obligated to conduct
market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion
of the underwriter. No assurance can be given as to the
liquidity of, or the trading market for, the Class A common
shares as a result of any market-making activities undertaken by
any underwriter. This prospectus is to be used by any
underwriter in connection with this offering and, during the
period in which a prospectus must be delivered, with offers and
sales of the Class A common shares in market-making
transactions in the
over-the-counter
market at negotiated prices related to prevailing market prices
at the time of the sale.
In connection with this offering, Ladenburg Thalmann &
Co. Inc., on behalf of the underwriters, may purchase and sell
Class A common shares in the open market. These
transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve
syndicate sales of Class A common shares in excess of the
number of Class A common shares to be purchased by the
underwriters in this offering, which creates a syndicate short
position. Covered short sales are sales of
Class A common shares made in an amount up to the number of
Class A common shares represented by the underwriters
over-allotment option. In determining the source of Class A
common shares to close out the covered syndicate short position,
the underwriters will consider, among other things, the price of
Class A common shares available for purchase in the open
market as compared to the price at which they may purchase
Class A common shares through the overallotment option.
Transactions to close out the covered syndicate short position
involve either purchases of Class A common shares in the
open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also
make naked short sales of Class A common shares
in excess of the over-allotment option. The underwriters must
close out any naked short position by purchasing Class A
common shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that
there may be downward pressure on the price of Class A
common shares in the open market after pricing that could
adversely affect investors who purchase in this offering.
Stabilizing transactions consist of bids for or purchases of
Class A common shares in the open market while this
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from a
syndicate member when Ladenburg Thalmann & Co. Inc.
repurchases Class A common shares originally sold by that
syndicate member in order to cover syndicate short positions or
make stabilizing purchases.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of Class A common
shares. They may also cause the price of Class A common
shares to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The
underwriters may conduct these transactions on the Nasdaq Stock
Market LLC, or in the
over-the-counter
market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
We estimate that our portion of the total expenses of this
offering, excluding the underwriting discounts, will be
approximately $ .
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters. The
representative may agree to allocate a number of Class A
common shares to underwriters for sale to their online brokerage
account holders. The representative will allocate Class A
common shares to underwriters that may make Internet
distributions on the same basis as other allocations. In
addition, Class A common shares may be sold by the
underwriters to securities dealers who resell Class A
common shares to online brokerage account holders.
We anticipate that, from time to time, certain underwriters may
act as brokers or dealers in connection with the execution of
our portfolio transactions after they have ceased to be
underwriters and, subject to certain restrictions, may act as
brokers while they are underwriters.
121
Certain underwriters may have performed investment banking and
advisory services for us, Muni Capital Management and their
affiliates from time to time, for which they have received
customary fees and expenses. Certain underwriters may, from time
to time, engage in transactions with or perform services for us,
Muni Capital Management and their affiliates in the ordinary
course of business.
The principal business address of Ladenburg Thalmann &
Co. Inc. is 520 Madison Avenue, 9th Floor, New York, New
York 10022.
LEGAL
MATTERS
The validity of the securities offered by this prospectus will
be passed upon by Schulte Roth & Zabel LLP, New York,
New York. Ashurst LLP has acted as special tax counsel to the
company in connection with the offering. In connection with this
offering, Greenberg Traurig LLP, New York, New York is acting as
counsel to the underwriters.
EXPERTS
Consolidated financial statements as of December 31, 2008
and for the year then ended and as of December 31, 2007 and
for the period June 12, 2007 (Inception) to
December 31, 2007 of Muni Funding Company of America, LLC,
included in this prospectus and elsewhere in the registration
statement, have been so included in reliance upon the report of
Grant Thornton LLP, independent registered public accountants,
upon the authority of said firm as experts in giving said report.
The consolidated financial statements as of December 31,
2009 and for the year ended December 31, 2009 included in
this prospectus and elsewhere in the registration statement have
been included in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, appearing
elsewhere herein and upon the authority of said firm as experts
in accounting and auditing.
Ashurst LLP has provided its tax opinion in respect of our
status as a partnership for U.S. federal income tax
purposes. Reference to its opinion has been included in this
prospectus and given upon its authority as experts in tax law. A
copy of its opinion is filed as an exhibit to the registration
statement of which this prospectus forms a part.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the securities we are
offering by this prospectus. This prospectus does not contain
all of the information included in the registration statement.
For further information about us and our securities, you should
refer to the registration statement and the exhibits and
schedules filed with the registration statement. Whenever we
make reference in this prospectus to any of our contracts,
agreements or other documents, the references are materially
complete but may not include a description of all aspects of
such contracts, agreements or other documents, and you should
refer to the exhibits attached to the registration statement for
copies of the actual contract, agreement or other document.
Upon completion of this offering, we will be subject to the
information requirements of the Exchange Act and will file
annual, quarterly and current event reports, proxy statements
and other information with the SEC. You can read our SEC
filings, including the registration statement, over the Internet
at the SECs website at www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference
facility at 100 F Street, N.E., Washington, D.C.
20549.
You may also obtain copies of the documents at prescribed rates
by writing to the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facilities.
122
TABLE OF
CONTENTS
December 31,
2009 and 2008
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Page
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|
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F-2
|
|
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F-4
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|
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|
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F-5
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|
|
|
|
F-6
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|
|
|
|
F-7
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|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
Audited
Financial Statements
December 31, 2007
|
|
|
|
|
|
|
|
F-34
|
|
|
|
|
F-35
|
|
|
|
|
F-36
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|
|
|
|
F-37
|
|
|
|
|
F-38
|
|
|
|
|
F-39
|
|
Unaudited
Financial Statements
June 30, 2010 and 2009
|
|
|
|
|
|
|
|
F-56
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|
|
|
|
F-57
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|
|
F-58
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|
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F-59
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|
F-60
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F-61
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F-62
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|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors
Muni Funding Company of America, LLC:
We have audited the accompanying consolidated statement of
assets and liabilities, including the consolidated schedule of
investments, of Muni Funding Company of America, LLC as of
December 31, 2009, and the related consolidated statements
of operations, changes in net assets, and cash flows for the
year ended December 31, 2009. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The
accompanying consolidated statement of assets and liabilities,
including the schedule of investments as of December 31,
2008, and the related consolidated statements of operations,
changes in net assets, and cash flows for the year end
December 31, 2008 were audited by other independent
registered public accountants whose report thereon, dated
March 16, 2009, expressed an unqualified opinion on those
financial statements.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (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 consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Muni Funding Company of America, LLC as of
December 31, 2009, and the results of its operations, the
changes in its net assets, and its cash flows for the year
ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
February 22, 2010
F-2
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Muni Funding Company of America, LLC
We have audited the accompanying consolidated statements of
assets and liabilities of Muni Funding Company of America, LLC
(a Delaware Limited Liability Company), including the
consolidated schedules of investments, as of December 31,
2008 and 2007, and the related consolidated statements of
operations, changes in net assets and cash flows for the year
ended December 31, 2008 and the period June 12, 2007
(Inception) to December 31, 2007. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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. The Company is not required to
have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 consolidated
financial position of Muni Funding Company of America, LLC (a
Delaware Limited Liability Company) as of December 31, 2008
and 2007, and the consolidated results of its operations,
changes in net assets and cash flows for the year ended
December 31, 2008 and the period June 12, 2007
(Inception) to December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
May 13, 2010 (except for note 12 to the notes to the 2009
and 2008 consolidated financial statements and note 7 to the
notes to 2007 consolidated financial statements for which the
date is November 8, 2010)
F-3
MUNI
FUNDING COMPANY OF AMERICA, LLC
December 31,
2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29,090,353
|
|
|
$
|
9,560,219
|
|
Restricted cash
|
|
|
277,000
|
|
|
|
|
|
Investments, at fair value
|
|
|
57,971,131
|
|
|
|
15,302,902
|
|
Accrued interest receivables
|
|
|
3,302,965
|
|
|
|
4,420,243
|
|
Derivative asset
|
|
|
27,095
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
358,775
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
90,668,544
|
|
|
|
29,642,139
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Due to the Manager (related party)
|
|
|
114,756
|
|
|
|
49,662
|
|
Accrued expenses and other liabilities
|
|
|
338,679
|
|
|
|
354,924
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
453,435
|
|
|
|
404,586
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
90,215,109
|
|
|
$
|
29,237,553
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share (37,416,669 and 17,847,015 shares
outstanding, respectively)
|
|
$
|
2.41
|
|
|
$
|
1.64
|
|
See accompanying notes to consolidated financial statements.
F-4
MUNI
FUNDING COMPANY OF AMERICA, LLC
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cusip
|
|
|
State
|
|
|
Coupon
|
|
|
Maturity
|
|
|
of Net Assets
|
|
|
Par Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Tax exempt bonds:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in trusts NPPF II:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cope Community Services
|
|
|
89874QAA6
|
|
|
|
AZ
|
|
|
|
6.13
|
%
|
|
|
Aug-37
|
|
|
|
3.7
|
%
|
|
$
|
4,385,000
|
|
|
$
|
4,384,643
|
|
|
$
|
3,347,969
|
|
21st Century Charter School
|
|
|
082445AA5
|
|
|
|
AZ
|
|
|
|
6.00
|
|
|
|
Oct-32
|
|
|
|
2.8
|
|
|
|
3,550,000
|
|
|
|
3,549,814
|
|
|
|
2,491,940
|
|
Sacramento Country Day School
|
|
|
130795JV0
|
|
|
|
CA
|
|
|
|
5.65
|
|
|
|
Aug-37
|
|
|
|
11.5
|
|
|
|
13,350,000
|
|
|
|
13,331,239
|
|
|
|
10,366,208
|
|
Sierra Canyon High School Foundation
|
|
|
54465NAB0
|
|
|
|
CA
|
|
|
|
6.00
|
|
|
|
May-32
|
|
|
|
3.4
|
|
|
|
3,882,260
|
|
|
|
3,946,844
|
|
|
|
3,065,200
|
|
Goodwill of San Joaquin Valley
|
|
|
13033WD91
|
|
|
|
CA
|
|
|
|
5.85
|
|
|
|
Sep-37
|
|
|
|
2.9
|
|
|
|
3,405,000
|
|
|
|
3,404,711
|
|
|
|
2,596,585
|
|
Global Country of World Peace
|
|
|
19648AEC5
|
|
|
|
CO
|
|
|
|
5.70
|
|
|
|
Feb-37
|
|
|
|
13.6
|
|
|
|
17,460,000
|
|
|
|
16,979,954
|
|
|
|
12,253,253
|
|
Maranatha High School
|
|
|
19645 RCA7
|
|
|
|
CO
|
|
|
|
7.25
|
|
|
|
Aug-37
|
|
|
|
10.2
|
|
|
|
11,900,000
|
|
|
|
11,899,561
|
|
|
|
9,260,937
|
|
Yampa Valley Medical Center
|
|
|
19648AEU5
|
|
|
|
CO
|
|
|
|
5.13
|
|
|
|
Sep-29
|
|
|
|
7.5
|
|
|
|
7,500,000
|
|
|
|
7,224,824
|
|
|
|
6,798,413
|
|
Global Country of World Peace
|
|
|
1964745C0
|
|
|
|
CO
|
|
|
|
5.80
|
|
|
|
Feb-37
|
|
|
|
0.9
|
|
|
|
1,145,000
|
|
|
|
1,046,860
|
|
|
|
815,572
|
|
Madison Center
|
|
|
790609ANI
|
|
|
|
IN
|
|
|
|
5.25
|
|
|
|
Feb-28
|
|
|
|
3.6
|
|
|
|
4,000,000
|
|
|
|
3,881,024
|
|
|
|
3,289,130
|
|
Labette County Medical Center
|
|
|
505392BU3
|
|
|
|
KS
|
|
|
|
5.75
|
|
|
|
Sep-37
|
|
|
|
0.8
|
|
|
|
750,000
|
|
|
|
768,836
|
|
|
|
684,536
|
|
YMCA of the Capital Area
|
|
|
546279J27
|
|
|
|
LA
|
|
|
|
6.25
|
|
|
|
Sep-37
|
|
|
|
7.8
|
|
|
|
9,755,000
|
|
|
|
9,754,151
|
|
|
|
7,003,895
|
|
UMass Memorial Medical Center
|
|
|
57586CLQ6
|
|
|
|
MA
|
|
|
|
5.00
|
|
|
|
Jul-33
|
|
|
|
10.7
|
|
|
|
10,920,000
|
|
|
|
10,369,676
|
|
|
|
9,711,129
|
|
Alternatives Unlimited
|
|
|
57583RTU9
|
|
|
|
MA
|
|
|
|
7.38
|
|
|
|
Mar-38
|
|
|
|
10.0
|
|
|
|
10,895,000
|
|
|
|
10,892,929
|
|
|
|
9,010,383
|
|
Maine Central Institute
|
|
|
56041NAL6
|
|
|
|
ME
|
|
|
|
6.00
|
|
|
|
Aug-37
|
|
|
|
3.9
|
|
|
|
4,440,000
|
|
|
|
4,433,875
|
|
|
|
3,487,731
|
|
Guadalupe Centers
|
|
|
48503IFK9
|
|
|
|
MO
|
|
|
|
6.15
|
|
|
|
Feb-38
|
|
|
|
3.6
|
|
|
|
4,430,000
|
|
|
|
4,429,852
|
|
|
|
3,224,021
|
|
Family Guidance Center for Behavioral Health care
|
|
|
79076NAA0
|
|
|
|
MO
|
|
|
|
5.50
|
|
|
|
Mar-37
|
|
|
|
4.3
|
|
|
|
5,335,000
|
|
|
|
5,211,956
|
|
|
|
3,840,426
|
|
Tri-County Community Action Program
|
|
|
64468KBD7
|
|
|
|
NH
|
|
|
|
6.50
|
|
|
|
Sep-37
|
|
|
|
1.8
|
|
|
|
2,100,000
|
|
|
|
2,099,797
|
|
|
|
1,592,451
|
|
West Penn Allegheny Health System
|
|
|
01728AG83
|
|
|
|
PA
|
|
|
|
5.38
|
|
|
|
Nov-40
|
|
|
|
9.3
|
|
|
|
11,530,000
|
|
|
|
10,973,945
|
|
|
|
8,456,506
|
|
NHS III Properties
|
|
|
613609XN1
|
|
|
|
PA
|
|
|
|
6.50
|
|
|
|
Oct-37
|
|
|
|
5.8
|
|
|
|
6,740,000
|
|
|
|
6,739,186
|
|
|
|
5,281,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments of NPPF II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118.1
|
|
|
|
137,472,260
|
|
|
|
135,323,677
|
|
|
|
106,577,328
|
|
Class A Senior Certificates
|
|
|
65537WAA2
|
|
|
|
|
|
|
|
3.00
|
|
|
|
Feb-11
|
|
|
|
(73.0
|
)
|
|
|
(65,856,685
|
)
|
|
|
(65,856,685
|
)
|
|
|
(65,856,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Junior Certificates
|
|
|
65537WABO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.1
|
|
|
|
71,615,575
|
|
|
|
69,466,992
|
|
|
|
40,720,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments in tax exempt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular Research Foundation
|
|
|
773557AH6
|
|
|
|
NY
|
|
|
|
5.40
|
|
|
|
Jan-35
|
|
|
|
1.7
|
|
|
|
2,000,000
|
|
|
|
1,931,404
|
|
|
|
1,516,840
|
|
Project CURE
|
|
|
19648AGA7
|
|
|
|
CO
|
|
|
|
7.38
|
|
|
|
Feb-28
|
|
|
|
7.6
|
|
|
|
7,905,000
|
|
|
|
7,903,250
|
|
|
|
6,879,069
|
|
Labette County Medical Center
|
|
|
505392BU3
|
|
|
|
KS
|
|
|
|
5.75
|
|
|
|
Sep-37
|
|
|
|
0.4
|
|
|
|
350,000
|
|
|
|
356,932
|
|
|
|
319,450
|
|
Florida Care Properties
|
|
|
605279GU6
|
|
|
|
MS
|
|
|
|
6.50
|
|
|
|
Aug-27
|
|
|
|
5.0
|
|
|
|
5,035,000
|
|
|
|
5,069,817
|
|
|
|
4,538,876
|
|
Florida Care Properties
|
|
|
928104KK3
|
|
|
|
VA
|
|
|
|
6.50
|
|
|
|
Aug-27
|
|
|
|
4.4
|
|
|
|
4,475,000
|
|
|
|
4,481,778
|
|
|
|
3,996,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments in tax exempt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
19,765,000
|
|
|
|
19,743,181
|
|
|
|
17,250,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.2
|
%
|
|
$
|
91,380,575
|
|
|
$
|
89,210,173
|
|
|
$
|
57,971,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All tax exempt securities held directly by the Company and in
NPPF II are revenue bonds which are issued by a municipality or
an authority on behalf of a non-profit corporation to finance or
refinance a specific project and are typically secured by a
mortgage or a revenue pledge, or both, and a debt service
reserve fund. |
See accompanying notes to consolidated financial statements.
F-5
MUNI
FUNDING COMPANY OF AMERICA, LLC
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cusip
|
|
|
State
|
|
|
Coupon
|
|
|
Maturity
|
|
|
of Net Assets
|
|
|
Par Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Tax exempt bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in trusts NPPF II:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cope Community Services
|
|
|
89874QAA6
|
|
|
|
AZ
|
|
|
|
6.13
|
%
|
|
|
Aug-37
|
|
|
|
8.9
|
%
|
|
$
|
4,445,000
|
|
|
$
|
4,444,656
|
|
|
$
|
2,611,782
|
|
21st Century Charter School Project
|
|
|
082445AA5
|
|
|
|
AZ
|
|
|
|
6.00
|
|
|
|
Oct-32
|
|
|
|
7.4
|
|
|
|
3,550,000
|
|
|
|
3,549,846
|
|
|
|
2,170,248
|
|
Sacramento Country Day School
|
|
|
130795JV0
|
|
|
|
CA
|
|
|
|
5.65
|
|
|
|
Aug-37
|
|
|
|
29.2
|
|
|
|
13,350,000
|
|
|
|
13,330,696
|
|
|
|
8,547,838
|
|
Sierra Canyon High School Foundation
|
|
|
54465NAB0
|
|
|
|
CA
|
|
|
|
6.00
|
|
|
|
May-32
|
|
|
|
8.8
|
|
|
|
3,962,008
|
|
|
|
4,028,418
|
|
|
|
2,569,838
|
|
Goodwill of San Joaquin Valley
|
|
|
13033WD91
|
|
|
|
CA
|
|
|
|
5.85
|
|
|
|
Sep-37
|
|
|
|
7.7
|
|
|
|
3,455,000
|
|
|
|
3,454,721
|
|
|
|
2,243,478
|
|
Global Country of World Peace
|
|
|
19648AEC5
|
|
|
|
CO
|
|
|
|
5.70
|
|
|
|
Feb-37
|
|
|
|
38.4
|
|
|
|
18,360,000
|
|
|
|
17,837,667
|
|
|
|
11,223,009
|
|
Maranatha High School
|
|
|
19645RCA7
|
|
|
|
CO
|
|
|
|
7.25
|
|
|
|
Aug-37
|
|
|
|
28.7
|
|
|
|
11,900,000
|
|
|
|
11,899,595
|
|
|
|
8,389,381
|
|
Yampa Valley Medical Center
|
|
|
19648AEU5
|
|
|
|
CO
|
|
|
|
5.13
|
|
|
|
Sep-29
|
|
|
|
16.8
|
|
|
|
7,500,000
|
|
|
|
7,215,084
|
|
|
|
4,902,769
|
|
Global Country of World Peace
|
|
|
1964745C0
|
|
|
|
CO
|
|
|
|
5.80
|
|
|
|
Feb-37
|
|
|
|
12.5
|
|
|
|
5,945,000
|
|
|
|
5,418,073
|
|
|
|
3,663,071
|
|
Madison Center
|
|
|
790609AN1
|
|
|
|
IN
|
|
|
|
5.25
|
|
|
|
Feb-28
|
|
|
|
9.0
|
|
|
|
4,000,000
|
|
|
|
3,876,595
|
|
|
|
2,637,070
|
|
Labette County Medical Center
|
|
|
505392BU3
|
|
|
|
KS
|
|
|
|
5.75
|
|
|
|
Sep-37
|
|
|
|
1.5
|
|
|
|
750,000
|
|
|
|
769,199
|
|
|
|
449,370
|
|
YMCA of the Capital Area
|
|
|
546279J27
|
|
|
|
LA
|
|
|
|
6.25
|
|
|
|
Sep-37
|
|
|
|
21.8
|
|
|
|
9,885,000
|
|
|
|
9,884,183
|
|
|
|
6,383,535
|
|
UMass Memorial Medical Center
|
|
|
57586CLQ6
|
|
|
|
MA
|
|
|
|
5.00
|
|
|
|
Jul-33
|
|
|
|
20.4
|
|
|
|
10,920,000
|
|
|
|
10,355,572
|
|
|
|
5,974,441
|
|
Maine Central Institute
|
|
|
56041NAL6
|
|
|
|
ME
|
|
|
|
6.00
|
|
|
|
Aug-37
|
|
|
|
10.0
|
|
|
|
4,500,000
|
|
|
|
4,493,670
|
|
|
|
2,937,184
|
|
Massachusetts St Dev Fin Agy Rev
|
|
|
57583RTU9
|
|
|
|
MA
|
|
|
|
7.38
|
|
|
|
Mar-38
|
|
|
|
26.8
|
|
|
|
11,000,000
|
|
|
|
11,005,007
|
|
|
|
7,845,228
|
|
Eaglecrest Senior Housing
|
|
|
778112AA0
|
|
|
|
MN
|
|
|
|
5.38
|
|
|
|
Jul-42
|
|
|
|
43.7
|
|
|
|
23,505,000
|
|
|
|
23,024,658
|
|
|
|
12,762,569
|
|
Guadalupe Centers
|
|
|
485031FK9
|
|
|
|
MO
|
|
|
|
6.15
|
|
|
|
Feb-38
|
|
|
|
9.4
|
|
|
|
4,430,000
|
|
|
|
4,429,878
|
|
|
|
2,734,550
|
|
Family Guidance Ctr for Behavioral Hthcre
|
|
|
79076NAA0
|
|
|
|
MO
|
|
|
|
5.50
|
|
|
|
Mar-37
|
|
|
|
10.2
|
|
|
|
5,415,000
|
|
|
|
5,277,500
|
|
|
|
2,980,782
|
|
Tri-county Community Action Program
|
|
|
64468KBD7
|
|
|
|
NH
|
|
|
|
6.50
|
|
|
|
Sep-37
|
|
|
|
,4.7
|
|
|
|
2,125,000
|
|
|
|
2,124,804
|
|
|
|
1,379,964
|
|
Oak Tree Foundation
|
|
|
34565IAD5
|
|
|
|
OR
|
|
|
|
5.50
|
|
|
|
Mar-37
|
|
|
|
11.3
|
|
|
|
5,245,000
|
|
|
|
5,163,937
|
|
|
|
3,287,500
|
|
West Penn Allegheny Health System
|
|
|
01728AG83
|
|
|
|
PA
|
|
|
|
5.38
|
|
|
|
Nov-40
|
|
|
|
19.0
|
|
|
|
11,530,000
|
|
|
|
10,964,492
|
|
|
|
5,540,482
|
|
NHS III Properties
|
|
|
613609XN1
|
|
|
|
PA
|
|
|
|
6.50
|
|
|
|
Oct-37
|
|
|
|
14.9
|
|
|
|
6,900,000
|
|
|
|
6,899,182
|
|
|
|
4,357,333
|
|
Reedsburg Area Medical Center
|
|
|
97710VH43
|
|
|
|
WI
|
|
|
|
5.65
|
|
|
|
Jun-26
|
|
|
|
26.7
|
|
|
|
11,690,000
|
|
|
|
11,828,448
|
|
|
|
7,802,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments of NPPF II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387.8
|
|
|
|
184,362,008
|
|
|
|
181,275,881
|
|
|
|
113,393,737
|
|
Class A Senior Certificates
|
|
|
65537WAA2
|
|
|
|
|
|
|
|
2.85
|
|
|
|
Feb-09
|
|
|
|
(387.8
|
)
|
|
|
(116,077,410
|
)
|
|
|
(116,077,410
|
)
|
|
|
(113,393,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in NPPF II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,284,598
|
|
|
|
65,198,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in trusts Merrill Lynch Trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Certificate interests
|
|
|
708787AA4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9
|
|
|
|
21,270,000
|
|
|
|
20,490,986
|
|
|
|
840,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Merrill Lynch Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9
|
|
|
|
21,270,000
|
|
|
|
20,490,986
|
|
|
|
840,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments in tax exempt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rockland Cnty NY Indl Dv Agy
|
|
|
773557AH6
|
|
|
|
NY
|
|
|
|
5.40
|
|
|
|
Jan-35
|
|
|
|
4.1
|
|
|
|
2,000,000
|
|
|
|
1,928,092
|
|
|
|
1,205,820
|
|
Colorado Health Facs Auth Rev
|
|
|
19648AGA7
|
|
|
|
CO
|
|
|
|
7.38
|
|
|
|
Feb-28
|
|
|
|
19.8
|
|
|
|
7,905,000
|
|
|
|
7,903,292
|
|
|
|
5,794,859
|
|
Labette County Medical Center
|
|
|
505392BS8
|
|
|
|
KS
|
|
|
|
5.75
|
|
|
|
Sep-29
|
|
|
|
2.8
|
|
|
|
1,250,000
|
|
|
|
1,301,194
|
|
|
|
802,653
|
|
Labette County Medical Center
|
|
|
505392BU3
|
|
|
|
KS
|
|
|
|
5.75
|
|
|
|
Sep-37
|
|
|
|
0.7
|
|
|
|
350,000
|
|
|
|
357,066
|
|
|
|
209,706
|
|
Florida Care Properties
|
|
|
605279GU6
|
|
|
|
MS
|
|
|
|
6.50
|
|
|
|
Aug-27
|
|
|
|
I 1.4
|
|
|
|
5,180,000
|
|
|
|
5,217,400
|
|
|
|
3,341,100
|
|
Florida Care Properties
|
|
|
928104KK3
|
|
|
|
VA
|
|
|
|
6.50
|
|
|
|
Aug-27
|
|
|
|
10.6
|
|
|
|
4,605,000
|
|
|
|
4,612,317
|
|
|
|
3,108,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments in tax exempt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49.4
|
|
|
|
21,290,000
|
|
|
|
21,319,361
|
|
|
|
14,462,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52.3
|
%
|
|
$
|
110,844,598
|
|
|
$
|
107,008,818
|
|
|
$
|
15,302,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
MUNI
FUNDING COMPANY OF AMERICA, LLC
Years
ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
Income investments
|
|
$
|
8,581,819
|
|
|
$
|
8,106,531
|
|
Income total return swap
|
|
|
|
|
|
|
903,623
|
|
Income other
|
|
|
23,345
|
|
|
|
1,225,434
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
8,605,164
|
|
|
|
10,235,588
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Management fee (related party)
|
|
|
962,670
|
|
|
|
1,276,477
|
|
Amortization of financing costs
|
|
|
194,559
|
|
|
|
38,912
|
|
Professional fees
|
|
|
963,373
|
|
|
|
2,047,694
|
|
Insurance
|
|
|
266,788
|
|
|
|
313,994
|
|
Directors compensation
|
|
|
58,500
|
|
|
|
391,570
|
|
Shareholder reporting and transfer agent
|
|
|
15,427
|
|
|
|
86,703
|
|
Other general and administrative
|
|
|
184,814
|
|
|
|
182,283
|
|
Non cash incentive compensation (related party)
|
|
|
471,966
|
|
|
|
876,422
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,118,097
|
|
|
|
5,214,055
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
5,487,067
|
|
|
|
5,021,533
|
|
|
|
|
|
|
|
|
|
|
Realized losses:
|
|
|
|
|
|
|
|
|
Investments
|
|
|
(18,957,635
|
)
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
(38,829,108
|
)
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
|
(18,957,635
|
)
|
|
|
(38,829,108
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses):
|
|
|
|
|
|
|
|
|
Investments
|
|
|
54,464,711
|
|
|
|
(81,112,777
|
)
|
Derivatives
|
|
|
27,095
|
|
|
|
7,241,926
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
|
54,491,806
|
|
|
|
(73,870,851
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
before performance share allocation
|
|
|
41,021,238
|
|
|
|
(107,678,426
|
)
|
|
|
|
|
|
|
|
|
|
Performance share allocation
|
|
|
(5,920,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
after performance share allocation
|
|
$
|
35,100,790
|
|
|
$
|
(107,678,426
|
)
|
|
|
|
|
|
|
|
|
|
Basic net increase (decrease) in net assets from operations per
share(1)(2)
|
|
$
|
1.30
|
|
|
$
|
(4.39
|
)
|
Diluted net increase (decrease) in net assets from operations
per share(1)(2)
|
|
$
|
1.30
|
|
|
$
|
(4.39
|
)
|
Weighted average common shares outstanding basic
|
|
|
31,649,890
|
|
|
|
24,503,930
|
|
Weighted average common shares outstanding diluted
|
|
|
31,649,890
|
|
|
|
24,503,930
|
|
Distributions declared per share
|
|
$
|
|
|
|
$
|
0.24
|
|
|
|
|
(1) |
|
Calculation excludes performance share allocation |
|
|
|
(2) |
|
2008 amounts revised to reflect impact of June 2009 rights
offering: see note 12 |
See accompanying notes to consolidate financial statements.
F-7
MUNI
FUNDING COMPANY OF AMERICA, LLC
Years
ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase (decrease) in net assets resulting from operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
5,487,067
|
|
|
$
|
5,021,533
|
|
Net realized losses
|
|
|
(18,957,635
|
)
|
|
|
(38,829,108
|
)
|
Net unrealized gains (losses)
|
|
|
54,491,806
|
|
|
|
(73,870,851
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
41,021,238
|
|
|
|
(107,678,426
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in net assets resulting from distributions to
shareholders:
|
|
|
|
|
|
|
|
|
Distributions to common shareholders
|
|
|
|
|
|
|
(4,147,224
|
)
|
Distributions to LTIP shareholders
|
|
|
|
|
|
|
(152,400
|
)
|
|
|
|
|
|
|
|
|
|
Total decrease in net assets resulting from distributions to
shareholders
|
|
|
|
|
|
|
(4,299,624
|
)
|
|
|
|
|
|
|
|
|
|
Increase in net assets from share transactions
|
|
|
|
|
|
|
|
|
Increase in net assets from issuance of common shares, net
|
|
|
25,404,800
|
|
|
|
|
|
Vesting of incentive compensation
|
|
|
471,966
|
|
|
|
876,422
|
|
|
|
|
|
|
|
|
|
|
Total increase in net assets from share transactions
|
|
|
25,876,766
|
|
|
|
876,422
|
|
|
|
|
|
|
|
|
|
|
Decrease in net assets from performance share allocation:
|
|
|
|
|
|
|
|
|
Performance share allocation paid in cash
|
|
|
(2,083,000
|
)
|
|
|
|
|
Performance share allocation paid in shares
|
|
|
(3,837,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease in net assets from performance share allocation
|
|
|
(5,920,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets
|
|
|
60,977,556
|
|
|
|
(111,101,628
|
)
|
Net assets, beginning of year
|
|
|
29,237,553
|
|
|
|
140,339,181
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year
|
|
$
|
90,215,109
|
|
|
$
|
29,237,553
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
MUNI
FUNDING COMPANY OF AMERICA, LLC
Years
ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
before performance share allocation
|
|
$
|
41,021,238
|
|
|
$
|
(107,678,426
|
)
|
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations before performance share allocation to
net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
|
|
|
(54,491,806
|
)
|
|
|
73,870,851
|
|
Non cash incentive compensation (related party)
|
|
|
471,966
|
|
|
|
876,422
|
|
Net realized losses(1)
|
|
|
18,957,635
|
|
|
|
38,228
|
|
Purchase of investments
|
|
|
(50,220,728
|
)
|
|
|
(106,931,326
|
)
|
Sale of investments
|
|
|
43,150,379
|
|
|
|
|
|
Amortization of bond discount
|
|
|
(90,804
|
)
|
|
|
(77,492
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accrued interest receivables
|
|
|
1,117,278
|
|
|
|
(3,070,097
|
)
|
(Increase) decrease in restricted cash
|
|
|
(277,000
|
)
|
|
|
29,000,000
|
|
(Increase) decrease in other assets
|
|
|
358,775
|
|
|
|
(275,025
|
)
|
Increase (decrease) due to the Manager
|
|
|
65,094
|
|
|
|
(130,188
|
)
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
(16,245
|
)
|
|
|
120,094
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
45,782
|
|
|
|
(114,256,959
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares, net of costs of $173,005
|
|
|
21,567,352
|
|
|
|
|
|
Distributions to common shareholders
|
|
|
|
|
|
|
(4,147,224
|
)
|
Distributions to LTIP shareholders
|
|
|
|
|
|
|
(152,400
|
)
|
Performance share allocation paid in cash
|
|
|
(2,083,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
19,484,352
|
|
|
|
(4,299,624
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
19,530,134
|
|
|
|
(118,556,583
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
9,560,219
|
|
|
|
128,116,802
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
29,090,353
|
|
|
$
|
9,560,219
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash financing activities
|
|
|
|
|
|
|
|
|
Performance share allocation
|
|
$
|
3,837,448
|
|
|
$
|
|
|
|
|
|
(1) |
|
In 2008, net realized losses on the Statements of Cash Flows
includes $38,228 of realized loss from the sale of Tender Option
Bonds, which is included in the $38,829,108 of net realized
losses on derivatives on the Statements of Operations. |
See accompanying notes to consolidated financial statements.
F-9
MUNI
FUNDING COMPANY OF AMERICA, LLC
December 31,
2009 and 2008
|
|
(1)
|
Organization
and Nature of Operations
|
Muni Funding Company of America, LLC (the Company)
was organized as a Delaware Limited Liability Company on
April 27, 2007. The Company began operations on
June 12, 2007 upon the completion of an offering of common
shares of limited liability interests (Common Shares) in a
private offering to qualified institutional buyers in accordance
with Rule 144A under the Securities Act of 1933.
The Company is a specialty finance holding company that invests
directly or indirectly in U.S. federally tax exempt bonds
with the objective of generating attractive risk-adjusted
returns and predictable cash distributions. The Company seeks to
achieve this objective by (1) acquiring interests in
structured credit vehicles which own debt obligations, the
interest on which is exempt from U.S. federal income
taxation; (2) investing in total return swaps and other
derivative arrangements relating to tax exempt securities; and
(3) making direct investments in tax exempt securities. The
Company may also invest in securities that are subject to
federal income tax.
The Company is externally managed and advised by Muni Capital
Management, LLC (formerly knows as Tricadia Municipal
Management, LLC) (the Manager). The Manager is a
wholly-owned subsidiary of Tricadia Holdings, L.P. (together
with its predecessors and subsidiaries Tricadia).
Prior to March 18, 2009, the Company was managed by Cohen
Municipal Capital Management, LLC (the Former
Manager), a subsidiary of Cohen Brothers, LLC (Cohen
and Company). In February 2009, Tiptree Financial
Partners, L.P. (Tiptree), a private partnership
managed by Tricadia, acquired a controlling interest in the
Company. Currently, Tiptree owns approximately 75% of the
outstanding Common Shares of the Company.
The Company has selected December 31 as its fiscal year-end. The
Company has no stated date of dissolution.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
The accompanying consolidated financial statements have been
prepared by management in accordance with accounting principles
generally accepted in the United States of America
(U.S. GAAP).
Although the Company conducts its operations so that the Company
is not required to register as an investment company under the
Investment Company Act, for financial reporting purposes the
Company is an investment company and follows the AICPA Audit and
Accounting Guide for Investment Companies (the Audit Guide).
Accordingly, investments are carried at fair value with changes
in fair value reflected in the consolidated statements of
operations.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make assumptions and
estimates that affect the reported amounts in the consolidated
financial statements and the accompanying notes. Actual results
could differ from those estimates.
|
|
(b)
|
Principles
of Consolidation
|
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary MFCA
Funding, Inc. (Funding, Inc.). All intercompany transactions
have been eliminated.
On December 24, 2003, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Codification
(ASC) Topic 810, Consolidation (formerly
Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest Entities
(FIN 46R)), to clarify the application of Accounting
Research Bulletin (ARB) No. 51, Consolidated Financial
Statements (ARB 51), as amended by FASB Statement
No. 94, Consolidation of All Majority-Owned Subsidiaries
(SFAS No. 94). However, the effective date of
F-10
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
FIN 46R was deferred for investment companies (including
nonregistered investment companies) that are accounting for
investments in accordance with the Audit Guide.
On May 11, 2007, the FASB clarifies that those entities
which account for themselves as investment companies under the
Audit Guide are not subject to the consolidation requirements of
FIN 46R.
The Company reviews each investment that it makes under a
control based framework in accordance with ASC Topic 810. If the
Company determines it controls the investee and the investee
itself meets the definition of an investment company under the
Audit Guide, the Company consolidates the investee. Otherwise,
the Company will report its equity investment at fair value as
required by the Audit Guide.
|
|
(c)
|
Recent
Accounting Developments
|
In June 2009, the FASB issued ASC Topic 860, Transfers and
Servicing (formerly Statement of Financial Accounting
Standards (SFAS) No. 166, Accounting for Transfers of
Financial Assets an amendment of FASB Statement
No. 140) and ASC Topic 810, (formerly
SFAS No. 167, Amendments to FASB Interpretation
No. 46(R)), which change the accounting for securitizations
and VIEs. ASC Topic 860 eliminates the concept of a QSPE,
changes the requirements for derecognizing financial assets, and
requires additional disclosures about transfers of financial
assets, including securitization transactions and continuing
involvement with transferred financial assets. ASC Topic 810
will change the determination of whether and when a VIE should
be consolidated. ASC Topic 860 and ASC Topic 810 are effective
for fiscal years beginning after November 15, 2009. The
Company is currently evaluating the impact that ASC Topic 860
and ASC Topic 810 will have on the consolidated financial
statements.
In August 2009, the FASB issued Accounting Standards Update
(ASU)
2009-5, Fair
Value Measurements and Disclosures Measuring
Liabilities at Fair Value, which amends ASC Topic 820 to provide
further guidance on how to measure the fair value of a
liability. ASU
2009-5
primarily sets forth the types of valuation techniques to be
used to value a liability when a quoted price in an active
market for the identical liability is not available. In these
circumstances, ASU
2009-5 states
that a company can apply the quoted price of an identical or
similar liability when traded as an asset, or other valuation
techniques that are consistent with principles of ASC Topic 820.
ASU 2009-5
will be effective for the next reporting period and the Company
does not expect such adoption to have a material effect on the
consolidated financial statements.
In June 2009, the FASB issued ASC Topic 855, Subsequent
Events (formerly SFAS No. 165), which establishes
general standards of accounting for, and disclosing events that
occur after the balance sheet date but before the financial
statements are issued or available to be issued. It requires the
disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, i.e., whether the
date represents the date the financial statements were issued or
were available to be issued. Subsequent events have been
evaluated through February 22, 2010, the issuance date of
our financial statements.
|
|
(d)
|
Cash
and Cash Equivalents
|
Cash and cash equivalents consist of cash held at banks as well
as short term investments with an original maturity of three
months or less, as defined in ASC Topic 230, Statement of
Cash Flows.
Restricted cash represents cash collateral posted with
counterparties. Income earned on restricted cash balances is
included as a component of income other in the
consolidated statements of operations.
F-11
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
|
|
(f)
|
Financial
Instruments
|
Fair value is used to measure the Companys financial
instruments. The fair value of a financial instrument is the
amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, also known as the exit
price.
The fair values of the Companys assets and liabilities
which qualify as financial instruments under ASC Topic 825
(formerly SFAS No. 107, Disclosures about Fair
Value of Financial Instruments), approximate the carrying
amounts presented in the consolidated statements of assets and
liabilities.
The Company has adopted ASC Topic 820 (formerly
SFAS No. 157, Fair Value Measurements)). ASC
Topic 820 establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of
the fair value hierarchy under ASC Topic 820 are described below:
Level 1 Financial assets and liabilities
whose values are based on unadjusted quoted prices in active
markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2 Financial assets and liabilities
whose values are based on one or more of the following:
(a) Quoted prices for similar assets or liabilities in
active markets;
(b) Quoted prices for identical or similar assets or
liabilities in nonactive markets;
(c) Pricing models whose inputs are observable for
substantially the full term of the asset or liability;
(d) Pricing models whose inputs are derived principally
from or corroborated by observable market data through
correlation or other means for substantially the full term of
the asset or liability.
Level 3 Financial assets and liabilities
whose values are based on prices or valuation techniques that
require inputs that are both significant to the fair value
measurement and unobservable. These inputs reflect
managements own assumptions about the assumptions a market
participant would use in pricing the asset or liability.
A financial instruments level within the fair value
hierarchy is based on the lowest level of input that is
significant to the fair value measurement. See note 6 for a
discussion of the impact of adopting ASC Topic 820.
Following is a description of the valuation methodologies used
for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation
hierarchy.
Investments
The Company invests in debt obligations, the interest on which
is exempt from U.S. federal income taxation. In some cases
the Company purchases the investments directly; and in other
cases the Company invests in a special purpose trust which holds
the assets. From time to time, the Company may also invest in
certain derivative contracts. The Company records all of its
investments at fair value.
|
|
I.
|
Direct
Investment in Tax Exempt Securities
|
In general, fair value is determined by obtaining quotations
from independent pricing services. In most cases, quotes are
obtained from two pricing services and the average of both
quotes is used. The independent pricing services determine their
quotes using observable inputs such as current interest rates,
specific issuer
F-12
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
information and other market data for such securities.
Therefore, the Companys estimate of fair value is subject
to a high degree of variability based upon market conditions,
the availability of specific issuer information and the
assumptions made. Due to the inherent uncertainty of valuation,
these estimated fair values may differ from the actual price
obtained through sales. The valuation inputs used to arrive at
fair value for such debt obligations are generally classified
within Level 2 or 3 of the valuation hierarchy. The
difference between the cost basis in the investment and the fair
value is included in the unrealized gains/(losses)
investments.
The income earned on the tax exempt securities is recorded on an
accrual basis and included as a component of income-investments
in the consolidated statements of operations. Any accrued and
unpaid income is included as a component of receivables in the
consolidated statements of assets and liabilities.
The Company will invest in a trust in order to acquire tax
exempt securities. The trust will acquire the bonds and finance
the purchase by issuing junior and senior certificates. In
general, the Company will purchase all of the junior
certificates and third party investors will purchase the senior
certificates.
In valuing its investment, the junior certificates, the Company
will generally use one of two techniques:
Asset
Based Valuation
The Company will value all of the underlying assets of the trust
as noted in the previous section above. The Company will then
deduct from this, the fair value of the senior certificates of
the trust. The senior certificates have a stated rate of
interest. In addition, the certificate holder is entitled to a
pro-rata share of 20% of the appreciation of the financial
assets owned by the trust over an agreed upon threshold amount
(Gain Share).
The fair value of the senior certificates is calculated by using
either pricing quotes from independent pricing services or
internally prepared pricing models. Depending on the inputs to
these models, this will generally be classified as either
Level 2 or Level 3 financial instruments in the
valuation hierarchy. Any fair value estimate will include any
Gain Share owed to the senior certificates. Any change in fair
value of the junior certificates will be recorded as a component
of unrealized gains/(losses) investments in the
consolidated statements of operations.
Cash Flow
Based Valuation
The Company will determine a valuation of the junior
certificates by estimating the residual cash flows it will
receive and applying an appropriate discount rate. In general, a
cash flow based valuation will be considered a Level 3
valuation.
Each circumstance is unique, but in general, the company will
default to an asset based valuation. The Company will use a cash
flow based valuation in cases where the asset based valuation
yields a result close to zero (or a negative amount) yet the
residual interest is still generating cash flow and is expected
to for the foreseeable future.
The Net Carry of the trust is comprised of the
income earned on the tax exempt securities acquired by the trust
offset by the stated interest paid to the senior certificates.
This Net Carry is recorded on an accrual basis and is recorded
as a component of income-investments in the consolidated
statements of operations. Any accrued and unpaid Net Carry is
included as a component of receivables in the consolidated
statements of assets and liabilities. See note 9 and
note 10.
F-13
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
III. Interest
Rate Swap
The Company has entered into interest rate swaps. Interest rate
swap contracts represent the contractual exchange of fixed and
floating rate payments based on a notional amount and a
referenced interest rate. The Company uses interest rate swaps
to hedge all or a portion of the interest rate risk associated
with its investments.
The fair value of the interest rate swaps is either included in
derivative asset or derivative liability in the consolidated
statements of assets and liabilities. Fair value is determined
by obtaining broker or counterparty quotes. Because there were
observable inputs used to arrive at these quoted market prices,
the Company considered the interest rate swaps to be
Level 2 financial instruments within the valuation
hierarchy. The change in the unrealized loss is included as a
component of unrealized gains/(losses) derivatives
in the consolidated statements of operations. The periodic
payments or receipts under the Companys interest rate swap
contracts are recorded as an increase or decrease in interest
expense or income in the consolidated statements of operations.
See Note 7 for further discussion of the Companys
interest rate swap activities.
The Company qualifies as a partnership for U.S. federal
income tax purposes. As a partnership, the Company will not pay
federal income tax and will be treated as a pass through entity.
However, MFCA Funding, Inc. (Funding, Inc.), a
wholly owned subsidiary of the Company is organized as a
C-corporation for U.S. federal income tax purposes and will
pay federal income tax. Further, the Company may be subject to
certain state and local income taxes.
Deferred tax assets and liabilities are determined using the
asset and liability method in accordance with ASC Topic 740
(formerly SFAS No. 109, Accounting for Income
Taxes), under this method, deferred tax assets and
liabilities are established for future tax consequences of
temporary differences between the financial statement carrying
amounts of assets and liabilities and their tax basis. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in years in which those
temporary differences are expected to reverse. A valuation
allowance is established when necessary to reduce a deferred tax
asset to the amount expected to be realized. As of
December 31, 2009 and 2008, the Company had recorded a 100%
valuation allowance against the deferred tax asset in each
period.
In accordance with ASC Topic 740 (FIN No. 48,
Accounting for Uncertainty in Income Taxes), the Company
evaluates tax positions taken or expected to be taken in the
course of preparing its tax returns to determine whether the tax
positions are more-likely than-not of being
sustained by the applicable tax authority. The Companys
tax benefit or tax expense is adjusted accordingly for tax
positions not deemed to meet the more-likely than-not threshold
in the current year. The Company records interest and penalties
associated with audits as a component of income before income
taxes. Penalties are recorded as an operating expense, and
interest expense is recorded as interest expense in the
consolidated statements of operations. The Company incurred no
interest and penalties for the period from inception to
December 31, 2009.
|
|
(h)
|
Securities
Transactions and Income
|
Purchases and sales of investments and derivatives are recorded
on a trade date basis. During the period between the trade date
and settlement date, any money due to or from the counterparty
will be recorded either as a component of receivables or accrued
expenses and other liabilities in the consolidated statements of
assets and liabilities.
Realized gains and losses are determined using the average cost
method, when partial positions are sold or unscheduled paydowns
are received. Interest income, adjusted for the accretion of
discounts, and expenses are recorded on the accrual basis.
F-14
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
|
|
(i)
|
Net
Increase (Decrease) in Net Assets from Operations
|
In accordance with ASC Topic 260 (formerly
SFAS No. 128, Earnings per Share), the Company
presents both basic and diluted net increase (decrease) in net
assets from operations (EPS) in its consolidated financial
statements and footnotes thereto. Basic net increase (decrease)
in net assets from operations (Basic EPS) excludes dilution and
is computed by dividing net income or loss allocable to common
shareholders by the weighted average number of common shares,
including shares that were issued as compensation, such as
vested restricted shares and vested LTIP shares that have
achieved parity, outstanding for the period. Diluted net
increase (decrease) in net assets from operations (Diluted EPS)
reflect the potential additional dilution of unvested restricted
shares and unvested and vested LTIP shares that have not
achieved parity issued as compensation if they are not
anti-dilutive. See note 11.
Effective January 1, 2009, the Company calculates EPS using
the two-class method which is an earnings allocation formula
that determines EPS for common shares and participating
securities. Unvested share-based payment awards that contain
non-forfeitable rights to distributions or distribution
equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of EPS using
the two-class method. Accordingly, all earnings (distributed and
undistributed) are allocated to common shares and participating
securities based on their respective rights to receive
distributions. See note 11.
|
|
(j)
|
Share-Based
Compensation
|
The Company issued share based compensation to its directors and
employees of its Former Manager and accounts for such issuances
as equity-settled transactions using the methodology prescribed
by ASC Topic 718 (formerly SFAS No. 123(R), Share
Based Compensation, and Emerging Issues Task force (EITF)
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services).
Employees of the Companys Former Manager and certain
independent members of the credit committee of Funding, Inc.
received long term incentive profit shares (LTIP shares). LTIP
shares are a special class of limited liability company
interests whereby upon the occurrence of certain events, the
Company will revalue its assets and an increase in the valuation
will be allocated first to the holders of the LTIP shares to
equalize the capital accounts of each LTIP share with the
capital account of each common share. Upon equalization of the
capital accounts, the LTIP shares will achieve full parity with
the common shares and, to the extent the LTIP shares are vested,
can be converted into common shares (a
book-up
event).
At a meeting of the Board of Directors of the Company held on
July 23, 2009, the directors approved the issuance of
common shares in partial payment of a performance share
allocation to the Manager. These shares were valued at $2.01 per
share, which is higher than the LTIP shares performance
target of $1.25 per share. The issuance of these shares
constituted a
book-up
event and the vested LTIP shares became eligible for
conversion to common shares of the Company. All LTIP shares were
converted to common shares as of December 31, 2009.
Nonmanagement directors received restricted common shares.
Quarterly distributions on each restricted common share, whether
vested or not, will be the same as those made on common shares.
The restricted shares are subject to restrictions on transfer
during the vesting period. In general, unvested restricted
shares will vest early upon change of control or other
liquidation. The fair value of the restricted common shares as
of the grant date is being amortized to share based compensation
over the three year vesting period of the underlying grants net
of assumed forfeitures.
F-15
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
|
|
(3)
|
Related
Party Transactions
|
Management Contract. The Company has no
employees and relies upon its Manager to conduct its operations
pursuant to its management agreement dated June 12, 2007
(the Management Agreement). On March 18, 2009, the Former
Manager and Tricadia entered into an Assignment and Assumption
Agreement that provided for the assignment of the Management
Agreement to the Manager. The Manager is responsible for
(i) the selection, purchase, monitoring and sale of
portfolio investments; (ii) developing and implementing the
Companys financing and risk management policies;
(iii) providing the Company with investment advisory
services; and (iv) carrying out the day to day operations
of the Company.
A. Base Management Fee: The Company pays
the Manager a base management fee on a monthly basis equal to
1/12th of the Companys US GAAP basis equity x 1.50%.
The US GAAP basis equity shall exclude one time events pursuant
to changes in US GAAP and other noncash charges (subject to the
approval of the Companys independent directors). To date,
the Company has not sought approval for any one time events or
noncash charges. The Company accrues this expense on a monthly
basis. Base management fees for the years ended
December 31, 2009 and December 31, 2008 were $962,670
and $1,276,477, respectively, and are separately reported in the
consolidated statements of operations. The management fees
remaining payable at December 31, 2009 and
December 31, 2008 were $112,856 and $35,541, respectively,
and are included as a component of due to the Manager in the
consolidated statements of assets and liabilities.
The monthly base management fee payable will be reduced (but not
below zero) by the proportionate share of the amount of any
management fees paid to the Manager or its affiliates by a
structured tax exempt partnership (STEP) or other structured
credit vehicle in which the Company invests. The proportionate
share is based on the percentage of the most junior class of
certificates the Company holds in any STEP or other structured
credit vehicle. Origination fees, structuring fees, or placement
fees paid to the Manager and its affiliates will not reduce the
base management fee. No such fees were incurred for the years
ended December 31, 2009 and 2008.
B. Performance Share Allocation
(PSA). The Company will pay the Manager incentive
compensation in the form of an allocation of profits to the
performance share (on a quarterly basis) equal to the product of
(i) 20% of the amount by which (a) consolidated net
income per weighted average common share exceeds (b) the
weighted average offering price of all common shares issued by
the Company multiplied by the quarterly benchmark rate, as
defined, and (ii) the weighted average number of common
shares outstanding in such quarter. This amount is paid through
a special allocation of assets to the performance share after
the end of the quarter.
The quarterly benchmark is equal to the greater of (i) 2%
or (ii) 0.75% plus the 10 year Municipal Market Data
(MMD) index for the quarter. The performance share
calculation will be adjusted to exclude one-time events pursuant
to changes in U.S. GAAP, as well as other noncash charges
(subject to the approval of the Companys independent
directors). To date, the Company has not sought approval for any
one time events or noncash charges. The Company accrues this
expense on a quarterly basis. PSA approved by the board of
directors for the years ended December 31, 2009 and 2008 is
summarized below and are separately reported in the consolidated
statements of assets and liabilities and the consolidated
statements of operations.
F-16
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
Performance
Share Allocation
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
For the quarter ended:
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
1,200,895
|
|
|
$
|
|
|
June 30
|
|
|
2,082,691
|
|
|
|
|
|
September 30
|
|
|
2,636,862
|
|
|
|
|
|
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,920,448
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Under the Companys First Amended and Restated Limited
Liability Company Agreement, the Company is required to pay PSA
to the Manager. The Board of Directors considered the
Companys need for capital and the implications of issuing
common shares in lieu of a cash distribution and determined that
each PSA should be paid as a combination of cash and common
shares of the Company. Each quarterly PSA was paid as summarized
below:
Performance
Share Allocation Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Total PSA
|
|
$
|
1,200,895
|
|
|
$
|
2,082,691
|
|
|
$
|
2,636,862
|
|
PSA paid in cash
|
|
|
|
|
|
|
1,200,000
|
|
|
|
883,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSA paid in common shares
|
|
$
|
1,200,895
|
|
|
$
|
882,691
|
|
|
$
|
1,753,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share before PSA
|
|
$
|
2.17
|
|
|
$
|
2.01
|
|
|
$
|
2.43
|
|
Shares issued in payment of PSA
|
|
|
553,407
|
|
|
|
438,712
|
|
|
|
721,528
|
|
Interest Rate Swap with Tiptree. On
July 14, 2009, the Company entered into a 10 year
interest rate swap for the purpose of hedging portfolio-wide
interest rate risk. The counterparty for the swap is Tiptree.
The Company will make semi-annual interest payments to Tiptree
based on a fixed rate of 3.6475% and a notional amount of
$5,000,000. Tiptree will make quarterly interest payments based
on a floating rate of three-month LIBOR and a notional amount of
$5,000,000. The fair value of the interest rate swap is $27,095
at December 31, 2009.
Expense Reimbursements. From time to time, the
Manager will pay certain of the Companys expenses and the
Company will reimburse the Manager. Total reimbursement payments
to Tricadia for general and administrative expenses for the
period from March 18, 2009 through December 31, 2009
were $447. Total reimbursement payments to the Former Manager
for general and administrative expenses for the period from
January 1, 2009 through March 17, 2009 and for the
year ended December 31, 2008 were $16,780 and $146,477,
respectively. Unpaid amounts due to the Managers for
reimbursement at December 31, 2009 and 2008 were $0 and
$14,121, respectively, and were included as a component of due
to the Manager in the consolidated statements of assets and
liabilities.
F-17
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
|
|
(4)
|
General
and Administrative Expenses
|
The Company pays its own general and administrative expenses.
The Manager is responsible for paying its employees compensation
and benefits (with the exception of share based compensation
described above). In general, the Company is responsible for all
other general and administrative expenses for its operations.
These include (but are not limited to): transaction costs
incidental to the acquisition, disposition and financing of
investments; legal, tax, accounting, consulting, and other
similar service fees and expenses; compensation and expenses of
the Companys directors; the cost of directors and
officers liability insurance; the costs associated with
the establishment and maintenance of any credit facilities,
tender option bond programs, and other financing arrangements
and other indebtedness (including commitment fees, accounting
fees, legal fees, closing and other costs); expenses associated
with security offerings; expenses associated with making
distributions to shareholders; the costs of printing and mailing
proxies and reports to the Companys shareholders; costs
associated with computer software or hardware; electronic
equipment or purchased information technology services from
third party vendors which is used solely by the Company; all
regulatory costs incurred by the Company; and all taxes and
insurance expense incurred by the Company or on its behalf. In
addition, the Company is required to pay its pro rata share of
rent, telephone, utilities, office furniture, equipment,
machinery and other office, internal and overhead expenses of
the Manager which is required for the Companys operations.
See note 3.
These expenses may be paid directly out of Company funds or,
from time to time, will be paid by the Manager and the Company
will reimburse the Manager.
At December 31, 2009, the taxable subsidiary had net
operating loss carry forwards for tax purposes of $1,016,842 and
net capital loss carry forwards of $24,914,455. The net
operating losses may be carried forward to reduce taxable income
through the years 2027 of $651,733, 2028 of $245,589, and 2029
of $119,520. The net capital losses may be carried forward to
reduce capital gains through the years 2012 of $2,710,351 and
2013 of $22,204,104.
Items that gave rise to deferred tax assets and liabilities at
December 31, 2009 and 2008, were comprised of the
following: for 2009, unrealized gains on municipal bonds, and
net operating loss carry forward; and for 2008, unrealized
losses on municipal bonds, net operating loss carry forward, and
net capital loss carryforward. The gross deferred tax asset
balance as of December 31, 2009 and 2008 was approximately
$9,554,314 and $9,999,668, respectively. A 100% valuation has
been established against the deferred tax assets because it is
more likely than not that the Company will be unable to utilize
the loss carry forwards before their respective expiration dates.
The components of the net deferred tax asset are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Unrealized losses on municipal bonds
|
|
$
|
478,361
|
|
|
$
|
965,547
|
|
Net capital loss carryforward
|
|
|
8,720,058
|
|
|
|
8,720,058
|
|
Net operating loss
|
|
|
355,895
|
|
|
|
314,063
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,554,314
|
|
|
|
9,999,668
|
|
Less:
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(9,554,314
|
)
|
|
|
(9,999,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-18
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
The federal income tax benefit at the U.S. federal income
tax rate of 35% is the income tax benefit reflected in the
consolidated statements of operations which has been offset by a
100% valuation allowance.
Income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Current tax expense
|
|
$
|
|
|
|
$
|
|
|
Deferred tax expense (credit)
|
|
|
445,354
|
|
|
|
(2,867,369
|
)
|
Change in valuation allowance
|
|
|
(445,354
|
)
|
|
|
2,867,369
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
Fair
Value of Financial Instruments
|
Upon adoption of ASC Topic 820, the Company did not record a
transition adjustment as the Company already had previously
recorded its assets and its liabilities at fair value.
Assets and liabilities measured at fair value on a recurring
basis including the senior certificates for which the Company
has elected the fair value option are summarized below (see
note 2-f
for a description of the three levels of the valuation hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
Significant
|
|
|
|
|
|
|
Prices in
|
|
Other
|
|
Significant
|
|
|
December 31,
|
|
Active
|
|
Observable
|
|
Unobservable
|
|
|
2008
|
|
Markets
|
|
Inputs
|
|
Inputs
|
Description
|
|
Fair Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, at fair value
|
|
$
|
15,302,902
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,302,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
Significant
|
|
|
|
|
|
|
Prices in
|
|
Other
|
|
Significant
|
|
|
December 31,
|
|
Active
|
|
Observable
|
|
Unobservable
|
|
|
2009
|
|
Markets
|
|
Inputs
|
|
Inputs
|
Description
|
|
Fair Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, at fair value(1)
|
|
$
|
57,971,131
|
|
|
$
|
|
|
|
$
|
17,250,488
|
|
|
$
|
40,720,643
|
|
Derivative, at fair value
|
|
|
27,095
|
|
|
|
|
|
|
|
27,095
|
|
|
|
|
|
|
|
|
(1) |
|
See the consolidated schedule of investments for detailed
categorization. |
F-19
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
The following table presents additional information about assets
and liabilities measured at fair value on a recurring basis and
for which the Company has utilized Level 3 inputs to
determine fair value for the years ended December 31, 2008
and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Realized/
|
|
|
Transfers in
|
|
|
Purchases
|
|
|
|
|
|
Gains and
|
|
|
|
January 1,
|
|
|
Unrealized
|
|
|
and/or Out,
|
|
|
and Sales and
|
|
|
December 31,
|
|
|
(Losses) Still
|
|
|
|
2008
|
|
|
Losses
|
|
|
Net, of Level 3
|
|
|
Other, Net(1)
|
|
|
2008
|
|
|
Held(2)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in NPPF II, at fair value
|
|
$
|
|
|
|
$
|
(65,198,471
|
)
|
|
$
|
63,758,256
|
|
|
$
|
1,440,215
|
|
|
$
|
|
|
|
$
|
(65,198,471
|
)
|
Investment in Merrill Lynch Trusts, at fair value
|
|
|
|
|
|
|
(19,650,597
|
)
|
|
|
20,483,117
|
|
|
|
7,869
|
|
|
|
840,389
|
|
|
|
(19,650,597
|
)
|
Direct Investments in Tax Exempt Securities, at fair value
|
|
|
|
|
|
|
(6,856,848
|
)
|
|
|
21,319,326
|
|
|
|
35
|
|
|
|
14,462,513
|
|
|
|
(6,856,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments, at fair value
|
|
|
|
|
|
$
|
(91,705,916
|
)
|
|
$
|
105,560,699
|
|
|
$
|
1,448,119
|
|
|
$
|
15,302,902
|
|
|
$
|
(91,705,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily comprised of return of investments of underlying
assets of the Trusts NPPF II and the underlying
assets of the Merrill Lynch Trusts and the direct investments in
tax exempt securities offset by the partial redemption of
Class A Certificates of NPPF II and the Class A
Certificates of the Merrill Lynch Trusts. |
|
(2) |
|
Represents the amount of total gains or losses for the period,
included in earnings, attributable to the change in unrealized
gains (losses) relating to assets classified as Level 3
that are still held at December 31, 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Realized/
|
|
|
Transfers in
|
|
|
Purchases
|
|
|
|
|
|
Gains and
|
|
|
|
January 1,
|
|
|
Unrealized
|
|
|
and/or Out,
|
|
|
and Sales and
|
|
|
December 31,
|
|
|
(Losses) Still
|
|
|
|
2009
|
|
|
Gains
|
|
|
Net, of Level 3
|
|
|
Other, Net
|
|
|
2008
|
|
|
Held(1)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in NPPF II, at fair value
|
|
$
|
|
|
|
$
|
36,452,122
|
|
|
$
|
|
|
|
$
|
4,268,521
|
|
|
$
|
40,720,643
|
|
|
$
|
(28,746,349
|
)
|
Investment in Merrill Lynch Trusts, at fair value
|
|
|
840,389
|
|
|
|
19,650,597
|
|
|
|
|
|
|
|
(20,490,986
|
)
|
|
|
|
|
|
|
|
|
Direct Investments in Tax Exempt Securities, at fair value
|
|
|
14,462,513
|
|
|
|
4,364,155
|
|
|
|
(17,250,488
|
)
|
|
|
(1,576,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments, at fair value
|
|
$
|
15,302,902
|
|
|
$
|
60,466,874
|
|
|
$
|
(17,250,488
|
)
|
|
$
|
(17,798,645
|
)
|
|
$
|
40,720,643
|
|
|
$
|
(28,746,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount of total gains or losses for the period,
included in earnings, attributable to the change in unrealized
gains(losses) relating to assets classified as Level 3 that
are still held at December 31, 2009. |
The Company may utilize derivative financial instruments as part
of its overall investment activities. Investments in derivative
contracts are subject to additional risk that can result in a
loss of all or part of an investment. The Companys
derivative activities are primarily classified by underlying
interest rate risk. In
F-20
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
addition to this interest rate exposure, the Company is also
subject to additional counterparty risk should its
counterparties fail to meet the contract terms.
Interest Rate Swaps
The Company is exposed to interest rate risk when there is an
unfavorable change in the value of investments as a result of
adverse movements in the market interest rates. The Company
enters into interest rate swap contracts to protect against such
adverse movements in the interest rates.
Interest rate swaps are contracts whereby counterparties
exchange different rates of interest on a specified notional
amount for a specified period of time. The payment flows are
usually netted against each other, with the difference being
paid by one party to the other. The Company enters into these
contracts so as to minimize the underlying interest rate
exposure of the investment portfolio. The Company is required to
post cash collateral for the benefit of the counterparty. This
is included as a component of restricted cash in the
consolidated statements of assets and liabilities.
The volume of the Companys interest rate derivative
activities has been extremely low. Specifically, there were two
open contracts at the start of 2008 which were terminated in
February 2008 and the Company recorded a realized gain of
$750,000 which was included as a component of net realized
loss derivatives in the consolidated statement of
operations for the year ended December 31, 2008. Only one
contract was entered into in 2009 and this contract remains
outstanding as of December 31, 2009. This limited interest
rate swap activity is consistent with the limited trading
activity within the Companys investment portfolio.
The following table identifies the fair value amounts of
derivative instruments included in the consolidated statements
of assets and liabilities as derivative contracts, categorized
by primary underlying risk, at December 31, 2009. Balances
are presented on a gross basis, prior to the application of the
impact of counterparty and collateral netting.
ASSET
DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
Other
|
|
|
|
|
|
|
Contract Risk
|
|
|
Contract Risk
|
|
|
Total
|
|
|
Swap contracts
|
|
$
|
27,095
|
|
|
$
|
|
|
|
$
|
27,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table identifies the net gain and loss amounts
included in the consolidated statements of operations as net
gain (loss) from derivative contracts, categorized by primary
underlying risk, for the year ended December 31, 2009.
CHANGE IN
UNREALIZED GAINS / (LOSSES) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
Other
|
|
|
|
|
|
|
Contract Risk
|
|
|
Contract Risk
|
|
|
Total
|
|
|
Swap contracts
|
|
$
|
27,095
|
|
|
$
|
|
|
|
$
|
27,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swap
Total return swaps (TRS) are contracts whereby
counterparties exchange the total cash flow of a single asset or
basket of assets in exchange for periodic cash flows. The
Company enters into TRS for speculative investment purposes.
Our volume in this activity is extremely low. Specifically,
since inception, the Company, through its wholly-owned
subsidiary Funding, Inc., was party to one TRS transaction which
was initiated in 2007 and terminated in 2008. Under the terms of
this TRS, the counterparty investment bank and Funding, Inc.
identified tax-exempt
F-21
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
bonds that served as the reference portfolio for the swap.
Funding, Inc. was exposed to the downside risk of this basket of
positions. The TRS was terminated in February 2008 and a
realized loss of approximately $14 million was recorded at
termination and included as a component of net realized
loss derivatives in the consolidated statement of
operations for the year ended December 31, 2008.
We terminated our total return swap and converted into the NPPF
II structure in response to the volatility and illiquidity in
the market precipitated by the financial crisis. The conversion
was undertaken for the following reasons. First, the
restructuring provided us a one year window to identify better
opportunities to sell the underlying assets in more stable
markets and avoid the need to sell in a volatile market at
depressed prices. Second, NPPF II did not require the posting of
additional collateral due to decreases in the value of the
underlying collateral which eliminated the need to continually
transfer margin between the Company and the counterparty. The
conversion also created additional risk to the Company because
the total amount of collateral NPPF II was required to post was
greater than the total amount of collateral the Company was
required to post in connection with the total return swap. Other
than as described above, the economic positions of the parties
involved in the conversion did not change.
Restricted cash is comprised of:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
IRS collateral deposit
|
|
$
|
277,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
277,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The interest rate swap collateral deposit represents cash posted
with Morgan Stanley as credit support. The amount will be
returned when the interest rate swap is terminated.
NPPF II was created in 2008 and made its initial acquisition of
a portfolio of tax-exempt securities by issuing Class A
Senior Certificates (the senior certificates) and
Class B Junior Certificates (the junior
certificates) to finance such purchase. The Company
purchased all of the junior certificates. These certificates are
carried at fair value and are included as a component of
investments in the consolidated statements of assets and
liabilities. The fair value of the junior certificates is the
fair value of the tax exempt securities owned by NPPF II less
the fair value of the senior certificates issued by NPPF II. See
note 2-f
Investments in Trusts for the Companys methodology
in determining fair value of the assets and liabilities of NPPF
II. We terminated our total return swap and converted into the
NPPF II structure in response to the volatility and illiquidity
in the market precipitated by the financial crisis. The
conversion was undertaken for the following reasons. First, the
restructuring provided us a one year window to identify better
opportunities to sell the underlying assets in more stable
markets and avoid the need to sell in a volatile market at
depressed prices. Second, NPPF II did not require the posting of
additional collateral due to decreases in the value of the
underlying collateral which eliminated the need to continually
transfer margin between the Company and the counterparty. The
conversion also created additional risk to the Company because
the total amount of collateral NPPF II was required to post was
greater than the total amount of collateral the Company was
required to post in connection with the total return swap. Other
than as described above, the economic positions of the parties
involved in the conversion did not change.
The fair value of the tax exempt securities acquired by NPPF II
was $172.1 million. The cash value contributed paid for the
senior certificates and junior certificates were
$118.1 million and $56.2 million,
F-22
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
respectively, which was used to fund the purchase of the bonds
plus accrued interest purchased and closing costs.
The trust agreement required a mandatory auction of the assets
of the trust in February 2009. The proceeds of the mandatory
auction are required to be used to redeem the senior
certificates. If the bids received by the trustee do not exceed
the face amount of the senior certificates (currently
$65.9 million), the auction fails. Upon a failed auction,
the interest rate payable to the senior certificates increases
to a floating rate based on the rolling
30-day
average of the USD-SIFMA Municipal Swap Index, subject to a
maximum rate which will not exceed the aggregate amount of
income during the distribution period, and the auction is
repeated weekly until successful.
For periods prior to the mandatory auction, the trust agreement
provided for payment of a fixed rate of 2.85% per annum to the
Class A Certificate holder. Also, proceeds from
dispositions of tax exempt securities owned by the trust were
paid to the senior certificate holder as partial paydown of its
principal outstanding (after adjustment for any Disposition
Gains as determined in accordance with the Internal Revenue Code
which were generally distributed 20% to the senior certificate
holder and 80% to the junior certificate holder). Such principal
paydowns served to reduce interest accruing to the senior
certificate in subsequent periods. The remainder of income and
principal receipts were paid to the junior certificate holder.
Generally, if a certificate holder had a deficit balance in its
capital account following the liquidation of its interest in the
trust, such certificate holder had no obligation to make any
payment to any other certificate holder.
As of December 31, 2008 the fair value of the tax exempt
bonds owned by NPPF II was less than the fair value of the
principal of the senior certificates and the Company valued the
junior certificates at $0. Although the tax exempt bonds owned
by NPPF II continued to provide scheduled cash flows, the
Company did not value the junior certificates using the Cash
Flow Based Valuation method because of the imminent mandatory
auction date.
Due to the general weak conditions in the market for tax exempt
securities leading up to the date of the mandatory auction, on
February 27, 2009, the Company and the holder of the senior
certificates of NPPF II agreed to extend the mandatory auction
of the trusts assets until February 2011 and to modify the
terms of the trust agreement as follows:
|
|
|
|
|
The Company agreed to contribute $8 million of capital to
the trust which was used to pay down the principal balance of
the senior certificates. The Company recorded this payment as
additional investment in the junior certificates and no
additional junior certificates were issued.
|
|
|
|
The Class A Certificate Rate (Priority Income Distribution)
was increased from 2.85% to 3.00% fixed for the remaining period
until auction. In addition, a significant portion of the excess
income proceeds was allocated to reduce the outstanding
principal balance of the senior certificates, leaving
approximately 13.35% of income proceeds for distribution to the
junior certificate holder.
|
|
|
|
Distribution of the proceeds from dispositions of tax exempt
securities are allocated to the senior and junior certificate
holders either 80% and 20%, respectively, or 100% and 0%,
respectively, based on the reasons for the disposition and
whether the senior certificate holder gives prior consent to
unscheduled dispositions. Any Disposition Gain continues to be
determined in accordance with the Internal Revenue Code and to
generally be distributed 20% to the senior certificate holder
and 80% to the junior certificate holder.
|
|
|
|
The Company can further extend the mandatory auction date until
February 2012, if it contributes an additional $10 million
in collateral into the trust (either in cash or securities
reasonably acceptable to the senior certificate holder).
|
F-23
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
|
|
|
|
|
Although the lack of obligation to restore a deficit balance as
described above, is unchanged, the Company agreed to undertake
contributing additional value under a deficit restoration
requirement, to the trust at the time of liquidation of the
trust to the extent that asset values are insufficient to fully
redeem the senior certificates.
|
|
|
|
The deficit restoration requirement is supported by the deposit
of $19.8 million par value of bonds currently held by the
Company into a collateral account for the benefit of the trust.
The Company receives the periodic income payments from these
bonds and the proceeds of any maturities or sales are paid to
the holder of the senior certificates as a reduction of par.
This represents all of the Companys bonds that are not
held in trusts.
|
|
|
|
The senior certificate holder has agreed that the Companys
obligation to contribute to the deficit restoration can be
satisfied at the Companys option at any time if the
Company contributes an additional $7 million in cash
collateral to the trust, at which point the $19.8 million
of bonds would be released.
|
There are no other contractual obligations related to NPPF II
and no unrecorded liabilities in connection with NPPF II. The
senior certificates are recourse only to the assets of the trust
and the Companys bonds that are not held in trusts as
described above. If the assets of the trust became worthless or
the trust otherwise could not redeem the senior certificates,
the net loss to the Company would be the net carrying value of
the junior certificates of the trust, plus the net carrying
value of direct investments in bonds included in the
consolidated statements of assets and liabilities and any
accrued and unpaid interest receivable on the Companys
investment in NPPF II and the direct investments in bonds. As of
December 31, 2009, the junior certificates are recorded at
a fair value of $40.7 million. The accrued Net Carry
related to the junior certificates is included in receivables
and is recorded at a carrying value of $2.8 million.
During 2009, $50.2 million of par value of tax exempt
securities was redeemed or paid down at or below face value. Of
this amount, $1.2 million was disposed of at face value in
connection with scheduled paydowns and $45.7 million was
disposed of in connection with refinancing of the bond by the
issuer or by sale from the trust at or below face value.
During 2009, the senior certificates were paid down by
$50.2 million which includes the $8 million
contributed by the junior certificate holder, $4.7 million
from the payment of Priority Income Distributions, and
$37.5 million from the proceeds of dispositions of tax
exempt securities.
|
|
(10)
|
Merrill
Lynch Trusts
|
During 2007, the Company had invested in several TOBs sponsored
by Merrill Lynch Capital Services as liquidity provider and
remarketing agent (Merrill). During 2007, the
Company was in negotiations with respect to a shortfall
agreement as well as other agreements with Merrill. The terms of
the shortfall agreement were never agreed upon and no shortfall
agreement was executed. In the absence of a shortfall agreement,
the Company did not believe that it was obligated to reimburse
Merrill for any losses incurred by Merrill in its role as
liquidity provider and remarketing agent. The Company had
initially invested $38,228 for its investment in the TOB
Residual Certificates. Subsequent to the Companys
investment in the TOBs, the fair value of the underlying bonds
had declined below the value of the Senior Certificates of the
TOBs. Accordingly, the Company carried its investment at zero in
its consolidated financial statements as of December 31,
2007 and through the date of the termination of the TOB trusts
described below.
On March 13, 2008, Merrill issued a margin call to the
Company to collateralize the difference between the value of the
underlying bonds and the Senior Certificates of the TOBs. The
Company notified Merrill of the Companys position that it
had no obligation to post margin or to reimburse Merrill for the
decline in
F-24
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
value of the underlying bonds. On March 14, 2008, Merrill
served on the Company a Summons with Notice seeking
$18.0 million in damages presumably related to the dispute.
On May 8, 2008, the Company reached a settlement with
Merrill relating to the dispute. Merrill agreed to withdraw its
claims without any damages paid. Concurrent with the settlement,
four newly created trusts (the Merrill Lynch Trusts)
acquired the four bonds previously financed as part of the TOB
program. As part of the settlement, the Company agreed to
purchase the junior certificates and Merrill purchased the
senior certificates of the trusts. The Company paid
approximately $20.5 million in aggregate for all the junior
certificates and Merrill paid $79.6 million for the senior
certificates for a total purchase price of $100.1 million.
The total par value of the four bonds was $100.9 million.
The total fair value of the bonds at the time was approximately
$81 million and the fair value of the junior certificates
was $1.4 million. The junior certificates had been carried
at fair value and were included as a component of investments in
the consolidated statements of assets and liabilities as of
December 31, 2008. The fair value of the junior
certificates was a cash flow based valuation because the asset
based valuation yielded a result of zero but the residual
interest was still generating cash flow.
The junior certificates received the residual income comprised
of: the income from the bonds, less the interest on the senior
certificates, and less any expenses of the trusts. On
October 9, 2009, the Company sold the junior certificates
to Merrill for approximately $2,032,000. At the time of the
sale, the bonds underlying the four trusts were valued at
$77.8 million, which was less the par amount of the senior
certificates of $79.2 million. The junior certificates at
the time were valued at $204,740 based on the estimated future
cash flow from the trusts through the final distribution dates.
The Company realized a loss of $18.5 million which was
recorded upon the sale and is included as a component of net
realized loss investments in the consolidated
statements of operations. Although the Company recorded a net
realized loss, the sale resulted in a net increase to the net
asset value of the Company of junior certificates at the time of
the sale.
As of December 31, 2008 the fair value of the tax exempt
bonds owned by the Merrill Lynch Trusts (defined below) was less
than the fair value of the principal of the senior certificates
and under the asset based valuation methodology the junior
certificates were valued at $0. However, the tax exempt bonds
owned by the Merrill Lynch Trusts continued to provide scheduled
cash flows and the trusts had maturity dates ranging through
2011 and 2012, so the Company valued the junior certificates
using the cash flow based valuation methodology. Under this
methodology, the net future cash flows to the junior
certificates were determined based on the current rates of the
underlying investment assets and offset by the current rates on
the senior certificates, less any recurring trust expenses.
These net future cash flows were discounted by applying the
average discount rate applied to par as determined by the
independent pricing services in measuring the fair market value
of the assets.
The Company is organized as a limited liability company and is
taxed as a partnership. The Company currently has the following
classes of membership interests:
Membership
Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
Description
|
|
Authorized
|
|
2009
|
|
2008
|
|
Unrestricted common shares
|
|
|
Unlimited
|
|
|
|
37,394,169
|
|
|
|
17,265,100
|
|
Restricted common shares
|
|
|
60,000
|
|
|
|
22,500
|
|
|
|
15,000
|
|
LTIP shares
|
|
|
690,000
|
|
|
|
|
|
|
|
566,915
|
|
F-25
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
The combined total of restricted common shares and LTIP shares
authorized is currently fixed at 750,000. Accordingly, the
Company may issue more restricted common shares than listed
above as authorized as long as the combined total is less than
or equal to 750,000.
A. Unrestricted Common Shares. The
unrestricted common shares are each entitled to one vote per
share and participate pro rata in quarterly distributions. In
general, except for extraordinary corporate transactions,
certain amendments to the operating agreement, liquidation, and
the election and removal of directors, all matters voted on by
the shareholders require a simple majority of votes cast. In the
case of election of directors, a plurality of votes cast in
person or by proxy is required. In the case of extraordinary
corporate transactions, liquidation and removal of directors for
cause, a majority of all votes entitled to be cast is required.
The Company completed a Rights Offering for 18,116,964 new
common shares on June 26, 2009. One subscription right was
issued for the purchase of one common share at a price of $1.20
per share to holders of common shares and LTIP shares. Tiptree
purchased 14,901,307 shares and the Manager purchased
810,798 shares in the Rights Offering. The Company raised
$21.6 million after the expenses of the offering.
B. Restricted Common Shares. The
restricted common shares are identical to normal common shares
except that they are subject to vesting. To date, all restricted
common shares have been issued to directors of the Company.
C. LTIP Shares. As of July 23, 2009,
the LTIP shares have achieved parity with the common shares and
became eligible for conversion to common shares. As of
December 31, 2009, all outstanding LTIP shares were
converted to common shares.
The Company completed a voluntary exchange of LTIP shares on
June 26, 2009 whereby existing LTIP shares with a
performance target of $10.00 were exchanged for new LTIP shares
with a performance target $1.25. The exchange ratio was
one-for-two,
such that one new LTIP share was issued for every two existing
LTIP shares tendered. 566,915 existing LTIP shares were tendered
and 283,458 new LTIP shares were issued. There were no changes
to capital balances as a result of the LTIP Exchange.
D. Preferred Shares. The Companys
board of directors is authorized to issue an unlimited amount of
one or more classes or series of preferred shares without
further action or approval from the common shareholders. The
board of directors is authorized to fix the number of shares,
relative powers, preference and rights, and the qualifications,
limitations or restrictions applicable to each class or series
by resolution.
The Company has granted the Manager one performance share. The
performance share is entitled to a special allocation of profits
as described in note 3. The performance share is generally
not entitled to vote.
F-26
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
As a limited liability company, the shareholder interests noted
above are generally limited in their liability to the extent of
each shareholders investment in the Company. The Company
has no stated date of dissolution. The following table shows the
Companys share activity for the periods presented:
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Nonvested
|
|
|
December 31,
|
|
Membership Interests
|
|
2007
|
|
|
Vested
|
|
|
Shares
|
|
|
2008
|
|
|
Unrestricted common shares
|
|
|
17,250,100
|
|
|
|
15,000
|
|
|
|
|
|
|
|
17,265,100
|
|
Restricted common shares
|
|
|
30,000
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
15,000
|
|
LTIP shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
22,000
|
|
|
|
298,331
|
|
|
|
|
|
|
|
320,331
|
|
Nonvested
|
|
|
615,000
|
|
|
|
(298,331
|
)
|
|
|
(70,085
|
)
|
|
|
246,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
637,000
|
|
|
|
|
|
|
|
(70,085
|
)
|
|
|
566,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,917,100
|
|
|
|
|
|
|
|
(70,085
|
)
|
|
|
17,847,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rollforward
of Components of Members Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Compensation
|
|
|
Distributions
|
|
|
Earnings
|
|
|
2008
|
|
|
Unrestricted common shares
|
|
$
|
158,969,367
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
158,969,367
|
|
Restricted common shares
|
|
|
50,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
LTIP shares
|
|
|
892,232
|
|
|
|
776,422
|
|
|
|
|
|
|
|
|
|
|
|
1,668,654
|
|
Earnings/(deficit)
|
|
|
(18,139,050
|
)
|
|
|
|
|
|
|
|
|
|
|
(107,678,426
|
)
|
|
|
(125,817,476
|
)
|
Distributions
|
|
|
(1,433,368
|
)
|
|
|
|
|
|
|
(4,299,624
|
)
|
|
|
|
|
|
|
(5,732,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
140,339,181
|
|
|
$
|
876,422
|
|
|
$
|
(4,299,624
|
)
|
|
$
|
(107,678,426
|
)
|
|
$
|
29,237,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lieu of
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
|
|
|
Issuance as
|
|
|
Incentive
|
|
|
|
|
|
LTIP Shares
|
|
|
|
|
|
|
December 31,
|
|
|
Rights
|
|
|
Shares
|
|
|
Share-Based
|
|
|
Shares
|
|
|
LTIP
|
|
|
to Common
|
|
|
December 31
|
|
Membership Interests
|
|
2008
|
|
|
Offering
|
|
|
Allocation
|
|
|
Compensation
|
|
|
Vested
|
|
|
Exchange
|
|
|
Shares
|
|
|
2009
|
|
|
Unrestricted common shares
|
|
|
17,265,100
|
|
|
|
18,116,964
|
|
|
|
1,713,647
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
283,458
|
|
|
|
37,394,169
|
|
Restricted common shares
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
22,500
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
22,500
|
|
LTIP shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
320,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,584
|
|
|
|
(283,457
|
)
|
|
|
(283,458
|
)
|
|
|
|
|
Nonvested
|
|
|
246,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(283,457
|
)
|
|
|
(283,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,847,015
|
|
|
|
18,116,964
|
|
|
|
1,713,647
|
|
|
|
22,500
|
|
|
|
|
|
|
|
(283,457
|
)
|
|
|
|
|
|
|
37,416,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
Roll
forward of Components of Members Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lieu of
|
|
|
|
|
|
|
|
|
Conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
|
|
|
Performance
|
|
|
Noncash
|
|
|
Incentive
|
|
|
LTIP Shares
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Rights
|
|
|
Shares
|
|
|
Shares
|
|
|
Incentive
|
|
|
Share
|
|
|
to Common
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
Offering
|
|
|
Allocation
|
|
|
Allocation
|
|
|
Compensation
|
|
|
Vested
|
|
|
Shares
|
|
|
Earnings
|
|
|
2009
|
|
|
Unrestricted common shares
|
|
$
|
158,969,367
|
|
|
$
|
21,567,352
|
|
|
$
|
|
|
|
$
|
3,837,448
|
|
|
$
|
|
|
|
$
|
300,000
|
|
|
$
|
1,982,245
|
|
|
$
|
|
|
|
$
|
186,656,412
|
|
Restricted common shares
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,375
|
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
|
|
|
|
8,375
|
|
LTIP shares
|
|
|
1,668,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,591
|
|
|
|
|
|
|
|
(1,982,245
|
)
|
|
|
|
|
|
|
|
|
Earnings/(deficit) before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Share Allocation
|
|
|
(125,817,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,021,238
|
|
|
|
(84,796,238
|
)
|
Performance Share Allocation
|
|
|
|
|
|
|
|
|
|
|
(5,920,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,920,448
|
)
|
Distributions
|
|
|
(5,732,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,732,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,237,553
|
|
|
$
|
21,567,352
|
|
|
$
|
(5,920,448
|
)
|
|
$
|
3,837,448
|
|
|
$
|
471,966
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
41,021,238
|
|
|
$
|
90,215,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
|
Net
Increase (Decrease) in Net Assets from Operations Per
Share
|
The Company calculates basic net increase (decrease) in net
assets from operations per share by dividing net increase
(decrease) in net assets from operations for the period by the
weighted average shares of its common shares outstanding for the
period, which includes common shares outstanding, as well as
vested restricted common shares and vested LTIP shares that have
achieved parity. Diluted net increase (decrease) in net assets
from operations per share takes into account the effect of
unvested restricted common shares and unvested LTIP shares and
vested LTIP shares that have not achieved parity unless they are
anti-dilutive.
For the year ended December 31, 2008, the basic and diluted
weighted average shares outstanding have been revised for the
impact of June 2009 rights offering.
For the year ended December 31, 2008, the Company
determined that the unvested restricted common shares and
unvested LTIP shares and the vested LTIP shares that have not
achieved parity are anti-dilutive. Therefore, the weighted
average shares outstanding on a fully diluted basis are the same
as the weighted average shares outstanding used for basic net
increase (decrease) in net assets from operations per share.
As of December 31, 2009, 22,500 restricted shares had not
vested and all LTIP shares had been converted to common shares.
As of December 31, 2008, 15,000 restricted shares and
246,584 LTIP shares had not vested. Both basic and fully diluted
shares outstanding include the unrestricted common shares
outstanding during the years ended December 31, 2009 and
December 31, 2008. Fully diluted shares outstanding also
includes the dilutive effect of unvested restricted common
shares, vested LTIP shares that have not achieved parity and
unconverted LTIP shares.
The Company does not include the performance share issued to the
Manager (see note 10) in either the fully diluted net
increase (decrease) in net assets from operations per share or
basic net increase (decrease) in net assets from operations per
share calculation as it does not participate in the net profits
or distributions of the Company. See note 3 for a
description of Performance Share Allocation recorded for the
year ended December 31, 2009.
|
|
(13)
|
Share
Based Compensation
|
In June 2007, the Company issued 30,000 restricted common shares
to its directors. The Company valued the restricted common
shares at $10 per share, the offering price of unrestricted
common shares on June 12, 2007. The value of the restricted
common shares issued is being amortized to noncash incentive
compensation over the vesting period of the underlying grants,
net of assumed forfeitures. The vesting period is three years
and the amortization is calculated on a straight line basis.
F-28
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
In June 2007, August 2007 and November 2007, the Company issued
637,000 LTIP shares to nonemployees of the Company in exchange
for services to be provided. ASC Topic 718 establishes criteria
for determining the measurement date for equity-based
compensation awarded to nonemployees. Although only certain
aspects of the accounting for equity-based payment transactions
with nonemployees are explicitly addressed by ASC Topic 718, the
Securities and Exchange Commission (SEC) staff in Staff
Accounting Bulletin (SAB) 107 instructs entities to use by
analogy the guidance in ASC Topic 718 as it applies to employees
for equity-based compensation awarded to nonemployees. In
accordance with ASC Topic 505, MFCA has determined that the
measurement date for the LTIP shares awarded to nonemployees
occurs when the LTIP shares vest. The fair values of the LTIP
shares, which is based on the most recently available net asset
value, are being amortized to share based compensation over the
vesting period of the underlying grants net of assumed
forfeitures. In addition, the Company records an adjustment at
the end of each reporting period to account for changes in fair
value of the Companys common shares until the LTIP shares
are vested.
The LTIP shares were issued as follows:
a. 345,000 LTIP shares were issued on June 26, 2007
with an average price of $3.70 over the vesting period ending on
June 30, 2010.
b. 267,000 LTIP shares were issued on August 9, 2007
with an average price of $3.39 over the vesting period ending on
June 30, 2010.
c. 25,000 LTIP shares were issued on November 15, 2007
with an average price of $2.10 over the vesting period ending on
September 30, 2010.
For the year ended December 31, 2008, 15,000 restricted
common shares and 298,331 LTIP shares became vested. As of
December 31, 2008, 15,000 restricted shares and 246,584
LTIP shares were unvested.
Based on the December 31, 2008 ending net asset value per
share, the remaining share based compensation expense to be
recognized over the remaining vesting period is $392,079 for
LTIP shares and $150,000 for restricted shares.
On February 5, 2009, in connection with the acquisition of
a controlling interest of the Company by Tiptree the remaining
unvested restricted shares and LTIP shares became vested and the
Company recorded $419,083 of compensation expense.
In April 2009 and July 2009, the Company issued 22,500
restricted common shares to its directors. The Company valued
the restricted common shares at the most recent ending net asset
value per share. The value of the restricted common shares
issued is being amortized to noncash incentive compensation over
the vesting period of the underlying grants, net of assumed
forfeitures. The vesting period is three years and the
amortization is calculated on a straight line basis.
The restricted common shares were issued as follows:
a. 7,500 restricted shares were issued on April 14,
2009 at a value of $2.17 per share and vest over a three year
period.
b. 15,000 restricted shares were issued on July 23,
2009 at a value of $2.05 per share and vest over a three year
period.
In June 2009, the Company offered to exchange existing LTIP
shares (old LTIPs) for new LTIP shares (new LTIPs) at a rate of
one-for-two.
Under the terms of the LTIP shares, the Company will revalue its
assets upon the occurrence of certain specified events, and any
increase in valuation from the time of grant until such event
will be allocated first to the holders of the LTIP shares to
equalize the capital accounts of each LTIP share with the
capital account of a common share of the Company. Upon
equalization of the capital accounts,
F-29
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
the LTIP shares will achieve full parity with the common shares
for all purposes, including with respect to subsequent
allocations and distributions, including, to the extent vested,
liquidating distributions. If such parity is reached, (obtaining
a performance target) vested LTIP shares may be converted into
an equal number of common shares, and the holders may thereafter
enjoy all the rights of shareholders of the Company. Under the
old LTIPs the performance target was $10.00 per share. Under the
new LTIPs the performance target was $1.25 per share.
All holders of outstanding LTIP shares elected to convert to new
LTIPs. The Company did not record any compensation expense in
connection with the LTIP exchange.
At a meeting of the Board of Directors of the Company held on
July 23, 2009, the directors approved the issuance of
common shares in partial payment of a performance share
allocation to Tricadia Municipal Management, LLC, the
Companys Manager. These shares were valued at $2.01 per
share, which was higher than the new LTIP shares
performance target of $1.25 per share. This was a
book-up
event and vested LTIP shares became eligible for
conversion to common shares of the Company. All LTIP shares were
converted to common shares as of December 31, 2009. The
company did not record any compensation expense in connection
with the conversions of LTIP shares to common shares.
|
|
(14)
|
Commitments
and Contingencies
|
In the normal course of business, the Company enters into
contracts that contain a variety of indemnifications. The
Companys maximum exposure under these arrangements is
unknown. However, the Company does not expect claims or losses
pursuant to these contracts and expects the risk of loss to be
remote. Thus no amounts have been accrued related to such
indemnifications.
The initial term of the Companys management contract with
the Manager expires on December 31, 2010 and automatically
renews for a one year term at each anniversary thereafter. The
contract may only be terminated after giving 180 days
notice, if at least two-thirds of the Companys independent
directors or the holders of at least a majority of the
outstanding common shares vote not to automatically renew.
If the Company were to terminate the management contract without
cause, it would be required to pay a termination fee to the
Manager equal to three times the average annual base management
fee for the two 12 month periods preceding the date of
termination (annualized for any partial year period). In
addition, the Company would need to redeem the performance share
at an amount equal to three times the average performance share
payments for the preceding two 12 month periods.
The contract can be terminated with cause without paying the
termination fees described above. Cause is narrowly defined and
does not include unsatisfactory performance, even if that
performance is materially detrimental to the Companys
business.
|
|
(c)
|
Registration
Rights Agreement
|
The Company entered into a registration rights agreement with
the Former Manager whereby there would be a reduction in the
level of management fees that the Company would pay the Manager
if the Company failed to timely file a registration statement.
The Company did not file a resale shelf registration statement
by March 31, 2008. Accordingly, the base management fee
payable to the Manager was reduced beginning on April 1,
2008 as described above through
F-30
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
June 28, 2008, and subsequently resumed to the original
level of 1.50% from June 28, 2008 to December 31, 2008.
As described in note 9, the NPPF II trust was originally
scheduled to auction its assets in February 2009. The Company
has executed a term sheet to extend the auction until February
2011 with an option to extend to February 2012.
In the ordinary course of business, the Company manages a
variety of risks including market risk and credit risk. The
Company identifies, measures, and monitors risk through various
control mechanisms including diversifying exposures and
activities across a variety of instruments, markets, and
counterparties.
Market risk is the risk of potential adverse changes in the
value of financial instruments and their derivatives because of
changes in market conditions, such as interest rate movements
and volatility in security prices. The Company manages market
risk through the use of risk management strategies and various
analytical monitoring techniques that evaluate the effect of
cash instruments and derivative contracts.
Credit risk is the risk the counterparties may fail to fulfill
their obligations or that the collateral value becomes
inadequate. The Company attempts to minimize its counterparty
risk exposure by monitoring the size of its credit exposure to
and the creditworthiness of its counterparties.
|
|
(16)
|
Concentrations
of Credit Risk
|
Cash and Cash Equivalents. As of
December 31, 2009, the Company held substantially all of
its cash and cash equivalents with U.S. Bank. If
U.S. Bank failed under its obligation as custodian of these
funds, the Company could lose a portion or all of its
unrestricted cash balances with U.S. Bank.
The cash distributions were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Common shareholders
|
|
$
|
|
|
|
$
|
4,140,824
|
|
Restricted common shareholders
|
|
|
|
|
|
|
6,400
|
|
Holders of LTIP shares
|
|
|
|
|
|
|
152,400
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
4,299,624
|
|
|
|
|
|
|
|
|
|
|
F-31
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31,
2009 and 2008
|
|
(18)
|
Financial
Highlights
|
In accordance with the Audit Guide, the per share information
and ratios to average net assets are presented below for each
period:
Per Share
Operating Performance
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning net asset value
|
|
$
|
1.64
|
|
|
$
|
7.83
|
|
Net investment income
|
|
|
0.15
|
|
|
|
0.28
|
|
Net realized losses
|
|
|
(0.51
|
)
|
|
|
(2.18
|
)
|
Net unrealized gains (losses)
|
|
|
1.46
|
|
|
|
(4.14
|
)
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
1.10
|
|
|
|
(6.04
|
)
|
Issuance of rights offering, net
|
|
|
1.19
|
|
|
|
|
|
Other share transactions
|
|
|
0.12
|
|
|
|
0.09
|
|
Dilutive effect of rights offering and other
|
|
|
(1.48
|
)
|
|
|
|
|
Distributions to shareholders
|
|
|
|
|
|
|
(0.24
|
)
|
Performance share allocations
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending net asset value per share outstanding
|
|
$
|
2.41
|
|
|
$
|
1.64
|
|
|
|
|
|
|
|
|
|
|
The per share amounts above are calculated based on the
Companys shares outstanding as well as its unvested
restricted stock and its vested and unvested LTIP shares. The
LTIP shares are included because they are eligible to receive
distributions and the performance share is excluded.
Ratios to
Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Management fee
|
|
|
1.53
|
%
|
|
|
1.31
|
%
|
Other expenses
|
|
|
2.67
|
|
|
|
3.14
|
|
Noncash incentive compensation
|
|
|
0.75
|
|
|
|
0.90
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
4.95
|
%
|
|
|
5.35
|
%
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
8.71
|
%
|
|
|
5.14
|
%
|
Total return
|
|
|
20.84
|
%
|
|
|
(79.77
|
)%
|
The above ratios for the years ended December 31, 2009 and
2008 are calculated by dividing income or expenses as applicable
by the monthly average of net assets ($63.0 million and
$97.5 million, respectively).
Total return is calculated by dividing the quarterly net
increase (decrease) in net assets from operations by beginning
net assets for the period on a compounded basis.
The per share information, ratios and total return above are
calculated based on the shareholder group taken as a whole. An
individual shareholders results may vary from those shown
above due to the timing of capital transactions.
F-32
MUNI
FUNDING COMPANY OF AMERICA, LLC
AUDITED
FINANCIAL STATEMENTS
December 31,
2007
F-33
MUNI
FUNDING COMPANY OF AMERICA, LLC
CONSOLIDATED
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 2007
|
|
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
128,116,802
|
|
Restricted cash
|
|
|
29,000,000
|
|
Interest receivable
|
|
|
1,350,146
|
|
Other assets
|
|
|
83,750
|
|
|
|
|
|
|
Total assets
|
|
|
158,550,698
|
|
|
|
|
|
|
|
LIABILITIES
|
Unrealized loss on total return swap
|
|
|
17,378,922
|
|
Unrealized loss on basis swaps
|
|
|
417,915
|
|
Due to the Manager (related party)
|
|
|
179,850
|
|
Accrued expenses and other liabilities
|
|
|
234,830
|
|
|
|
|
|
|
Total liabilities
|
|
|
18,211,517
|
|
|
|
|
|
|
Net Assets
|
|
$
|
140,339,181
|
|
|
|
|
|
|
Net asset value per share (17,917,100 shares outstanding)
|
|
$
|
7.83
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-34
MUNI
FUNDING COMPANY OF AMERICA, LLC
As of
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Range of
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Expiration
|
|
of Net
|
|
|
Notional of
|
|
|
|
|
|
|
|
Derivatives
|
|
Contracts
|
|
|
Dates
|
|
Assets
|
|
|
Underlying
|
|
|
Cost
|
|
|
Fair Value
|
|
|
TOB (Residual Certificates)
|
|
|
3
|
|
|
Sep 2017 - Dec 2033
|
|
|
0.0
|
%
|
|
$
|
100,900,000
|
|
|
$
|
38,228
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
25
|
|
|
May 2008
|
|
|
(5.7
|
)%
|
|
|
181,850,000
|
|
|
|
|
|
|
|
(7,999,404
|
)
|
Interest rate swaps
|
|
|
23
|
|
|
May 2008
|
|
|
(6.7
|
)%
|
|
|
177,850,000
|
|
|
|
|
|
|
|
(9,379,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359,700,000
|
|
|
|
|
|
|
|
(17,378,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis swaps
|
|
|
2
|
|
|
Nov 2019 and Nov 2032
|
|
|
(0.3
|
)%
|
|
|
87,750,000
|
|
|
|
|
|
|
|
(417,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
548,350,000
|
|
|
$
|
38,228
|
|
|
$
|
(17,796,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-35
MUNI
FUNDING COMPANY OF AMERICA, LLC
For
the Period from June 12, 2007 (inception) to
December 31, 2007
|
|
|
|
|
Revenue
|
|
|
|
|
Investment income TOB
|
|
$
|
142,391
|
|
Investment income total return swap
|
|
|
1,150,382
|
|
Interest income
|
|
|
3,794,680
|
|
|
|
|
|
|
Total revenue
|
|
|
5,087,453
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Management fee (related party)
|
|
|
1,111,993
|
|
Professional fees
|
|
|
374,727
|
|
Insurance
|
|
|
96,250
|
|
Directors compensation
|
|
|
65,627
|
|
Shareholder reporting and transfer agent
|
|
|
17,781
|
|
Other general and administrative
|
|
|
72,479
|
|
Non cash incentive compensation (related party)
|
|
|
942,232
|
|
|
|
|
|
|
Total expenses
|
|
|
2,681,089
|
|
|
|
|
|
|
Net investment income
|
|
|
2,406,364
|
|
|
|
|
|
|
Realized and unrealized gains and (losses) from
investments
|
|
|
|
|
Net realized losses on investments
|
|
|
(2,710,351
|
)
|
Net unrealized losses on investments
|
|
|
(17,835,065
|
)
|
|
|
|
|
|
Net realized and unrealized losses from investments
|
|
|
(20,545,416
|
)
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(18,139,052
|
)
|
|
|
|
|
|
Basic and diluted net decrease in net assets from operations per
share(1)
|
|
$
|
(0.74
|
)
|
Weighted average common shares outstanding basic and
diluted(1)
|
|
|
24,451,929
|
|
Distributions declared per share
|
|
$
|
0.08
|
|
|
|
|
(1) |
|
Revised to reflect impact of June 2009 rights offering; see note
7. |
See accompanying notes to consolidated financial statements
F-36
MUNI
FUNDING COMPANY OF AMERICA, LLC
For the
Period from June 12, 2007 (inception) to December 31,
2007
|
|
|
|
|
Decrease in net assets resulting from operations
|
|
|
|
|
Net investment income
|
|
$
|
2,406,364
|
|
Net realized losses on investments
|
|
|
(2,710,351
|
)
|
Net unrealized losses on investments
|
|
|
(17,835,065
|
)
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
|
(18,139,052
|
)
|
|
|
|
|
|
Distributions to common shareholders
|
|
|
(1,382,408
|
)
|
Distributions to LTIP shareholders
|
|
|
(50,958
|
)
|
|
|
|
|
|
Total decrease in net assets resulting from distributions to
shareholders
|
|
|
(1,433,366
|
)
|
|
|
|
|
|
Increase in net assets from share transactions
|
|
|
|
|
Increase in net assets from issuance of common shares, net
|
|
|
158,969,367
|
|
Increase in net assets from issuance of incentive compensation
|
|
|
942,232
|
|
|
|
|
|
|
Total increase in net assets from share transactions
|
|
|
159,911,599
|
|
|
|
|
|
|
Net increase in net assets
|
|
|
140,339,181
|
|
Net assets, beginning of period
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
140,339,181
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-37
MUNI
FUNDING COMPANY OF AMERICA, LLC
For the
Period from June 12, 2007 (inception) to December 31,
2007
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(18,139,052
|
)
|
Adjustments to reconcile net decrease in net assets resulting
from operations to net cash flows used in operating activities
|
|
|
|
|
Unrealized loss on total return swap
|
|
|
17,378,922
|
|
Investment in TOB Residual Certificates
|
|
|
(38,228
|
)
|
Unrealized loss on TOB Residual Certificates
|
|
|
38,228
|
|
Unrealized loss on basis swaps
|
|
|
417,915
|
|
Non cash incentive compensation (related party)
|
|
|
942,232
|
|
Change in operating assets and liabilities:
|
|
|
|
|
(Increase) decrease in receivables
|
|
|
(1,350,146
|
)
|
(Increase) decrease in restricted cash
|
|
|
(29,000,000
|
)
|
(Increase) decrease in other assets
|
|
|
(83,750
|
)
|
Increase (decrease) due to the Manager
|
|
|
179,850
|
|
Increase (decrease) in accrued expense and other liabilities
|
|
|
234,830
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(29,419,199
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from issuance of common shares, (net of costs of
$13,531,633)
|
|
|
158,969,367
|
|
Distributions to common shareholders
|
|
|
(1,382,408
|
)
|
Distributions to LTIP shareholders
|
|
|
(50,958
|
)
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
157,536,001
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
128,116,802
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
128,116,802
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-38
MUNI
FUNDING COMPANY OF AMERICA, LLC
December 31,
2007
NOTE 1
ORGANIZATION AND NATURE OF OPERATIONS
Municipal Funding Company of America, LLC (the
Company), was organized as a Delaware Limited
Liability Company on April 27, 2007. The Company began
operations on June 12, 2007 upon the completion of an
offering of common shares of limited liability interests
(Common Shares) in a private offering to qualified
institutional buyers in accordance with Rule 144A under the
Securities Act of 1933.
The Company is a specialty finance holding company that is
externally managed and advised by Cohen Municipal Capital
Management, LLC, a subsidiary of Cohen Brothers, LLC
(Cohen and Company). The Company invests directly or
indirectly in U.S. federally tax-exempt bonds with the
objective of generating attractive risk-adjusted returns and
predictable cash distributions. The Company seeks to achieve
this objective by (1) acquiring interests in structured
credit vehicles which own debt obligations, the interest on
which is exempt from U.S. federal income taxation;
(2) investing in total return swaps and other derivative
arrangements relating to tax exempt bonds; and (3) making
direct investments in Tax Exempt Bonds. The Company may also
invest in securities that are subject to federal income tax.
The Company has selected December 31 as its fiscal year-end. The
Company has no stated date of dissolution.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been
prepared by management in accordance with accounting principles
generally accepted in the United States of America (US
GAAP).
Although the Company conducts its operations so that the Company
is not required to register as an investment company under the
Investment Company Act, for financial reporting purposes we are
an investment company and follow the AICPA Audit and Accounting
Guide for Investment Companies (the Audit Guide).
Accordingly, investments in securities are carried at fair value
with changes in fair value reflected in the consolidated
statement of operations.
The preparation of financial statements in conformity with US
GAAP requires management to make assumptions and estimates that
affect the reported amounts in the consolidated financial
statements and the accompanying notes. Actual results could
differ from those estimates.
|
|
B.
|
Principles
of Consolidation
|
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary MFCA
Funding, Inc. (Funding, Inc.). All intercompany
transactions have been eliminated.
On December 24, 2003, the Financial Accounting Standards
Board (FASB) issued Interpretation No. 46 (Revised
December 2003), Consolidation of Variable Interest Entities
(FIN 46R), to clarify the application of
Accounting Research Bulletin (ARB) No. 51,
Consolidated Financial Statements (ARB 51),
as amended by FASB Statement No. 94, Consolidation of
All Majority-Owned Subsidiaries (SFAS 94).
However, the effective date of FIN 46R was deferred for
investment companies (including non-registered investment
companies) that are accounting for investments in accordance
with the Audit Guide.
On May 11, 2007, the FASB issued FASB Staff Position
FIN 46R-(7)
Application of FASB Interpretation No. 46I to
Investment Companies
(FIN 46R-7).
FIN 46R-7
clarifies that those entities which account for themselves as
investment companies under the Audit Guide are not subject to
the consolidation requirements of FIN 46R.
F-39
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
The Company reviews each investment that it makes under a
control based framework in accordance with ARB 51 and
SFAS 94. If the Company determines it controls the investee
and the investee itself meets the definition of an investment
company under the Audit Guide, the Company consolidates the
investee. Otherwise, the Company will report its equity
investment at fair value as required by the Audit Guide.
|
|
C.
|
Fair
Value of Financial Instruments
|
The fair values of the Companys assets and liabilities
which qualify as financial instruments under Statement of
Financial Accounting Standard No. 107, Disclosures about
Fair Value of Financial Instruments
(SFAS 107) approximate the carrying amounts
presented in the consolidated statement of assets and
liabilities.
|
|
D.
|
Recent
Accounting Developments
|
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). This
standard establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and
requires additional disclosures about fair value measurements.
SFAS 157 applies to fair value measurements already
required or permitted by existing standards. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. Management believes the impact of
SFAS 157 will not be material to the Companys
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). This standard provides
companies the option of reporting certain financial instruments
at fair value which were previously carried at cost or not
recognized on the financial statements. This Statement is
effective as of the beginning of an entitys first fiscal
year that begins after November 15, 2007. Management
believes the impact of SFAS 159 will not be material to the
Companys financial statements.
On June 11, 2007, the American Institute of Certified
Public Accountants (AICPA) issued SOP
07-01,
Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent
Companies and Equity Method Investors for Investments in
Investment Companies
(SOP 07-01).
SOP 07-01
also provides guidance for determining whether investment
company accounting applied by a subsidiary or equity method
investee should be retained in the financial statements of the
parent company or an equity method investor.
SOP 07-01
was to be effective for fiscal years beginning after
December 15, 2007 with early adoption encouraged. However
due to various implementation issues that surfaced in practice
since the SOP was issued in 2007, the FASB decided, in February
2008, to issue FASB Staff Position
SOP 07-1-1
which indefinitely defers the effective date of
SOP 07-1.
Based on its review of
SOP 07-01
as issued by the AICPA on June 11, management concluded
that adoption of
SOP 07-01
would not have a material impact to its financial statements.
However, given that modifications may be made prior to final
adoption of
SOP 07-01,
management can not determine the impact to the Companys
financial statements at this time.
|
|
E.
|
Cash
and Cash Equivalents
|
Cash and cash equivalents consist of cash held at banks as well
as short term investments with original maturity of three months
or less as defined in SFAS 95, Statement of Cash
Flows.
F-40
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
Restricted cash represents cash collateral posted with
counterparties. Income earned on restricted cash balances is
included as a component of revenue in the consolidated statement
of operations in the same line item as the income earned on the
underlying security the restricted cash is supporting.
In the ordinary course of business, the Company has entered into
off-balance sheet derivatives. These derivatives involve, to
varying degrees, elements of credit and market risk in excess of
the amount recorded on the consolidated statement of assets and
liabilities.
All derivatives are carried at fair value.
Total Return Swap (TRS). The
Company, through its wholly-owned subsidiary Funding, Inc., has
made an investment in a TRS. Under the terms of the TRS, the
counterparty investment bank and Funding, Inc. will identify
tax-exempt bonds that will serve as the reference portfolio for
the swap. The counterparty is not obligated to, but may,
actually own the bonds in the reference portfolio. The actual
owner of the underlying bonds is able to declare the income
received from the bonds as tax exempt. However, Funding, Inc. is
not the owner of the underlying portfolio of tax-exempt bonds.
That is, Funding, Inc. has a derivative interest in the
underlying reference bonds but is not the owner. Therefore, any
income earned by the TRS will be taxable to Funding, Inc.
Funding, Inc. is required to post cash collateral for the
benefit of the counterparty. The TRS is non-recourse to Funding,
Inc. and Funding, Inc.s total loss, at any one point in
time, is limited to the cash collateral posted at that time.
The total return of the TRS has two components: (1) the
Net Carry which represents the income generated by
the reference bonds less a cost of financing which is agreed
upon between the counterparty and Funding, Inc. and (2) the
change in the underlying fair value of the reference bonds and
related interest rate hedges.
The Company includes the collateral posted for the TRS as
restricted cash in the consolidated statement of assets and
liabilities. The value of the TRS is calculated by the
counterparty by obtaining quoted market prices on the underlying
bonds and interest rate hedges. The Company includes this value
as either unrealized gain or unrealized loss on total return
swap in the consolidated statement of assets and liabilities.
The Net Carry is recognized as a component of investment
income total return swap and the change in the
underlying value of the reference bonds is recognized as an
unrealized gain or loss on investments in the consolidated
statement of operations. Any unrealized gain or loss will be
realized either at termination of the TRS or when a reference
bond is removed from the TRS.
Tender Option Bond Program
(TOB). The Company makes investments
in TOBs. A TOB is a trust that acquires tax exempt bonds in the
secondary market. Each TOB finances this purchase by issuing
senior floating tax exempt securities (Senior
Certificate) and junior residual interest tax exempt
securities (Residual Certificate). The Senior
Certificate holders are entitled to a variable rate of interest
which is reset on a weekly basis by the remarketing agent based
on market conditions. The Residual Certificate holders are
entitled to the residual income (i.e. the income generated by
the underlying bonds less the amount due to the Senior
Certificate holders less fees and expenses incurred by the
trust). In each TOB the Company has invested in to date,
realized gains and losses on the underlying bonds are shared as
follows: If the underlying bonds are sold for a gain, the Senior
Certificate holders are entitled to 5% of the gain and the
Residual Certificate holders are entitled to 95% of the gain. If
the underlying bonds are sold for a loss, 100% of the loss is
borne by the Residual Certificate holder up to its initial
investment.
F-41
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
The Company currently purchases 100% of the Residual Certificate
securities in each TOB in which it invests. The Senior
Certificate holders have the right to put their securities back
to the TOB. The Senior Certificate holders right to put
their securities back to the TOB terminates upon certain events,
including (i) payment default of the underlying bonds;
(ii) bankruptcy of the bond issuers; (iii) if the
rating of the bonds falls below certain levels; (iv) an
event that causes interest of the bonds to be taxable; and
(v) bankruptcy of the guarantor of the bonds.
If the TOB is required to acquire the Senior Certificates and,
if the remarketing agent cannot remarket them, the TOB can draw
on a liquidity facility provided by a third party liquidity
provider. The Company may enter into a shortfall agreement
whereby it agrees to reimburse the third party liquidity
provider for losses suffered under its obligations under the
liquidity facility. Each shortfall agreement is unique and may
provide for full recourse to the Company or limited recourse. To
date, the Company has not entered into a shortfall agreement.
The value of the TOB Residual Certificates is calculated by
obtaining values on the underlying bonds of the TOB. The Company
uses an independent pricing service or quotes from independent
broker dealers to value the underlying bonds. If the bonds have
increased in value as compared to the cost paid by the TOB, the
Company will increase the fair value of the TOB Residual
Certificates by 95% of the increase in the value of the
underlying bonds. If the bonds have decreased in value, the
Company will reduce the fair value of the TOB Residual
Certificate by 100% of the decline in value.
If the Company has not executed a shortfall agreement, the
Company will not reduce the fair value of the TOB Residual
Certificates below zero. However, if the Company has a shortfall
agreement, the Company will reduce the fair value of the TOB
Residual Certificates below zero resulting in a net unrealized
loss on Residual Certificates in the consolidated statement of
assets and liabilities. Any reduction in value of the TOB
Residual Certificates will be limited to the maximum obligation
the Company has agreed to under the shortfall agreement.
The fair value of the TOB Residual Certificates is either
included as net unrealized gain or net unrealized loss on
Residual Certificates in the consolidated statement of assets
and liabilities.
The residual income received under the Residual Certificates is
recorded as a component of investment income TOB.
The change in the value of the TOB Residual Certificates is
included as either unrealized gain or loss on investments in the
consolidated statement of operations. Any unrealized gain or
loss will be realized at termination of the TOB.
Basis Swaps. The Company has entered into two
basis swap arrangements. A basis swap is an interest rate swap
which involves the exchange of two floating rate financial
instruments (that is, a floating-floating interest rate swap
under which the floating rate payments are referenced to
different bases).
In the case of the basis swaps entered into by the Company, no
cash is exchanged at the outset of the contract and no principal
payments are made by either party. A single net payment will be
made by one counterparty at each due date. The payments commence
in February of 2010 and are made quarterly thereafter until
termination. The potential loss for the Company on the basis
swaps is unlimited.
The fair value of the basis swaps is either included in
unrealized gain or unrealized loss on basis swap in the
consolidated statement of assets and liabilities. Fair value is
determined by obtaining quotes from the counterparty. The change
in the unrealized loss is included as a component of net
unrealized losses on investments in the consolidated statement
of operations.
The Company enters into basis swaps in order to hedge interest
rate risk related to bonds held on balance sheet or as part of
the reference portfolio of the TRS.
F-42
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
The Company qualifies as a partnership for U.S. federal
income tax purposes. As a partnership, the Company will not pay
federal income tax and will be treated as a pass through entity.
However, a certain wholly-owned subsidiary of the Company is
organized as a C-corporation for U.S. federal income tax
purposes and will pay federal income tax. Further, the Company
may be subject to certain state and local income taxes.
Deferred tax assets and liabilities are determined using the
asset and liability method in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under this
method, deferred tax assets and liabilities are established for
future tax consequences of temporary differences between the
financial statement carrying amounts of assets and liabilities
and their tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in years in which those temporary differences are
expected to reverse. A valuation allowance is established when
necessary to reduce deferred tax amounts to the amount expected
to be realized.
In accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN
48), the Company evaluates tax positions taken or expected
to be taken in the course of preparing its tax returns to
determine whether the tax positions are more-likely
than-not of being sustained by the applicable tax
authority. The Companys tax benefit or tax expense is
adjusted accordingly for tax positions not deemed to meet the
more-likely-than-not threshold in the current year. The Company
records interest and penalties associated with audits as a
component of income before income taxes. Penalties are recorded
as an operating expense, and interest expense is recorded as
interest expense in the statement of operations. The Company
incurred no interest and penalties for the year ended
December 31, 2007.
|
|
I.
|
Securities
Transactions and Income
|
Purchases and sales of derivatives are recorded on a trade date
basis. During the period between the trade date and settlement
date, any money due to or from the counterparty will be recorded
either as a component of receivables or accrued expenses and
other liabilities in the consolidated statement of assets and
liabilities.
Realized gains and losses are determined using the average cost
method, when partial positions are sold. Interest income and
expenses are recorded on the accrual basis.
|
|
J.
|
Net
increase (decrease) in net assets from operations
|
In accordance with SFAS No. 128, Earnings per Share
(SFAS 128), the Company presents both basic
and diluted net increase (decrease) in net assets from
operations (EPS) in its consolidated financial
statements and footnotes thereto. Basic net increase (decrease)
in net assets from operations (Basic EPS) excludes
dilution and is computed by dividing net income or loss
allocable to common shareholders by the weighted average number
of common shares, including vested restricted shares and vested
LTIP shares issued as compensation, outstanding for the period.
Diluted net increase (decrease) in net assets from operations
(Diluted EPS) reflect the potential additional
dilution of unvested restricted shares and unvested LTIP shares
issued as compensation if they are not anti-dilutive. (See
note 6)
|
|
K.
|
Share-Based
Compensation
|
The Company issues share based compensation to its directors and
employees of its manager, Cohen Municipal Capital Management,
LLC (Cohen or Manager) and accounts for
such issuances as equity-settled transactions using the
methodology prescribed by SFAS No. 123I Share Based
Compensation (SFAS 123R) and Emerging
Issues Task force (EITF)
No. 96-18
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
F-43
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
Employees of the Companys Manager and certain independent
directors of the credit committee of Funding, Inc. receive long
term incentive profit shares (LTIP shares). LTIP
shares are a special class of limited liability company
interests. Quarterly distributions on each LTIP share, whether
vested or not, will be the same as those made on common shares.
However, LTIP shares will not have full parity with common
shares with respect to liquidating distributions. Under the
terms of the LTIP shares, the Company will revalue its assets
upon the occurrence of certain events, and any increase in
valuation from the time of the grant until such event will be
allocated first to the holders of the LTIP shares to equalize
the capital accounts of each LTIP share with the capital account
of each common share. Upon equalization of the capital accounts,
the LTIP shares will achieve full parity with the common shares
and, to the extent the LTIP shares are vested, can be converted
into common shares.
Non-management directors receive restricted common shares.
Quarterly distributions on each restricted common share, whether
vested or not, will be the same as those made on common shares.
The restricted shares are subject to restrictions on transfer
during the vesting period. In general, unvested restricted
shares will vest early upon change of control or other
liquidation.
The fair value of the restricted common shares as of the grant
date is being amortized to share based compensation over the
three year vesting period of the underlying grants net of
assumed forfeitures.
The fair values of the LTIP shares are being amortized on a
straight line basis to share based compensation over the vesting
period of the underlying grants net of assumed forfeitures. In
addition, the Company records an adjustment at the end of each
reporting period to account for changes in fair value of the
Companys common shares until the LTIP shares are vested.
NOTE 3
RELATED PARTY TRANSACTIONS
Management Contract. The Company has no
employees and relies upon its Manager, Cohen Municipal Capital
Management, LLC (Cohen), to conduct its operations
pursuant to its management agreement dated June 12, 2007
(the Management Agreement). The Manager is
responsible for (i) the selection, purchase, monitoring and
sale of portfolio investments; (ii) developing and
implementing the Companys financing and risk management
policies; (iii) providing the Company with investment
advisory services; and (iv) carrying out the day to day
operations of the Company.
A. Base Management Fee: The Company
pays Cohen a base management fee on a monthly basis equal to
1/12th of the Companys US GAAP basis equity x 1.50%. The
US GAAP basis equity shall exclude one time events pursuant to
changes in US GAAP and other non-cash charges (subject to the
approval of the Companys independent directors). To date,
the Company has not sought approval for any one time events or
non-cash charges. The Company accrues this expense on a monthly
basis. Cohen agreed to charge no management fee to the Company
for the month of June 2007. Base management fees for the period
from July 1, 2007 to December 31, 2007 were $1,111,993
and are separately reported in the consolidated statement of
operations. The management fees remaining payable at
December 31, 2007 were $164,366 and are included as a
component of due to Manager in the consolidated statement of
assets and liabilities.
The base management fee otherwise payable in any fiscal year
will be reduced (but not below zero), by the proportionate share
of the amount of any management fees paid to Cohen or its
affiliates by a structured tax exempt partnership
(STEP) or other structured credit vehicle in which
the Company invests. The proportionate share is based on the
percentage of the most junior class of certificates the Company
holds in any STEP or other structured credit vehicle.
Origination fees, structuring fees, or placement fees paid to
Cohen and its affiliates will not reduce the base management fee.
B. Incentive Fee: The Company will pay
Cohen incentive compensation (on a quarterly basis) equal to the
product of (i) 20% of the amount by which
(a) consolidated net income per weighted average common
F-44
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
share exceeds (b) the weighted average offering price of
all common shares issued by the Company multiplied by the
quarterly benchmark rate, as defined, and (ii) the weighted
average number of common shares outstanding in such quarter.
This amount is paid through a special allocation of income to
the performance share issued. (See note 6)
The quarterly benchmark is equal to the greater of (i) 2%
or (ii) 0.75% plus the 10 year Municipal Market Data
(MMD) index for the quarter. The performance share
calculation will be adjusted to exclude one-time events pursuant
to changes in US GAAP, as well as other non-cash charges
(subject to the approval of the Companys independent
directors). To date, the Company has not sought approval for any
one time events or non-cash charges. The Company accrues this
expense on a quarterly basis. No incentive fees have been
incurred for the period from June 12, 2007 to
December 31, 2007.
Realized loss on TRS. Prior to the
Companys formation, Cohen entered into a TRS with a
counterparty bank and began to identify reference bonds for the
benefit of the Company. In August 2007, the TRS was assigned
from Cohen to the Company. At that time, the accumulated mark to
market loss on Cohens interest in the TRS was $3,028,794.
In order to approve the assignment and renewal of the TRS, the
counterparty required that this loss be realized and funded. As
part of the assignment, Cohen and the Company agreed to split
that loss and each bear approximately one half of the loss.
Although the Company was contractually obligated to fund the
entire loss, Cohen offered to absorb half of the loss in order
to provide financial support to the Company during this period
shortly after the initial sale of capital and while the Company
was constructing initial investments in STEP transactions. This
arrangement was approved by the independent directors of the
Company. Accordingly, the Company recorded a $1,528,794 realized
loss in its consolidated statement of operations. In addition,
as part of the assignment and renewal, the counterparty required
of the Company, a higher level of collateral and modified other
terms of the TRS agreement. The Company posted $19,000,000 of
collateral with the counterparty at that time and the
counterparty returned to Cohen the collateral it had posted
previously. The Company subsequently posted an additional
$10,000,000 of collateral for the benefit of the counterparty
prior to year end.
Expense reimbursements. From time to
time, Cohen will pay certain of the Companys expenses and
the Company will reimburse Cohen. Total reimbursement payments
to Cohen for general and administrative expenses for the period
from commencement of operations to December 31, 2007 are
$118,171. Unpaid amounts due to the Manager for reimbursement
are $15,484 and are included as a component of due to Manager in
the consolidated statement of assets and liabilities.
NOTE 4
GENERAL AND ADMINISTRATIVE EXPENSES
The Company pays its own general and administrative expenses.
Cohen is responsible for paying its employees compensation and
benefits (with the exception of share based compensation
described above). In general, the Company is responsible for all
other general and administrative expenses for its operations.
These include (but are not limited to): transaction costs
incidental to the acquisition, disposition and financing of
investments; legal, tax, accounting, consulting, and other
similar service fees and expenses; compensation and expenses of
the Companys directors; the cost of directors and
officers liability insurance; the costs associated with
the establishment and maintenance of any credit facilities,
tender option bond programs, and other financing arrangements
and other indebtedness (including commitment fees, accounting
fees, legal fees, closing and other costs); expenses associated
with security offerings; expenses associated with making
distributions to shareholders; the costs of printing and mailing
proxies and reports to the Companys shareholders; costs
associated with computer software or hardware; electronic
equipment or purchased information technology services from
third party vendors which is used solely by the Company; all
regulatory costs incurred by the Company; and all taxes and
insurance expense incurred by the Company or on its behalf. In
addition, the Company is required to pay its pro rata share of
rent, telephone, utilities, office furniture,
F-45
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
equipment, machinery and other office, internal and overhead
expenses of Cohen which is required for the Companys
operations (See note 3).
These expenses may be paid directly out of Company funds or,
from time to time, will be paid by Cohen and the Company will
reimburse Cohen.
NOTE 5
INCOME TAXES
No provision was made for federal income tax for the year ended
December 31, 2007, since the Companys taxable
subsidiary had a significant net operating loss. For the year
ended December 31, 2007, the taxable subsidiary incurred a
net loss carry forward for tax purposes of $1,800,236. The net
operating losses may be carried forward to reduce taxable income
through the year 2012.
Temporary differences that give rise to deferred tax assets and
liabilities at December 31, 2007, were comprised of
unrealized losses on the total return swap, the basis swap, and
the net operating loss carry forward. The gross deferred tax
asset balance as of December 31, 2007 is approximately
$7,132,299. A 100% valuation has been established against the
deferred tax assets, as the utilization of the loss carry
forwards cannot reasonably be assured.
The components of the net deferred tax asset are summarized
below:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Deferred tax asset:
|
|
|
|
|
Unrealized losses
|
|
$
|
6,502,217
|
|
Net operating loss
|
|
|
630,082
|
|
|
|
|
|
|
Total
|
|
|
7,132,299
|
|
Less:
|
|
|
|
|
Valuation allowance
|
|
|
(7,132,299
|
)
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
The federal income tax benefit at the U.S. federal income
tax rate of 35.0% is the income tax benefit reflected in the
consolidated statement of operations which has been offset by a
100% valuation allowance.
Income tax expense consisted of the following:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Current tax expense
|
|
$
|
|
|
|
|
|
|
|
Deferred tax credit
|
|
|
(7,132,299
|
)
|
Change in valuation allowance
|
|
|
7,132,299
|
|
|
|
|
|
|
Net Deferred tax credit
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
F-46
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
NOTE 6
EQUITY SHARES
The Company is organized as a limited liability company and is
taxed as a partnership. The Company currently has the following
classes of membership interests:
|
|
|
|
|
|
|
|
|
Membership Interests as of
December 31, 2007:
|
Description
|
|
Authorized
|
|
Outstanding
|
|
Unrestricted common shares
|
|
|
Unlimited
|
|
|
|
17,250,100
|
|
Restricted common shares
|
|
|
60,000
|
|
|
|
30,000
|
|
LTIP shares
|
|
|
690,000
|
|
|
|
637,000
|
|
The combined total of restricted common shares and LTIP shares
authorized is currently fixed at 750,000. Accordingly, the
Company may issue more LTIPs or more restricted common shares
than listed above as long as the combined total is less than or
equal to 750,000. As of December 31, 2007, all restricted
common shares and 615,000 LTIP shares were unvested. 22,000
LTIPs shares became vested during October and November 2007 upon
separation of certain employees of Cohen.
A. Unrestricted common shares. The
unrestricted common shares are each entitled to one vote per
share and participate pro rata in quarterly distributions. In
general, except for extraordinary corporate transactions,
certain amendments to the operating agreement, liquidation, and
the election and removal of directors, all matters voted on by
the shareholders require a simple majority of votes cast.
In the case of election of directors, a plurality of votes
cast in person or by proxy is required. In the case of
extraordinary corporate transactions, liquidation and removal of
directors for cause, a majority of all votes entitled to be
cast is required.
B. Restricted common shares. The
restricted common shares are identical to normal common shares
except that they are subject to vesting. To date, all restricted
common shares have been issued to directors of the Company and
its subsidiaries.
C. LTIP shares. LTIP shares represent a
special class of limited liability interest. LTIP shares are
subject to vesting. LTIP shares are entitled to the same voting
rights and participation in quarterly dividends as common shares
whether vested or not. LTIP shares will not have full parity
with common shares with respect to liquidating distributions.
Under the terms of the LTIP shares, the Company will revalue its
assets upon the occurrence of certain events, and any increase
in valuation from the time of the grant until such event will be
allocated first to the holders of the LTIP shares to equalize
the capital accounts of each LTIP share with the capital account
of each common share. Upon equalization of the capital accounts,
the LTIP shares will achieve full parity with the common shares
and, to the extent the LTIP shares are vested, can be converted
into common shares.
D. Preferred shares. The Companys
board of directors is authorized to issue an unlimited amount of
one or more classes or series of preferred shares without
further action or approval from the common shareholders. The
board of directors is authorized to fix the number of shares,
relative powers, preference and rights, and the qualifications,
limitations or restrictions applicable to each class or series
by resolution.
The Company has granted Cohen one performance share. The
performance share is entitled to a special allocation of profits
as described in Note 3. The performance share is generally
not entitled to vote.
F-47
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
As a limited liability company, the shareholder interests noted
above are generally limited in their liability to the extent of
each shareholders investment in the Company. The Company
has no stated date of dissolution. The following table shows the
Companys share activity for the period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROLLFORWARD OF
SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
Issuance as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
Share Based
|
|
|
|
|
|
|
|
|
December 31,
|
|
Membership Interests
|
|
Inception
|
|
|
Offering
|
|
|
Compensation
|
|
|
Distribution
|
|
|
Earnings
|
|
|
2007
|
|
|
Unrestricted common shares
|
|
|
|
|
|
|
17,250,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,250,100
|
|
Restricted common shares
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
LTIP shares
|
|
|
|
|
|
|
|
|
|
|
637,000
|
|
|
|
|
|
|
|
|
|
|
|
637,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,250,100
|
|
|
|
667,000
|
|
|
|
|
|
|
|
|
|
|
|
17,917,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROLLFORWARD OF COMPONENTS OF
MEMBERS EQUITY
|
|
|
|
|
|
|
Initial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering,
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Inception
|
|
|
Net
|
|
|
Vesting
|
|
|
Distribution
|
|
|
Earnings
|
|
|
2007
|
|
|
Unrestricted common shares
|
|
$
|
|
|
|
$
|
158,969,367
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
158,969,367
|
|
Restricted common shares
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
LTIP shares
|
|
|
|
|
|
|
|
|
|
|
892,232
|
|
|
|
|
|
|
|
|
|
|
|
892,232
|
|
Earnings / (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,433,366
|
)
|
|
|
(18,139,052
|
)
|
|
|
(19,572,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
158,969,367
|
|
|
$
|
942,232
|
|
|
$
|
(1,433,366
|
)
|
|
$
|
(18,139,052
|
)
|
|
$
|
140,339,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS PER
SHARE
The Company calculates basic net increase (decrease) in net
assets from operations per share by dividing net increase
(decrease) in net assets from operations for the period by the
weighted-average shares of its common shares outstanding for the
period, which includes common shares outstanding as well as
vested restricted common and vested LTIP shares. Diluted net
increase (decrease) in net assets from operations per share
takes into account the effect of unvested restricted common and
unvested LTIP shares unless they are anti-dilutive.
For the period from inception to December 31, 2007, the
basic and diluted weighted average shares outstanding have been
revised for the impact of the June 2009 rights offering.
For the periods presented herein, the Company determined that
the unvested restricted common and unvested LTIP shares are
anti-dilutive. Therefore, the weighted average shares
outstanding on a fully diluted basis are the same as the
weighted average shares outstanding used for basic net increase
(decrease) in net assets from operations per share.
As of December 31, 2007, all restricted shares and 615,000
LTIP shares had not vested. Accordingly both basic and fully
diluted shares outstanding represent the unrestricted common
shares outstanding and 22,000 vested LTIP shares outstanding for
the period through December 31, 2007.
The Company does not include the performance share issued to
Cohen (see note 6) in either the fully diluted net
increase (decrease) in net assets from operations per share or
basic net increase (decrease) in net assets from operations per
share calculation as it does not participate in the net profits
or dividends of the
F-48
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
Company. Any amounts paid under the management agreement as part
of the performance share would be reported as an expense in the
consolidated statement of operations. To date, the performance
criteria have not been met and no expense has been recorded.
NOTE 8
SHARE BASED COMPENSATION
In June, 2007, the Company issued 30,000 restricted common
shares to its directors. The Company valued the restricted
common shares at $10 per share, the offering price of
unrestricted common shares on June 12, 2007. The value of
the restricted common shares issued is being amortized to
non-cash incentive compensation over the vesting period of the
underlying grants; net of assumed forfeitures. The vesting
period is three years.
In June 2007 and November 2007, the Company issued 637,000 LTIP
shares to non-employees of the Company in exchange for services
to be provided. The fair values of the LTIP shares are being
amortized to share based compensation over the vesting period of
the underlying grants net of assumed forfeitures. In addition,
the Company records an adjustment at the end of each reporting
period to account for changes in fair value of the
Companys common shares until the LTIP shares are vested.
For vested LTIP shares, the Company values these shares based on
the Companys most recent ending net asset value per share
available in the month the LTIP shares vest.
The LTIP shares were issued as follows:
1. 345,000 LTIP shares were issued on June 26, 2007
and vest over the period ending on June 30, 2010.
2. 267,000 LTIP shares were issued on August 9, 2007
and vest over the period ending on June 30, 2010.
3. 25,000 LTIP shares were issued on November 15, 2007
and vest over the period ending on September 30, 2010.
Based on the December 31, 2007 ending net asset value per
share, the remaining share based compensation expense to be
recognized over the remaining vesting period is
$4.1 million.
NOTE 9
COMMITMENTS AND CONTINGENCIES
Indemnifications
In the normal course of business, the Company enters into
contracts that contain a variety of indemnifications. The
Companys maximum exposure under these arrangements is
unknown. However, the Company does not expect claims or losses
pursuant to these contracts and expects the risk of loss to be
remote. Thus no amounts have been accrued related to such
indemnifications.
Management
contract
The initial term of the Companys management contract with
Cohen expires on December 31, 2010 and automatically renews
for a one year term at each anniversary thereafter. The contract
may only be terminated after giving 180 days notice, if at
least two-thirds of the Companys independent directors or
the holders of at least a majority of the outstanding common
shares vote not to automatically renew.
If the Company were to terminate the management contract without
cause, it would be required to pay a termination fee to Cohen
equal to three times the average annual base management fee for
the two 12 month periods preceding the date of termination
(annualized for any partial year period). In addition, the
Company
F-49
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
would need to redeem the performance share at an amount equal to
three times the average performance share payments for the
preceding two 12 month periods.
The contract can be terminated with cause without paying the
termination fees described above. Cause is defined and does not
include unsatisfactory performance, even if that performance is
materially detrimental to the Companys business.
Tender
option bonds shortfall agreement
As of December 31, 2007, the Company had invested in
several TOBs with a single financial institution as liquidity
provider and remarketing agent (the Liquidity
Provider). At the time the Company invested in the TOBs,
the Company was in negotiations with respect to a shortfall as
well as other agreements with the Liquidity Provider. The terms
of the shortfall agreement were never agreed upon and no
shortfall agreement was executed. In the absence of a shortfall
agreement, the Company does not believe that it is obligated to
reimburse the liquidity provider for any losses incurred.
As of December 31, 2007, the Company estimates the
underlying value of the bonds of the TOB had declined in value
by approximately $7.7 million since the purchase by the
TOB. However, because the Company has determined it has no
obligation to reimburse the liquidity provider, the Company has
not recorded a liability or net unrealized loss for this decline
in value.
The Company initially invested $38,228 for its investment in the
TOB Residual Certificates. The Company currently carries this
investment at zero in its consolidated financial statements.
Accounting for contingencies is described in
SFAS No. 5, Accounting for Contingencies
(SFAS 5). In addition to disclosure of all
contingencies, SFAS 5 requires that a contingent liability
be recognized when the outcome of the contingency rises to the
level of probable and reasonably estimable.
On March 13, 2008, the Liquidity Provider issued a margin
call to the Company in the amount of $21.5 million which
was comprised of $6.3 million of initial margin and
$15.2 million representing the Liquidity Providers
estimate of the decline in value of the underlying bonds as of
March 13, 2008. The Company has notified the Liquidity
Provider of its position that it has no obligation to post
margin or to reimburse the liquidity provider for the decline in
value of the underlying bonds. On March 14, 2008, the
Liquidity Provider served on the Company a Summons with Notice
seeking $18.0 million in damages presumably related to this
dispute. The Company intends to defend this action vigorously.
The Company does not currently believe it is probable that an
adverse judgment will be rendered. Therefore, no contingent
liability is recorded. However, if an adverse judgment were
rendered, the Company could be found to be liable for the net
unrealized loss on the bonds in the TOB (estimated, by the
Company, as $7.7 million as of December 31, 2007 and,
by the Liquidity Provider, as $15.2 million as of
March 13, 2008) and could incur additional legal and
court costs. Furthermore, the value of the underlying bonds in
the TOB varies based upon changes in market conditions;
therefore, any ultimate liability could be greater than (or less
than) the estimated unrealized loss as of December 31, 2007
or March 13, 2008.
Registration
Rights Agreement
The Company entered into a registration rights agreement with
Cohen. Terms and conditions of the agreement call for a
reduction in the level of management fees that the Company will
pay Cohen if the Company fails to timely file a registration
statement. If the Company does not file a resale shelf
registration statement by March 31, 2008, the base
management fee payable to Cohen will be reduced by 0.50% to
1.00% from that date until the actual filing date of a shelf
registration statement. In addition, the agreement calls for the
Company to retain the allocation of profits or distributions
associated with Cohens performance share of
F-50
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
the Company, after March 31, 2008, if the resale shelf
registration statement is not filed by March 31, 2008,
until the registration statement is filed, at which time the
Company will pay all allocations and distributions currently due
along with what Cohen earned during the period since
March 31, 2008. In the event the Company does not file the
shelf registration statement by June 12, 2008, the Company
will further reduce Cohens management fee by an additional
0.50% to 0.50%, for periods from June 12, 2008 until the
actual filing date. Once the registration statement is filed,
the Company will resume paying Cohen management fees based on
the original level of 1.50%. However any reduction in the base
management fee during the time the registration statement is not
filed will not be recaptured by Cohen. If the Company has
endeavored in good faith to timely file the resale registration
statement but is unable to make such filing as of the specified
date as a result of circumstances outside the reasonable control
of the Company, then these reductions in Cohens management
fee shall not apply. In addition, the Companys obligations
under the registration rights agreement will terminate in their
entirety when the Companys non-affiliated shareholders can
sell their shares in the Company without restriction pursuant to
Rule 144 under the securities act of 1933, as amended.
NOTE 10
RISK MANAGEMENT
In the ordinary course of business, the Company manages a
variety of risks including market risk and credit risk. The
Company identifies, measures, and monitors risk through various
control mechanisms including diversifying exposures and
activities across a variety of instruments, markets, and
counterparties.
Market risk is the risk of potential adverse changes in the
value of financial instruments and their derivatives because of
changes in market conditions, such as interest movements and
volatility in security prices. The Company manages market risk
through the use of risk management strategies and various
analytical monitoring techniques that evaluate the effect of
cash instruments and derivative contracts.
Credit risk is the risk the counterparties may fail to fulfill
their obligations or that the collateral value becomes
inadequate. The Company attempts to minimize its counterparty
risk exposure by monitoring the size of its credit exposure to
and the creditworthiness of counterparties.
NOTE 11
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
In the normal course of its business, the Company trades various
financial instruments and enters into various investment
activities with off-balance sheet risk. These financial
instruments may include total return swap arrangements, interest
rate swaps, basis swaps and tender option bonds. Each of these
financial instruments contains varying degrees of off-balance
sheet risk whereby changes in the market values of the
securities underlying the financial instruments or the
Companys satisfaction of the related obligations may
ultimately exceed the amount currently recorded in the
consolidated statement of assets and liabilities.
The contract amounts of these investments do not represent the
Companys risk of loss due to counterparty nonperformance.
The Companys exposure to credit risk is associated with
counterparty nonperformance on these investments and is limited
to the unrealized gains inherent in such contracts which are
recognized in consolidated statement of assets and liabilities
and the cash collateral on deposit, if any, with these
counterparties. See note 12.
The Company is subject to interest rate risk. Generally, the
value of the fixed income securities with fixed rates will
change inversely with changes in interest rates. Even though the
Company currently holds no fixed rate bonds on balance sheet,
most of the reference bonds in the TRS are fixed rate. As
interest rates rise, the market value of fixed rate fixed income
securities, or derivatives based on the value of fixed rate
fixed income securities such as the TRS, tends to decrease.
Conversely, as interest rates fall, the market value of fixed
rate fixed income securities tends to increase. It is the
Companys policy to manage this risk primarily through swap
arrangements.
F-51
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
With respect to floating-rate tax exempt bonds, interest rate
risk is the risk that defaults on tax-exempt bonds will increase
during periods of rising interest rates and, during periods of
declining interest rates, that obligors may exercise their
option to prepay principal earlier than scheduled. Such
increases and decreases in rates may result in corresponding
increases or decreases in the Companys interest income and
the distribution payables to holders of certificates issued by
tender option trusts and payments to counterparties under the
TRS.
Total
return swap.
The TRS is accounted for at fair value and included either in
unrealized gain or loss on total return swap on the consolidated
statement of assets and liabilities. The Company has posted cash
collateral for the benefit of the counterparty in the amount of
$29,000,000. This cash collateral is included in restricted cash
in the consolidated statement of assets and liabilities and
represents the maximum potential loss to the Company under the
TRS.
Basis
Swaps
In November 2007, the Company entered into two basis swap
arrangements. A basis swap is an interest rate swap which
involves the exchange of two floating rate financial instruments
(that is, a floating-floating interest rate swap under which the
floating rate payments are referenced to different bases).
In the case of the basis swaps entered into by the Company, no
cash is exchanged at the outset of the contract and no principal
payments are made by either party. A single net payment will be
made by one counterparty at each due date. The payments commence
in February of 2010 and are made quarterly thereafter until
termination.
One basis swap with a notional of $60,500,000 terminates in
November 2032. The second basis swap with a notional of
$27,250,000 terminates in November 2019. The potential loss for
the Company on the basis swaps is unlimited.
NOTE 12
CONCENTRATIONS OF CREDIT RISK
Total return swap. As of December 31,
2007, the Company maintains a TRS, including the related
interest rate hedge agreements and interest basis swap
agreements, with a single counterparty. The fair value of the
TRS is included in unrealized loss on TRS in the consolidated
statement of assets and liabilities. In addition, the Company
has provided the counterparty with $29,000,000 of cash
collateral which is included in restricted cash in the
consolidated statement of assets and liabilities. If the swap
counterparty failed to perform under their obligations of the
TRS, the Company could lose the restricted cash it has posted as
well as any unrealized gain on the TRS then outstanding. As of
December 31, 2007, the TRS is in a net unrealized loss
position.
Cash and cash equivalents. As of
December 31, 2007, the Company held $128,106,782 of its
cash and cash equivalents with U.S. Bank. If U.S. Bank
failed under its obligation as custodian of these funds, the
Company could lose a portion or all of its unrestricted cash
balances with U.S. Bank.
All other trading activities. The
Companys trading activities are primarily with brokers and
financial institutions mentioned above. All securities
transactions of the Company are cleared by multiple securities
firms pursuant to customer agreements. At December 31,
2007, all the investments in the TRS and TOB are positions held
with two of these brokers. The Company had substantially all of
its individual counterparty concentrations with these brokers
and their affiliates.
F-52
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
NOTE 13
DISTRIBUTIONS
In November 2007, the Companys Board of Directors approved
the initiation of a quarterly cash distribution, payable on the
Companys common shares, restricted shares and LTIP shares.
During the period from October 1, 2007 to December 31,
2007, the quarterly cash distribution was $0.08 per share. The
total amount declared and paid was $1,433,366 comprised of
$1,380,008 to the common shareholders, $2,400 to the restricted
common shareholders and $50,958 to the holders of LTIP shares.
NOTE 14
FINANCIAL HIGHLIGHTS
In accordance with the Audit Guide, the per share information
and ratios to average net assets are presented below:
|
|
|
|
|
PER SHARE OPERATING
PERFORMANCE
|
|
For the Period from June 12, 2007 (inception) to
December 31, 2007
|
|
|
Beginning net asset value
|
|
$
|
|
|
Net investment income
|
|
|
0.13
|
|
Net realized losses on investments
|
|
|
(0.15
|
)
|
Net unrealized losses on investments
|
|
|
(1.00
|
)
|
|
|
|
|
|
Total from investment operations
|
|
|
(1.02
|
)
|
|
|
|
|
|
Distributions to shareholders
|
|
|
(0.08
|
)
|
Share transactions
|
|
|
8.93
|
|
|
|
|
|
|
Ending net asset value per share outstanding
|
|
$
|
7.83
|
|
|
|
|
|
|
The per share amounts above are calculated based on the
Companys shares outstanding as well as its unvested
restricted stock and its vested and unvested LTIP shares. The
LTIP shares are included because they are eligible to receive
dividends and the performance share is excluded.
|
|
|
|
|
RATIOS TO AVERAGE NET ASSETS
|
|
For the Period from June 12, 2007 (inception) to
December 31, 2007
|
|
|
Management fee
|
|
|
0.73
|
%
|
Other expenses
|
|
|
0.41
|
%
|
Non cash incentive compensation
|
|
|
0.62
|
%
|
|
|
|
|
|
Total expense
|
|
|
1.76
|
%
|
|
|
|
|
|
Net investment income
|
|
|
1.58
|
%
|
|
|
|
|
|
Total return
|
|
|
(10.82
|
)%
|
|
|
|
|
|
The above ratios are calculated by dividing income or expenses
as applicable by the monthly average of net assets
($152.1 million) and are not annualized.
Total return is calculated by dividing the quarterly net
decrease in net assets from operations by beginning net assets
for the period on a compounded basis and is not annualized.
The per share information, ratios and total return above are
calculated based on the shareholder group taken as a whole. An
individual shareholders results may vary from those shown
above due to the timing of capital transactions.
F-53
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2007
NOTE 15
SUBSEQUENT EVENT
In February 2008, the Company declared and paid a dividend of
$0.08 per share. The total distribution to be made is
$1.4 million.
In February 2008, the Company terminated the TRS which resulted
in a termination payment of $23.1 million to the
counterparty.
In conjunction with the termination of the TRS, a newly formed
trust, NPPF II, purchased approximately $174.3 million of
securities (most of which were previously the reference
portfolio of the TRS) including transaction costs and accrued
interest. NPPF II issued two classes of equity securities to
finance this purchase. The senior securities were issued in the
amount of $118.1 million and were purchased by the former
counterparty to the TRS. The junior securities were issued in
the amount of $56.2 million and were purchased by the
Company.
In March 2008, the Liquidity Provider issued a margin call to
the Company and served on the Company a Summons with Notice
seeking $18.0 million in damages. See note 9
F-54
MUNI
FUNDING COMPANY OF AMERICA, LLC
CONSOLIDATED
FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
F-55
MUNI
FUNDING COMPANY OF AMERICA, LLC
Consolidated
Statements of Assets and Liabilities
June 30, 2010 and December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,820,900
|
|
|
$
|
29,090,353
|
|
Restricted cash (related party)
|
|
|
432,000
|
|
|
|
277,000
|
|
Investments, at fair value
|
|
|
62,579,435
|
|
|
|
57,971,131
|
|
Accrued interest receivables
|
|
|
3,293,930
|
|
|
|
3,302,965
|
|
Derivative asset (related party)
|
|
|
|
|
|
|
27,095
|
|
Other assets
|
|
|
88,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
94,214,818
|
|
|
|
90,668,544
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Due to the Manager (related party)
|
|
|
116,925
|
|
|
|
114,756
|
|
Professional fees payable
|
|
|
233,956
|
|
|
|
317,316
|
|
Accrued expenses and other liabilities
|
|
|
27,944
|
|
|
|
21,363
|
|
Derivative liability (related party)
|
|
|
383,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
762,753
|
|
|
|
453,435
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
93,452,065
|
|
|
$
|
90,215,109
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share (37,416,669 and 37,416,669 shares
outstanding, respectively)
|
|
$
|
2.50
|
|
|
$
|
2.41
|
|
See accompanying notes to consolidated financial statements.
F-56
MUNI
FUNDING COMPANY OF AMERICA, LLC
Consolidated
Schedule of Investments
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cusip
|
|
|
State
|
|
|
Sector(2)
|
|
|
Coupon
|
|
|
Maturity
|
|
|
of Net Assets
|
|
|
Par Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Tax exempt bonds: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in trusts NPPF II:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cope Community Services
|
|
|
89874QAA6
|
|
|
|
AZ
|
|
|
|
HCB
|
|
|
|
6.13
|
%
|
|
|
Aug-37
|
|
|
|
3.7
|
%
|
|
$
|
4,385,000
|
|
|
$
|
4,385,000
|
|
|
$
|
3,464,293
|
|
21st Century Charter School
|
|
|
082445AA5
|
|
|
|
AZ
|
|
|
|
ED
|
|
|
|
6.00
|
|
|
|
Oct-32
|
|
|
|
2.8
|
|
|
|
3,550,000
|
|
|
|
3,550,000
|
|
|
|
2,576,084
|
|
Sacramento Country Day School
|
|
|
130795JV0
|
|
|
|
CA
|
|
|
|
ED
|
|
|
|
5.65
|
|
|
|
Aug-37
|
|
|
|
11.3
|
|
|
|
13,350,000
|
|
|
|
13,331,373
|
|
|
|
10,561,052
|
|
Sierra Canyon High School Foundation
|
|
|
54465NAB0
|
|
|
|
CA
|
|
|
|
ED
|
|
|
|
6.00
|
|
|
|
May-32
|
|
|
|
3.4
|
|
|
|
3,840,506
|
|
|
|
3,904,281
|
|
|
|
3,152,095
|
|
Goodwill of San Joaquin Valley
|
|
|
13033WD91
|
|
|
|
CA
|
|
|
|
SS
|
|
|
|
5.85
|
|
|
|
Sep-37
|
|
|
|
2.9
|
|
|
|
3,405,000
|
|
|
|
3,405,000
|
|
|
|
2,684,749
|
|
Global Country of World Peace
|
|
|
19648AEC5
|
|
|
|
CO
|
|
|
|
OT
|
|
|
|
5.70
|
|
|
|
Feb-37
|
|
|
|
13.3
|
|
|
|
17,460,000
|
|
|
|
16,986,373
|
|
|
|
12,395,552
|
|
Maranatha High School
|
|
|
19645RCA7
|
|
|
|
CO
|
|
|
|
ED
|
|
|
|
7.25
|
|
|
|
Aug-37
|
|
|
|
10.0
|
|
|
|
11,900,000
|
|
|
|
11,900,000
|
|
|
|
9,350,187
|
|
Yampa Valley Medical Center
|
|
|
19648AEU5
|
|
|
|
CO
|
|
|
|
HCA
|
|
|
|
5.13
|
|
|
|
Sep-29
|
|
|
|
7.5
|
|
|
|
7,500,000
|
|
|
|
7,230,077
|
|
|
|
6,978,675
|
|
Global Country of World Peace
|
|
|
1964745C0
|
|
|
|
CO
|
|
|
|
OT
|
|
|
|
5.80
|
|
|
|
Feb-37
|
|
|
|
0.9
|
|
|
|
1,145,000
|
|
|
|
1,046,306
|
|
|
|
824,927
|
|
Madison Center
|
|
|
790609AN1
|
|
|
|
IN
|
|
|
|
HCB
|
|
|
|
5.25
|
|
|
|
Feb-28
|
|
|
|
2.4
|
|
|
|
4,000,000
|
|
|
|
3,883,527
|
|
|
|
2,218,800
|
|
Labette County Medical Center
|
|
|
505392BU3
|
|
|
|
KS
|
|
|
|
HCA
|
|
|
|
5.75
|
|
|
|
Sep-37
|
|
|
|
0.8
|
|
|
|
750,000
|
|
|
|
768,688
|
|
|
|
716,001
|
|
YMCA of the Capital Area
|
|
|
546279J27
|
|
|
|
LA
|
|
|
|
OT
|
|
|
|
6.25
|
|
|
|
Sep-37
|
|
|
|
7.5
|
|
|
|
9,655,000
|
|
|
|
9,655,000
|
|
|
|
7,006,537
|
|
UMass Memorial Medical Center
|
|
|
57586CLQ6
|
|
|
|
MA
|
|
|
|
HCA
|
|
|
|
5.00
|
|
|
|
Jul-33
|
|
|
|
10.8
|
|
|
|
10,920,000
|
|
|
|
10,376,099
|
|
|
|
10,145,499
|
|
Alternatives Unlimited
|
|
|
57583RTU9
|
|
|
|
MA
|
|
|
|
HCB
|
|
|
|
7.38
|
|
|
|
Mar-38
|
|
|
|
9.6
|
|
|
|
10,780,000
|
|
|
|
10,778,417
|
|
|
|
9,017,362
|
|
Maine Central Institute
|
|
|
56041NAL6
|
|
|
|
ME
|
|
|
|
ED
|
|
|
|
6.00
|
|
|
|
Aug-37
|
|
|
|
3.9
|
|
|
|
4,440,000
|
|
|
|
4,434,082
|
|
|
|
3,657,406
|
|
Guadalupe Centers
|
|
|
485031FK9
|
|
|
|
MO
|
|
|
|
SS
|
|
|
|
6.15
|
|
|
|
Feb-38
|
|
|
|
3.6
|
|
|
|
4,430,000
|
|
|
|
4,430,000
|
|
|
|
3,343,033
|
|
Family Guidance Center for Behavioral Health Care
|
|
|
79076NAA0
|
|
|
|
MO
|
|
|
|
HCB
|
|
|
|
5.50
|
|
|
|
Mar-37
|
|
|
|
4.2
|
|
|
|
5,250,000
|
|
|
|
5,136,294
|
|
|
|
3,918,036
|
|
Tri-County Community Action Program
|
|
|
64468KBD7
|
|
|
|
NH
|
|
|
|
SS
|
|
|
|
6.50
|
|
|
|
Sep-37
|
|
|
|
1.7
|
|
|
|
2,100,000
|
|
|
|
2,100,000
|
|
|
|
1,637,354
|
|
West Penn Allegheny Health System
|
|
|
01728AG83
|
|
|
|
PA
|
|
|
|
HCA
|
|
|
|
5.38
|
|
|
|
Nov-40
|
|
|
|
9.3
|
|
|
|
11,530,000
|
|
|
|
10,978,352
|
|
|
|
8,721,378
|
|
NHS III Properties
|
|
|
613609XN1
|
|
|
|
PA
|
|
|
|
HCB
|
|
|
|
6.50
|
|
|
|
Oct-37
|
|
|
|
5.8
|
|
|
|
6,740,000
|
|
|
|
6,740,000
|
|
|
|
5,442,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments of NPPF II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115.4
|
|
|
|
137,130,506
|
|
|
|
135,018,869
|
|
|
|
107,811,621
|
|
Class A Senior Certificates
|
|
|
65537WAA2
|
|
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
|
Feb-11
|
|
|
|
(67.4
|
)
|
|
|
(62,935,954
|
)
|
|
|
(62,935,954
|
)
|
|
|
(62,935,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Junior Certificates
|
|
|
65537WAB0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.0
|
|
|
|
74,194,552
|
|
|
|
72,082,915
|
|
|
|
44,875,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments in tax exempt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular Research Foundation
|
|
|
773557AH6
|
|
|
|
NY
|
|
|
|
OT
|
|
|
|
5.40
|
|
|
|
Jan-35
|
|
|
|
1.7
|
|
|
|
2,000,000
|
|
|
|
1,933,015
|
|
|
|
1,564,280
|
|
Project CURE
|
|
|
19648AGA7
|
|
|
|
CO
|
|
|
|
OT
|
|
|
|
7.38
|
|
|
|
Feb-28
|
|
|
|
7.5
|
|
|
|
7,905,000
|
|
|
|
7,905,000
|
|
|
|
7,056,003
|
|
Labette County Medical Center
|
|
|
505392BU3
|
|
|
|
KS
|
|
|
|
HCA
|
|
|
|
5.75
|
|
|
|
Sep-37
|
|
|
|
0.4
|
|
|
|
350,000
|
|
|
|
356,383
|
|
|
|
334,134
|
|
Florida Care Properties
|
|
|
605279GU6
|
|
|
|
MS
|
|
|
|
HCB
|
|
|
|
6.50
|
|
|
|
Aug-27
|
|
|
|
5.0
|
|
|
|
5,035,000
|
|
|
|
5,068,400
|
|
|
|
4,661,315
|
|
Florida Care Properties
|
|
|
928104KK3
|
|
|
|
VA
|
|
|
|
HCB
|
|
|
|
6.50
|
|
|
|
Aug-27
|
|
|
|
4.4
|
|
|
|
4,475,000
|
|
|
|
4,481,316
|
|
|
|
4,088,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments in tax exempt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.0
|
|
|
|
19,765,000
|
|
|
|
19,744,114
|
|
|
|
17,703,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.0
|
%
|
|
$
|
93,959,552
|
|
|
$
|
91,827,029
|
|
|
$
|
62,579,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All tax exempt securities held directly by the Company and in
NPPF II are revenue bonds, which are issued by a municipality or
an authority on behalf of a non-profit corporation to finance or
refinance a specific project and are typically secured by a
mortgage or a revenue pledge, or both, and a debt service
reserve fund. |
|
|
|
(2) |
|
Sector abbreviations: ED-Education, HCA-Health Care Acute,
HCB-Health Care Behavorial, SS-Social Services and OT-Other |
See accompanying notes to consolidated financial statements.
F-57
MUNI
FUNDING COMPANY OF AMERICA, LLC
Consolidated
Schedule of Investments
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cusip
|
|
|
State
|
|
|
Sector(2)
|
|
|
Coupon
|
|
|
Maturity
|
|
|
of Net Assets
|
|
|
Par Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Tax exempt bonds: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in trusts NPPF II:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cope Community Services
|
|
|
89874QAA6
|
|
|
|
AZ
|
|
|
|
HCB
|
|
|
|
6.13
|
%
|
|
|
Aug-37
|
|
|
|
3.7
|
%
|
|
$
|
4,385,000
|
|
|
$
|
4,384,643
|
|
|
$
|
3,347,969
|
|
21st Century Charter School
|
|
|
082445AA5
|
|
|
|
AZ
|
|
|
|
ED
|
|
|
|
6.00
|
|
|
|
Oct-32
|
|
|
|
2.8
|
|
|
|
3,550,000
|
|
|
|
3,549,814
|
|
|
|
2,491,940
|
|
Sacramento Country Day School
|
|
|
130795JV0
|
|
|
|
CA
|
|
|
|
ED
|
|
|
|
5.65
|
|
|
|
Aug-37
|
|
|
|
11.5
|
|
|
|
13,350,000
|
|
|
|
13,331,239
|
|
|
|
10,366,208
|
|
Sierra Canyon High School Foundation
|
|
|
54465NAB0
|
|
|
|
CA
|
|
|
|
ED
|
|
|
|
6.00
|
|
|
|
May-32
|
|
|
|
3.4
|
|
|
|
3,882,260
|
|
|
|
3,946,844
|
|
|
|
3,065,200
|
|
Goodwill of San Joaquin Valley
|
|
|
13033WD91
|
|
|
|
CA
|
|
|
|
SS
|
|
|
|
5.85
|
|
|
|
Sep-37
|
|
|
|
2.9
|
|
|
|
3,405,000
|
|
|
|
3,404,711
|
|
|
|
2,596,585
|
|
Global Country of World Peace
|
|
|
19648AEC5
|
|
|
|
CO
|
|
|
|
OT
|
|
|
|
5.70
|
|
|
|
Feb-37
|
|
|
|
13.6
|
|
|
|
17,460,000
|
|
|
|
16,979,954
|
|
|
|
12,253,253
|
|
Maranatha High School
|
|
|
19645RCA7
|
|
|
|
CO
|
|
|
|
ED
|
|
|
|
7.25
|
|
|
|
Aug-37
|
|
|
|
10.2
|
|
|
|
11,900,000
|
|
|
|
11,899,561
|
|
|
|
9,260,937
|
|
Yampa Valley Medical Center
|
|
|
19648AEU5
|
|
|
|
CO
|
|
|
|
HCA
|
|
|
|
5.13
|
|
|
|
Sep-29
|
|
|
|
7.5
|
|
|
|
7,500,000
|
|
|
|
7,224,824
|
|
|
|
6,798,413
|
|
Global Country of World Peace
|
|
|
1964745C0
|
|
|
|
CO
|
|
|
|
OT
|
|
|
|
5.80
|
|
|
|
Feb-37
|
|
|
|
0.9
|
|
|
|
1,145,000
|
|
|
|
1,046,860
|
|
|
|
815,572
|
|
Madison Center
|
|
|
790609AN1
|
|
|
|
IN
|
|
|
|
HCB
|
|
|
|
5.25
|
|
|
|
Feb-28
|
|
|
|
3.6
|
|
|
|
4,000,000
|
|
|
|
3,881,024
|
|
|
|
3,289,130
|
|
Labette County Medical Center
|
|
|
505392BU3
|
|
|
|
KS
|
|
|
|
HCA
|
|
|
|
5.75
|
|
|
|
Sep-37
|
|
|
|
0.8
|
|
|
|
750,000
|
|
|
|
768,836
|
|
|
|
684,536
|
|
YMCA of the Capital Area
|
|
|
546279J27
|
|
|
|
LA
|
|
|
|
OT
|
|
|
|
6.25
|
|
|
|
Sep-37
|
|
|
|
7.8
|
|
|
|
9,755,000
|
|
|
|
9,754,151
|
|
|
|
7,003,895
|
|
UMass Memorial Medical Center
|
|
|
57586CLQ6
|
|
|
|
MA
|
|
|
|
HCA
|
|
|
|
5.00
|
|
|
|
Jul-33
|
|
|
|
10.7
|
|
|
|
10,920,000
|
|
|
|
10,369,676
|
|
|
|
9,711,129
|
|
Alternatives Unlimited
|
|
|
57583RTU9
|
|
|
|
MA
|
|
|
|
HCB
|
|
|
|
7.38
|
|
|
|
Mar-38
|
|
|
|
10.0
|
|
|
|
10,895,000
|
|
|
|
10,892,929
|
|
|
|
9,010,383
|
|
Maine Central Institute
|
|
|
56041NAL6
|
|
|
|
ME
|
|
|
|
ED
|
|
|
|
6.00
|
|
|
|
Aug-37
|
|
|
|
3.9
|
|
|
|
4,440,000
|
|
|
|
4,433,875
|
|
|
|
3,487,731
|
|
Guadalupe Centers
|
|
|
485031FK9
|
|
|
|
MO
|
|
|
|
SS
|
|
|
|
6.15
|
|
|
|
Feb-38
|
|
|
|
3.6
|
|
|
|
4,430,000
|
|
|
|
4,429,852
|
|
|
|
3,224,021
|
|
Family Guidance Center for Behavioral
|
|
|
79076NAA0
|
|
|
|
MO
|
|
|
|
HCB
|
|
|
|
5.50
|
|
|
|
Mar-37
|
|
|
|
4.3
|
|
|
|
5,335,000
|
|
|
|
5,211,956
|
|
|
|
3,840,426
|
|
Health Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tri-County Community Action Program
|
|
|
64468KBD7
|
|
|
|
NH
|
|
|
|
SS
|
|
|
|
6.50
|
|
|
|
Sep-37
|
|
|
|
1.8
|
|
|
|
2,100,000
|
|
|
|
2,099,797
|
|
|
|
1,592,451
|
|
West Penn Allegheny Health System
|
|
|
01728AG83
|
|
|
|
PA
|
|
|
|
HCA
|
|
|
|
5.38
|
|
|
|
Nov-40
|
|
|
|
9.3
|
|
|
|
11,530,000
|
|
|
|
10,973,945
|
|
|
|
8,456,506
|
|
NHS III Properties
|
|
|
613609XN1
|
|
|
|
PA
|
|
|
|
HCB
|
|
|
|
6.50
|
|
|
|
Oct-37
|
|
|
|
5.8
|
|
|
|
6,740,000
|
|
|
|
6,739,186
|
|
|
|
5,281,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments of NPPF II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118.1
|
|
|
|
137,472,260
|
|
|
|
135,323,677
|
|
|
|
106,577,328
|
|
Class A Senior Certificates
|
|
|
65537WAA2
|
|
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
|
Feb-11
|
|
|
|
(73.0
|
)
|
|
|
(65,856,685
|
)
|
|
|
(65,856,685
|
)
|
|
|
(65,856,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Junior Certificates
|
|
|
65537WAB0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.1
|
|
|
|
71,615,575
|
|
|
|
69,466,992
|
|
|
|
40,720,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments in tax exempt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular Research Foundation
|
|
|
773557AH6
|
|
|
|
NY
|
|
|
|
OT
|
|
|
|
5.40
|
|
|
|
Jan-35
|
|
|
|
1.7
|
|
|
|
2,000,000
|
|
|
|
1,931,404
|
|
|
|
1,516,840
|
|
Project CURE
|
|
|
19648AGA7
|
|
|
|
CO
|
|
|
|
OT
|
|
|
|
7.38
|
|
|
|
Feb-28
|
|
|
|
7.6
|
|
|
|
7,905,000
|
|
|
|
7,903,250
|
|
|
|
6,879,069
|
|
Labette County Medical Center
|
|
|
505392BU3
|
|
|
|
KS
|
|
|
|
HCA
|
|
|
|
5.75
|
|
|
|
Sep-37
|
|
|
|
0.4
|
|
|
|
350,000
|
|
|
|
356,932
|
|
|
|
319,450
|
|
Florida Care Properties
|
|
|
605279GU6
|
|
|
|
MS
|
|
|
|
HCB
|
|
|
|
6.50
|
|
|
|
Aug-27
|
|
|
|
5.0
|
|
|
|
5,035,000
|
|
|
|
5,069,817
|
|
|
|
4,538,876
|
|
Florida Care Properties
|
|
|
928104KK3
|
|
|
|
VA
|
|
|
|
HCB
|
|
|
|
6.50
|
|
|
|
Aug-27
|
|
|
|
4.4
|
|
|
|
4,475,000
|
|
|
|
4,481,778
|
|
|
|
3,996,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments in tax exempt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
19,765,000
|
|
|
|
19,743,181
|
|
|
|
17,250,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64.2
|
%
|
|
$
|
91,380,575
|
|
|
$
|
89,210,173
|
|
|
$
|
57,971,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All tax exempt securities held directly by the Company and in
NPPF II are revenue bonds, which are issued by a municipality or
an authority on behalf of a non-profit corporation to finance or
refinance a specific project and are typically secured by a
mortgage or a revenue pledge, or both, and a debt service
reserve fund. |
|
|
|
(2) |
|
Sector abbreviations: ED-Education, HCA-Health Care Acute,
HCB-Health Care Behavioral, SS-Social Services and OT-Other |
See accompanying notes to consolidated financial statements.
F-58
MUNI
FUNDING COMPANY OF AMERICA, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income investments
|
|
$
|
1,908,061
|
|
|
$
|
2,266,549
|
|
|
$
|
3,808,113
|
|
|
$
|
4,603,671
|
|
Income other (related party)
|
|
|
7,076
|
|
|
|
2,559
|
|
|
|
13,571
|
|
|
|
10,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,915,137
|
|
|
|
2,269,108
|
|
|
|
3,821,684
|
|
|
|
4,613,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee (related party)
|
|
|
351,661
|
|
|
|
160,883
|
|
|
|
696,815
|
|
|
|
322,287
|
|
Amortization of financing costs
|
|
|
|
|
|
|
18,902
|
|
|
|
|
|
|
|
34,468
|
|
Professional fees
|
|
|
107,880
|
|
|
|
440,298
|
|
|
|
189,001
|
|
|
|
878,442
|
|
Other general and administrative
|
|
|
33,550
|
|
|
|
90,545
|
|
|
|
64,130
|
|
|
|
259,023
|
|
Interest expense (related party)
|
|
|
|
|
|
|
|
|
|
|
92,707
|
|
|
|
|
|
Non cash incentive compensation (related party)
|
|
|
3,918
|
|
|
|
1,145
|
|
|
|
7,836
|
|
|
|
464,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
497,009
|
|
|
|
711,773
|
|
|
|
1,050,489
|
|
|
|
1,958,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
1,418,128
|
|
|
|
1,557,335
|
|
|
|
2,771,195
|
|
|
|
2,654,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(474,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(474,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
683,466
|
|
|
|
12,335,417
|
|
|
|
1,991,448
|
|
|
|
20,694,588
|
|
Derivatives (related party)
|
|
|
(374,632
|
)
|
|
|
|
|
|
|
(411,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains
|
|
|
308,834
|
|
|
|
12,335,417
|
|
|
|
1,580,425
|
|
|
|
20,694,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations before
performance share allocation
|
|
|
1,726,262
|
|
|
|
13,892,752
|
|
|
|
4,351,620
|
|
|
|
22,875,302
|
|
Performance share allocation:
|
|
|
|
|
|
|
(2,082,691
|
)
|
|
|
|
|
|
|
(3,283,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations after
performance share allocation
|
|
$
|
1,726,962
|
|
|
$
|
11,810,061
|
|
|
$
|
4,351,620
|
|
|
$
|
19,591,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net increase in net assets from operations per share(1)
|
|
$
|
0.05
|
|
|
$
|
0.51
|
|
|
$
|
0.12
|
|
|
$
|
0.87
|
|
Diluted net increase in net assets from operations per share(1)
|
|
$
|
0.05
|
|
|
$
|
0.51
|
|
|
$
|
0.12
|
|
|
$
|
0.87
|
|
Weighted average common shares outstanding basic
|
|
|
37,416,669
|
|
|
|
27,320,847
|
|
|
|
37,416,669
|
|
|
|
26,293,133
|
|
Weighted average common shares outstanding diluted
|
|
|
37,416,669
|
|
|
|
27,320,847
|
|
|
|
37,416,669
|
|
|
|
26,293,133
|
|
Distributions declared per share
|
|
$
|
0.03
|
|
|
$
|
|
|
|
$
|
0.03
|
|
|
$
|
|
|
|
|
|
(1) |
|
Calculation excludes performance share allocation |
See accompanying notes to consolidated financial statements.
F-59
MUNI
FUNDING COMPANY OF AMERICA, LLC
Consolidated
Statements of Changes in Net Assets
Six months ended June 30, 2010 and year ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Increase (decrease) in net assets resulting from operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
2,771,195
|
|
|
$
|
5,487,067
|
|
Net realized losses
|
|
|
|
|
|
|
(18,957,635
|
)
|
Net unrealized gains
|
|
|
1,580,425
|
|
|
|
54,491,806
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
4,351,620
|
|
|
|
41,021,238
|
|
|
|
|
|
|
|
|
|
|
Decrease in net assets from distributions to shareholders:
|
|
|
|
|
|
|
|
|
Distributions to common shareholders
|
|
|
(1,222,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease in net assets from distributions to shareholders
|
|
|
(1,222,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net assets from share transactions:
|
|
|
|
|
|
|
|
|
Increase in net assets from issuance of common shares, net
|
|
|
|
|
|
|
25,404,800
|
|
Vesting of incentive compensation
|
|
|
7,836
|
|
|
|
471,966
|
|
|
|
|
|
|
|
|
|
|
Total increase in net assets from share transactions
|
|
|
7,836
|
|
|
|
25,876,766
|
|
|
|
|
|
|
|
|
|
|
Decrease in net assets from performance share allocation:
|
|
|
|
|
|
|
|
|
Performance share allocation paid in cash
|
|
|
|
|
|
|
(2,083,000
|
)
|
Performance share allocation paid in shares
|
|
|
|
|
|
|
(3,837,448
|
)
|
|
|
|
|
|
|
|
|
|
Total decrease in net assets from performance share allocation
|
|
|
|
|
|
|
(5,920,448
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in net assets
|
|
|
3,236,956
|
|
|
|
60,977,556
|
|
Net assets, beginning of period
|
|
|
90,215,109
|
|
|
|
29,237,553
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
93,452,065
|
|
|
$
|
90,215,109
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-60
MUNI
FUNDING COMPANY OF AMERICA, LLC
Six
months ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations before
performance share allocation
|
|
$
|
4,351,620
|
|
|
$
|
22,875,302
|
|
Adjustments to reconcile net increase in net assets resulting
from operations before performance share allocation to net cash
flows used in operating activities:
|
|
|
|
|
|
|
|
|
Net unrealized gains
|
|
|
(1,580,425
|
)
|
|
|
(20,694,588
|
)
|
Non cash incentive compensation (related party)
|
|
|
7,836
|
|
|
|
464,736
|
|
Net realized losses
|
|
|
|
|
|
|
474,191
|
|
Purchase of investments
|
|
|
(2,920,729
|
)
|
|
|
(34,007,728
|
)
|
Sale of investments
|
|
|
341,754
|
|
|
|
25,767,287
|
|
Amortization of bond discount
|
|
|
(37,881
|
)
|
|
|
(54,099
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accrued interest receivables
|
|
|
9,035
|
|
|
|
144,060
|
|
Increase in restricted cash
|
|
|
(155,000
|
)
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(88,553
|
)
|
|
|
127,053
|
|
Increase due to the Manager (related party)
|
|
|
2,169
|
|
|
|
153,026
|
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
(76,779
|
)
|
|
|
238,885
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(146,953
|
)
|
|
|
(4,511,875
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares, net of costs of $173,005
|
|
|
|
|
|
|
21,540,357
|
|
Change in financing assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in due from transfer agent
|
|
|
|
|
|
|
(21,740,357
|
)
|
Increase in accrued expenses and other liabilities
|
|
|
|
|
|
|
200,000
|
|
Distributions to common shareholders
|
|
|
(1,122,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,122,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,269,453
|
)
|
|
|
(4,511,875
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
29,090,353
|
|
|
|
9,560,219
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
27,820,900
|
|
|
|
5,048,344
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Non-Cash Financing Activities
|
|
|
|
|
|
|
|
|
Performance share allocation
|
|
$
|
|
|
|
$
|
2,083,586
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-61
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30,
2010
|
|
(1)
|
Organization
and Nature of Operations
|
Muni Funding Company of America, LLC (the Company)
is a specialty finance holding company that invests directly or
indirectly in U.S. federally tax exempt bonds with the
objective of generating attractive risk-adjusted returns and
predictable cash distributions. The Company seeks to achieve
this objective by (1) acquiring interests in structured
credit vehicles which own debt obligations, the interest on
which is exempt from U.S. federal income taxation;
(2) investing in total return swaps and other derivative
arrangements relating to tax exempt securities; and
(3) making direct investments in tax exempt securities. The
Company may also invest in securities that are subject to
federal income tax.
The Company is externally managed and advised by Muni Capital
Management, LLC (formerly known as Tricadia Municipal
Management, LLC) (the Manager). The Manager is a
wholly-owned subsidiary of Tricadia Holdings, L.P. (together
with its predecessors and subsidiaries Tricadia).
Prior to March 18, 2009, the Company was managed by Cohen
Municipal Capital Management, LLC (the Former
Manager), a subsidiary of Cohen Brothers, LLC (Cohen
and Company). In February 2009, Tiptree Financial
Partners, L.P. (Tiptree), a private partnership
managed by Tricadia, acquired a controlling interest in the
Company. Currently, Tiptree owns 73.81% of the outstanding
Common Shares of the Company.
The Company believes that the current cash and cash equivalents,
along with cash flow from operations, are adequate to meet
anticipated long term (greater than one year) liquidity
requirements.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
The accompanying unaudited consolidated financial statements
have been prepared by management in accordance with accounting
principles generally accepted in the United States of America
(U.S. GAAP) for interim financial information. These
unaudited consolidated financial statements should be read in
conjunction with the Companys audited financial statements
and notes thereto as of and for the year ended December 31,
2009. In the opinion of management, all normal recurring
accruals have been included for a fair presentation of this
interim financial information. The nature of the Companys
business is such that the results of any interim period
information are not necessarily indicative of results for a full
year.
Although the Company conducts its operations so that the Company
is not required to register as an investment company under the
Investment Company Act, for financial reporting purposes the
Company is an investment company and follows the AICPA Audit and
Accounting Guide for Investment Companies (the Audit Guide).
Accordingly, investments are carried at fair value with changes
in fair value reflected in the consolidated statements of
operations.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make assumptions and
estimates that affect the reported amounts in the consolidated
financial statements and the accompanying notes. Actual results
could differ from those estimates.
|
|
(b)
|
Principles
of Consolidation
|
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary MFCA
Funding, Inc. (Funding, Inc.). All intercompany
transactions have been eliminated.
Financial Accounting Standards Board (FASB) Codification
(ASC) Topic 810, Consolidation, clarified
that those entities which account for themselves as investment
companies under the Audit Guide are not subject to the
consolidation requirements of ASC Topic 810.
F-62
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
|
|
(c)
|
Recent
Accounting Developments
|
In June 2009, the FASB issued ASC Topic 860, Transfers and
Servicing and ASC Topic 810, which changes the accounting
for securitizations and VIEs. ASC Topic 860 eliminates the
concept of a QSPE, changes the requirements for derecognizing
financial assets, and requires additional disclosures about
transfers of financial assets, including securitization
transactions and continuing involvement with transferred
financial assets. ASC Topic 810 gives additional guidance on
determining whether an equity is a variable interest entity and
requires ongoing assessments of whether an enterprise is the
primary beneficiary of a variable interest entity. ASC Topic 860
and ASC Topic 810 are effective for fiscal years beginning after
November 15, 2009. The Company has determined that ASC
Topic 860 and ASC Topic 810 do not have a material impact on the
consolidated financial statements.
In June 2009, the FASB issued ASC Topic 855, Subsequent
Events, which establishes general standards of accounting
for, and disclosing, events that occur after the balance sheet
date but before the financial statements are issued or available
to be issued. ASC Topic 855 requires the disclosure of the date
through which an entity has evaluated subsequent events and the
basis for that date. In February 2010, the FASB issued ASU
2010-09,
Amendments to Certain Recognition and Disclosure
Requirements, which amends ASC Topic 855 to provide further
clarification on disclosing the date that the financial
statements are issued and potential conflicts with guidance by
the Securities and Exchange Commission (the SEC).
The Company does not file financial statements with the SEC. See
note 16 for subsequent events disclosures.
In August 2009, the FASB issued Accounting Standards Update
(ASU)
2009-5,
Fair Value Measurements and Disclosures Measuring
Liabilities at Fair Value, which amends ASC Topic 820 to
provide further guidance on how to measure the fair value of a
liability. ASU
2009-5
primarily sets forth the types of valuation techniques to be
used to value a liability when a quoted price in an active
market for the identical liability is not available. In these
circumstances, ASU
2009-5 states
that a company can apply the quoted price of an identical or
similar liability when traded as an asset, or other valuation
techniques that are consistent with principles of ASC Topic 820.
The Company has determined that ASU
2009-5 does
not have a material effect on the consolidated financial
statements.
In January 2010, the FASB issued Accounting Standards Update, or
ASU, 2010-6,
Fair Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements, which amends ASC
Topic 820 to provide further guidance on how to provide greater
levels of disaggregation of asset classes. ASU
2010-6
primarily requires that transfers in and out of Level 1 and
Level 2 be disclosed, that investment activities within
Level 3 be disclosed on a gross basis, and that disclosure
be provided on valuation techniques and inputs used for fair
value measurements. The Company has adopted ASU
2010-6 and
has included the required disclosures in note 5 with the
exception of the requirement to provide disclosure of the
investment activities within Level 3 which will be
effective for the Companys interim and annual reporting
periods that begin after December 15, 2010.
|
|
(d)
|
Significant
Accounting Policies
|
The Companys significant accounting policies are discussed
in the Notes to Consolidated Financial Statements as of and for
the year ending December 31, 2009.
The Company qualifies as a partnership for U.S. federal
income tax purposes. As a partnership, the Company will not pay
federal income tax and will be treated as a pass through entity.
However, Funding Inc. is organized as a C-corporation for
U.S. federal income tax purposes and will pay federal
income tax. Further, the Company may be subject to certain state
and local income taxes.
F-63
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
Deferred tax assets and liabilities are determined using the
asset and liability method in accordance with ASC Topic 740,
Income Taxes. Under this method, deferred tax assets and
liabilities are established for future tax consequences of
temporary differences between the financial statement carrying
amounts of assets and liabilities and their tax basis. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in years in which those
temporary differences are expected to reverse. A valuation
allowance is established when necessary to reduce a deferred tax
asset to the amount expected to be realized. As of June 30,
2010, the Company had recorded a 100% valuation allowance
against the deferred tax asset.
In accordance with ASC Topic 740, the Company evaluates tax
positions taken or expected to be taken in the course of
preparing its tax returns to determine whether the tax positions
are more-likely-than-not of being sustained by the
applicable tax authority. The Companys tax benefit or tax
expense is adjusted accordingly for tax positions not deemed to
meet the more-likely-than-not threshold in the current period.
The Company records interest and penalties associated with
audits as a component of income before income taxes. Penalties
are recorded as an operating expense, and interest expense is
recorded as interest expense in the consolidated statements of
operations. The Company incurred no interest and penalties for
the period from inception to June 30, 2010, nor has taken
any tax positions not deemed to meet the more-likely-than-not
threshold.
The major tax jurisdictions for the Company are Federal, the
states of New Jersey, New York, Oregon and Pennsylvania and the
city of Philadelphia: from 2007 to date, the Company tax years
remain subject to examination by each of these jurisdictions.
The major tax jurisdictions for Funding Inc. are Federal, the
state of Pennsylvania and the city of Philadelphia: from 2007 to
date, Funding Inc. tax years remain subject to examination by
each of these jurisdictions.
|
|
(3)
|
Related
Party Transactions
|
Management Contract. The Company has no
employees and relies upon its Manager to conduct its operations
pursuant to its management agreement dated June 12, 2007
(the Management Agreement). On March 18, 2009, the Former
Manager and Tricadia entered into an Assignment and Assumption
Agreement that provided for the assignment of the Management
Agreement to the Manager. The Manager is responsible for
(i) the selection, purchase, monitoring and sale of
portfolio investments; (ii) developing and implementing the
Companys financing and risk management policies;
(iii) providing the Company with investment advisory
services; and (iv) carrying out the day to day operations
of the Company.
A. Base Management Fee: The Company pays
the Manager a base management fee on a monthly basis equal to
1/12th of the Companys US GAAP basis equity x 1.50%.
The US GAAP basis equity shall exclude one time events pursuant
to changes in US GAAP and other noncash charges (subject to the
approval of the Companys independent directors). To date,
the Company has not sought approval for any one time events or
noncash charges. The Company accrues this expense on a monthly
basis. Base management fees for the six months ended
June 30, 2010 and June 30, 2009 were $696,815 and
$322,287, respectively, and are separately reported in the
consolidated statements of operations. The management fees
payable at June 30, 2010 and December 31, 2009 were
$116,925 and $112,856 respectively, and are recorded as Due to
the Manager in the consolidated statements of assets and
liabilities.
The monthly base management fee payable will be reduced (but not
below zero) by the proportionate share of the amount of any
management fees paid to the Manager or its affiliates by a
structured tax exempt partnership (STEP) or other structured
credit vehicle in which the Company invests. The proportionate
share is based on the percentage of the most junior class of
certificates the Company holds in any STEP or other structured
credit vehicle. Origination fees, structuring fees, or placement
fees paid to the Manager and its affiliates will not reduce the
base management fee. No such fees were incurred for the six
months ended June 30, 2010.
F-64
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
B. Performance Share Allocation
(PSA). The Company will pay the Manager incentive
compensation in the form of an allocation of profits to the
performance share (on a quarterly basis) equal to the product of
(i) 20% of the amount by which (a) consolidated net
income per weighted average common share exceeds (b) the
weighted average offering price of all common shares issued by
the Company multiplied by the quarterly benchmark rate, as
defined, and (ii) the weighted average number of common
shares outstanding in such quarter. This amount is paid through
a special allocation of assets to the performance share after
the end of the quarter.
The quarterly benchmark is equal to the greater of (i) 2%
or (ii) 0.75% plus one-fourth of the 10 year Municipal
Market Data (MMD) index for the quarter. The performance
share calculation will be adjusted to exclude one-time events
pursuant to changes in U.S. GAAP, as well as other noncash
charges (subject to the approval of the Companys
independent directors). To date, the Company has not sought
approval for any one time events or noncash charges. The Company
accrues this expense on a quarterly basis. There was no PSA for
the six months ended June 30, 2010. PSA of $3,283,586 was
approved by the board of directors for the six months ended
June 30, 2009 and is separately reported in the
consolidated statements of operations. See note 16 for
disclosure regarding the subsequent revision to the methodology
for the calculation of PSA which will be effective as of
July 1, 2010.
Interest Rate Swap with Tiptree. On
July 14, 2009, the Company entered into a 10 year
interest rate swap for the purpose of hedging portfolio-wide
interest rate risk. The counterparty for the swap is Tiptree.
The Company will make semi-annual interest payments to Tiptree
based on a fixed rate of 3.6475% and a notional amount of
$5,000,000. Tiptree will make quarterly interest payments based
on a floating rate of three-month LIBOR and a notional amount of
$5,000,000. The fair value of the interest rate swap is a
derivative liability of $383,928 at June 30, 2010 and a
derivative asset of $27,095 at December 31, 2009.
Expense Reimbursements. From time to time, the
Manager will pay certain of the Companys expenses and the
Company will reimburse the Manager. Total reimbursement payments
to the Manager for general and administrative expenses for the
six months ended June 30, 2010 and for the period from
March 18, 2009 through December 31, 2009 were $21,373
and $447, respectively. Total reimbursement payments to the
Former Manager for general and administrative expenses for the
period from January 1, 2009 through March 17, 2009
were $16,780. Unpaid amounts due to the Manager for
reimbursement at June 30, 2010 were $0.
At June 30, 2010, the taxable subsidiary had net operating
loss carry forwards for tax purposes of $1,068,843 and net
capital loss carry forwards of $24,914,455. The net operating
losses may be carried forward to reduce taxable income through
the years 2027 of $651,733, 2028 of $245,589, 2029 of $119,520
and 2030 of $52,001. The net capital losses may be carried
forward to reduce capital gains through the years 2012 of
$2,710,351 and 2013 of $22,204,104.
Items that contributed to deferred tax assets and liabilities at
June 30, 2010 and December 31, 2009, were comprised of
unrealized gains on municipal bonds and net operating loss
carryforwards. The gross deferred tax asset balance as of
June 30, 2010 and December 31, 2009 was approximately
$9,495,159 and $9,554,314 respectively. A 100% valuation has
been established against the deferred tax assets because it is
more likely than not that the Company will be unable to utilize
the loss carry forwards before their respective expiration dates.
F-65
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
The components of the net deferred tax asset are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Unrealized losses on municipal bonds
|
|
$
|
401,006
|
|
|
$
|
478,361
|
|
Net capital loss carryforward
|
|
|
8,720,058
|
|
|
|
8,720,058
|
|
Net operating loss
|
|
|
374,095
|
|
|
|
355,895
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,495,159
|
|
|
|
9,554,314
|
|
Less:
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(9,495,159
|
)
|
|
|
(9,554,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax expense
|
|
$
|
59,155
|
|
|
$
|
259,032
|
|
Change in valuation allowance
|
|
|
(59,155
|
)
|
|
|
(259,032
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
Fair
Value of Financial Instruments
|
Fair value is used to measure the Companys financial
instruments. The fair value of a financial instrument is the
amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, also known as the exit
price.
ASC Topic 820, Fair Value Measurements, establishes a
fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3
measurements). A financial instruments level within the
fair value hierarchy is based on the lowest level of input that
is significant to the fair value measurement. Upon adoption of
ASC Topic 820, the Company did not record a transition
adjustment as the Company previously recorded its assets and its
liabilities at fair value.
The three levels of the fair value hierarchy under ASC Topic 820
are described below:
Level 1 Financial assets and liabilities
whose values are based on unadjusted quoted prices in active
markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2 Financial assets and liabilities
whose values are based on one or more of the following:
(a) Quoted prices for similar assets or liabilities in
active markets;
(b) Quoted prices for identical or similar assets or
liabilities in nonactive markets;
(c) Pricing models whose inputs are observable for
substantially the full term of the asset or liability;
(d) Pricing models whose inputs are derived principally
from or corroborated by observable market data through
correlation or other means for substantially the full term of
the asset or liability.
Level 3 Financial assets and liabilities
whose values are based on prices or valuation techniques that
require inputs that are both significant to the fair value
measurement and unobservable. These inputs reflect
managements own assumptions about the assumptions a market
participant would use in pricing the asset or liability.
F-66
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
The fair values of the Companys assets and liabilities
which qualify as financial instruments under ASC Topic 825,
Financial Instruments, approximate the carrying amounts
presented in the consolidated statements of assets and
liabilities.
The following is a description of the valuation methodologies
used for instruments measured at fair value, including the
general classification of such instruments pursuant to the
valuation hierarchy described above, based on their
classification in the consolidated statements of assets and
liabilities.
Investments
The Company invests in debt obligations, the interest on which
is exempt from U.S. federal income taxation. In some cases
the Company purchases the investments directly; and in other
cases the Company invests in a special purpose trust which holds
the assets. From time to time, the Company may also invest in
certain derivative contracts. The Company records all of its
investments at fair value.
|
|
I.
|
Direct
Investment in Tax Exempt Securities
|
In general, fair value is determined by obtaining quotations
from independent pricing services. In most cases, quotes are
obtained from two pricing services and the average of both
quotes is used. The independent pricing services determine their
quotes using observable inputs such as current interest rates,
specific issuer information and other market data for such
securities. Therefore, the Companys estimate of fair value
is subject to a high degree of variability based upon market
conditions, the availability of specific issuer information and
the assumptions made. Due to the inherent uncertainty of
valuation, these estimated fair values may differ from the
actual price obtained through sales. The valuation inputs used
to arrive at fair value for such debt obligations are generally
classified within Level 2 or 3 of the valuation hierarchy.
The difference between the cost basis in the investment and the
fair value is included in the unrealized
gains/(losses) investments.
The income earned on the tax exempt securities is recorded on an
accrual basis and included as a component of income-investments
in the consolidated statements of operations. Any accrued and
unpaid income is included as a component of receivables in the
consolidated statements of assets and liabilities.
The Company will invest in a trust in order to acquire tax
exempt securities. The trust will acquire the bonds and finance
the purchase by issuing junior and senior certificates. In
general, the Company will purchase all of the junior
certificates and third party investors will purchase the senior
certificates.
In valuing its investment, the junior certificates, the Company
will generally use one of two techniques:
Asset
Based Valuation
Generally, the Company will value all of the underlying assets
of the trust as noted in the previous section above, except for
certain positions within the trust where, as a result of market
conditions in 2008, the Company determined that the independent
prices were too high and an alternate lower valuation based on
credit spread (the spread over the AAA municipal market rates)
would be a better measure of fair value. The Company will then
deduct from this, the fair value of the senior certificates of
the trust. The senior certificates have a stated rate of
interest. In addition, the certificate holder is entitled to a
pro-rata share of 20% of the appreciation of the financial
assets owned by the trust over an agreed upon threshold amount
(Gain Share).
The fair value of the senior certificates is the lower of the
par value of the senior certificates and the fair value of the
portfolio, plus Gain Share, if any. The classification of the
fair value of the senior certificates as either Level 2 or
Level 3 financial instruments in the valuation hierarchy
depends upon the models used for the valuation of the underlying
assets and the inputs to those models. Any change in fair value
of the junior
F-67
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
certificates will be recorded as a component of unrealized
gains/(losses) investments in the consolidated
statements of operations.
Cash Flow
Based Valuation
The Company will determine a valuation of the junior
certificates by estimating the residual cash flows it will
receive and applying an appropriate discount rate. In general, a
cash flow based valuation will be considered a Level 3
valuation.
Each circumstance is unique, but in general, the Company will
default to an asset based valuation. The Company will use a cash
flow based valuation in cases where the asset based valuation
yields a result close to zero (or a negative amount) yet the
residual interest is still generating cash flow and is expected
to for the foreseeable future.
The Net Carry, or net investment income earned by
the trust, is comprised of the income earned on the tax exempt
securities acquired by the trust offset by the stated interest
paid to the senior certificates. This Net Carry is recorded on
an accrual basis and is recorded as a component of
income-investments in the consolidated statements of operations.
Any accrued and unpaid Net Carry is included as a component of
receivables in the consolidated statements of assets and
liabilities. See note 8 for further discussion of the
Companys investment in trusts.
Derivatives
The Company has entered into interest rate swaps. Interest rate
swap contracts represent the contractual exchange of fixed and
floating rate payments based on a notional amount and a
referenced interest rate. The Company uses interest rate swaps
to hedge all or a portion of the interest rate risk associated
with its investments.
The fair value of the interest rate swaps is either included in
derivative asset or derivative liability in the consolidated
statements of assets and liabilities. Fair value is determined
by obtaining broker or counterparty quotes. Because there were
observable inputs used to arrive at these quoted market prices,
the Company considered the interest rate swaps to be
Level 2 financial instruments within the valuation
hierarchy. The change in the unrealized loss is included as a
component of unrealized gains/(losses) derivatives
in the consolidated statements of operations. The periodic
payments or receipts under the Companys interest rate swap
contracts are recorded as an increase or decrease in interest
expense or income in the consolidated statements of operations.
See Notes 6 and 7 for further discussion of the
Companys interest rate swap activities.
Assets and liabilities measured at fair value on a recurring
basis including the senior certificates for which the Company
has elected the fair value option are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
June 30,
|
|
|
Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
2010
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, at fair value(1)
|
|
$
|
44,875,667
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44,875,667
|
|
Investment in NPPF II, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct investment in tax exempt securities, at fair value
|
|
|
17,703,768
|
|
|
|
|
|
|
|
17,703,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, at fair value
|
|
|
62,579,435
|
|
|
|
|
|
|
|
17,703,768
|
|
|
|
44,875,667
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability, at fair value
|
|
|
(383,928
|
)
|
|
|
|
|
|
|
(383,928
|
)
|
|
|
|
|
|
|
|
(1) |
|
See the consolidated schedule of investments for additional
detailed categorization. |
F-68
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
2009
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, at fair value(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in NPPF II, at fair value
|
|
$
|
40,720,643
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40,720,643
|
|
Direct investment in tax exempt securities, at fair value
|
|
|
17,250,488
|
|
|
|
|
|
|
|
17,250,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, at fair value
|
|
|
57,971,131
|
|
|
|
|
|
|
|
17,250,488
|
|
|
|
40,720,643
|
|
Derivative asset, at fair value
|
|
|
27,095
|
|
|
|
|
|
|
|
27,095
|
|
|
|
|
|
|
|
|
(1) |
|
See the consolidated schedule of investments for additional
detailed categorization. |
The following table presents additional information about assets
and liabilities measured at fair value on a recurring basis and
for which the Company has utilized Level 3 inputs to
determine fair value for the six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized/
|
|
|
Transfers in
|
|
|
Purchases
|
|
|
|
|
|
Unrealized
|
|
|
|
December 31,
|
|
|
Unrealized
|
|
|
And/or Out,
|
|
|
and Sales and
|
|
|
June 30,
|
|
|
Losses Still
|
|
|
|
2009
|
|
|
Gains
|
|
|
Net, of Level 3
|
|
|
Other, Net
|
|
|
2010
|
|
|
Held(1)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in NPPF II, at fair value
|
|
$
|
40,720,642
|
|
|
$
|
1,539,101
|
|
|
$
|
|
|
|
$
|
2,615,923
|
|
|
$
|
44,875,667
|
|
|
$
|
(27,207,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, at fair value
|
|
$
|
40,720,642
|
|
|
$
|
1,539,101
|
|
|
$
|
|
|
|
$
|
2,615,923
|
|
|
$
|
44,875,667
|
|
|
$
|
(27,207,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount of total gains or losses, attributable to
the change in unrealized losses relating to assets classified as
Level 3 that are still held at June 30, 2010. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized/
|
|
|
Transfers in
|
|
|
Purchases
|
|
|
|
|
|
Unrealized
|
|
|
|
December 31,
|
|
|
Unrealized
|
|
|
and/or Out,
|
|
|
and Sales and
|
|
|
December 31,
|
|
|
Losses Still
|
|
|
|
2008
|
|
|
Gains
|
|
|
Net, of Level 3
|
|
|
Other, Net
|
|
|
2009
|
|
|
Held(1)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in NPPF II, at fair value
|
|
$
|
|
|
|
$
|
36,452,122
|
|
|
$
|
|
|
|
$
|
4,268,521
|
|
|
$
|
40,720,643
|
|
|
$
|
(28,746,349
|
)
|
Investment in Merrill Lynch Trusts, at fair value
|
|
|
840,389
|
|
|
|
19,650,597
|
|
|
|
|
|
|
|
(20,490,986
|
)
|
|
|
|
|
|
|
|
|
Direct Investments in Tax Exempt Securities, at fair value
|
|
|
14,462,513
|
|
|
|
4,364,155
|
|
|
|
(17,250,488
|
)
|
|
|
(1,576,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, at fair value
|
|
$
|
15,302,902
|
|
|
$
|
60,466,874
|
|
|
$
|
(17,250,488
|
)
|
|
$
|
(17,798,645
|
)
|
|
$
|
40,720,643
|
|
|
$
|
(28,746,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount of total gains or losses for the period,
included in earnings, attributable to the charge in unrealized
gains (losses) relating to assets classified as Level 3
that are still held at December 31, 2009. |
F-69
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
The Company may utilize derivative financial instruments as part
of its overall investment activities. Investments in derivative
contracts are subject to additional risk that can result in a
loss of all or part of an investment. The Companys
derivative activities are primarily classified by underlying
interest rate risk. In addition to this interest rate exposure,
the Company is also subject to additional counterparty risk
should its counterparties fail to meet the contract terms.
Interest Rate Swaps
The Company is exposed to interest rate risk when there is an
unfavorable change in the value of investments as a result of
adverse movements in the market interest rates. The Company
enters into interest rate swap contracts to protect against such
adverse movements in the interest rates.
Interest rate swaps are contracts whereby counterparties
exchange different rates of interest on a specified notional
amount for a specified period of time. The payment flows are
usually netted against each other, with the difference being
paid by one party to the other. The Company enters into these
contracts so as to minimize the underlying interest rate
exposure of the investment portfolio. The Company is required to
post cash collateral for the benefit of the counterparty. This
is included as a component of restricted cash in the
consolidated statements of assets and liabilities.
The volume of the Companys interest rate derivative
activities consisted of one contract that was entered into in
2009 and this contract remains outstanding as of June 30,
2010. Such limited interest rate activity is consistent with the
limited trading activity within the Companys investment
portfolio.
The following table identifies the fair value amounts of
derivative instruments included in the consolidated statements
of assets and (liabilities) as derivative contracts, categorized
by primary underlying risk. Balances are presented on a gross
basis, prior to the application of the impact of counterparty
and collateral netting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Other
|
|
|
|
|
Contract Risk
|
|
Contract Risk
|
|
Total
|
|
Swap contracts at June 30, 2010
|
|
$
|
(383,928
|
)
|
|
$
|
|
|
|
$
|
(383,928
|
)
|
Swap contracts at December 31, 2009
|
|
|
27,095
|
|
|
|
|
|
|
|
27,095
|
|
The following table identifies the net gain and loss amounts
included in the consolidated statements of operations as net
gain (loss) from derivative contracts, categorized by primary
underlying risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Other
|
|
|
|
|
Contract Risk
|
|
Contract Risk
|
|
Total
|
|
Swap contracts for the six months ended June 30, 2010
|
|
$
|
(411,023
|
)
|
|
$
|
|
|
|
$
|
(411,023
|
)
|
Swap contracts for the year ended December 31, 2009
|
|
|
27,095
|
|
|
|
|
|
|
|
27,095
|
|
Restricted cash is comprised of:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
IRS collateral deposit
|
|
$
|
432,000
|
|
|
$
|
277,000
|
|
The interest rate swap collateral deposit represents cash posted
with its counterparty as credit support. The amount will be
returned when the interest rate swap is terminated.
F-70
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
NPPF II was created in 2008 and made its initial acquisition of
a portfolio of tax exempt securities by issuing Class A
Senior Certificates (the senior certificates) and
Class B Junior Certificates (the junior
certificates) to finance this purchase. The Company
purchased all of the junior certificates. These certificates are
carried at fair value and are included as a component of
investments in the consolidated statements of assets and
liabilities. The fair value of the junior certificates is the
fair value of the tax exempt securities owned by NPPF II less
the fair value of the senior certificates issued by NPPF II. See
note 2-f
Investments in Trusts in the Notes to Consolidated
Financial Statements as of and for the year ending
December 31, 2009 for the Companys methodology in
determining fair value of the assets and liabilities of NPPF II.
The fair value of the tax exempt securities acquired by NPPF II
was $172.1 million. The cash value contributed for the
senior certificates and junior certificates were
$118.1 million and $56.2 million, respectively, which
was used to fund the purchase of the bonds plus accrued interest
purchased and closing costs.
The trust agreement required a mandatory auction of the assets
of the trust in February 2009. The proceeds of the mandatory
auction are required to be used to redeem the senior
certificates. If the bids received by the trustee do not exceed
the face amount of the senior certificates (currently
$62.9 million), the auction fails. Upon a failed auction,
the interest rate payable to the senior certificates increases
to a floating rate based on the rolling
30-day
average of the USD-SIFMA Municipal Swap Index, subject to a
maximum rate which will not exceed the aggregate amount of
income during the distribution period, and the auction is
repeated weekly until successful.
For periods prior to the mandatory auction, the trust agreement
provided for payment of a fixed rate of 2.85% per annum to the
Class A Certificate holder. Also, proceeds from
dispositions of tax exempt securities owned by the trust were
paid to the senior certificate holder as partial paydown of its
principal outstanding (after adjustment for any Disposition
Gains as determined in accordance with the Internal Revenue Code
which were generally distributed 20% to the senior certificate
holder and 80% to the junior certificate holder). Such principal
paydowns served to reduce interest accruing to the senior
certificate in subsequent periods. The remainder of income and
principal receipts were paid to the junior certificate holder.
Generally, if a certificate holder had a deficit balance in its
capital account following the liquidation of its interest in the
trust, such certificate holder had no obligation to make any
payment to any other certificate holder.
Due to the general weak conditions in the market for tax exempt
securities leading up to the date of the mandatory auction, on
February 27, 2009, the Company and the holder of the senior
certificates of NPPF II agreed to extend the mandatory auction
of the trusts assets until February 2011 and to modify the
terms of the trust agreement as follows:
|
|
|
|
|
The Company agreed to contribute $8 million of capital to
the trust which was used to pay down the principal balance of
the senior certificates. The Company recorded this payment as
additional investment in the junior certificates and no
additional junior certificates were issued.
|
|
|
|
|
|
The Class A Certificate Rate (Priority Income Distribution)
was increased from 2.85% to 3.00% fixed for the remaining period
until auction. In addition, a significant portion of the excess
income proceeds was allocated to reduce the outstanding
principal balance of the senior certificates, leaving
approximately 13.35% of net income proceeds for distribution to
the junior certificate holder.
|
|
|
|
|
|
Distribution of the proceeds from dispositions of tax exempt
securities are allocated to the senior and junior certificate
holders either 80% and 20%, respectively, or 100% and 0%,
respectively, based on the reasons for the disposition and
whether the senior certificate holder gives prior consent to
unscheduled dispositions. Any Disposition Gain continues to be
determined in accordance with the Internal Revenue
|
F-71
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
|
|
|
|
|
Code and to generally be distributed 20% to the senior
certificate holder and 80% to the junior certificate holder.
|
|
|
|
|
|
The Company can further extend the mandatory auction date until
February 2012, if it contributes an additional $10 million
in collateral into the trust (either in cash or securities
reasonably acceptable to the senior certificate holder).
|
|
|
|
|
|
Although the lack of obligation to restore a deficit balance as
described above is unchanged, the Company contributed additional
value under a deficit restoration requirement, to the trust at
the time of liquidation of the trust to the extent that asset
values are insufficient to fully redeem the senior certificates.
|
|
|
|
|
|
The deficit restoration requirement is supported by the deposit
of $19.8 million par value of bonds currently held by the
Company into a collateral account for the benefit of the trust.
The Company receives the periodic income payments from these
bonds and the proceeds of any maturities or sales are paid to
the holder of the senior certificates as a reduction of par.
This represents all of the Companys bonds that are not
held in trusts.
|
|
|
|
The senior certificate holder has agreed that the Companys
obligation to contribute to the deficit restoration can be
satisfied at the Companys option at any time if the
Company contributes an additional $7 million in cash
collateral to the trust, at which point the $19.8 million
of bonds would be released.
|
There are no other contractual obligations related to NPPF II
and no unrecorded liabilities in connection with NPPF II. The
senior certificates are recourse only to the assets of the trust
and the Companys bonds that are not held in trusts as
described above. If the assets of the trust became worthless or
the trust otherwise could not redeem the senior certificates,
the net loss to the Company would be the net carrying value of
the junior certificates of the trust, plus the net carrying
value of direct investments in bonds included in the
consolidated statements of assets and liabilities and any
accrued and unpaid interest receivable on the Companys
investment in NPPF II and the direct investments in bonds. As of
June 30, 2010, the junior certificates are recorded at a
fair value of $44.9 million. The accrued Net Carry related
to the junior certificates is included in the consolidated
statements of assets and liabilities as accrued interest
receivables and is recorded at a carrying value of
$2.8 million.
During the six months ended June 30, 2010,
$3.0 million of the face amount of senior certificates were
redeemed as a result of dispositions within the portfolio and
the allocation of excess income proceeds.
The Company is organized as a limited liability company and is
taxed as a partnership. The Company currently has the following
classes of membership interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
Description
|
|
Authorized
|
|
June 30, 2010
|
|
December 31, 2009
|
|
Unrestricted common shares
|
|
|
Unlimited
|
|
|
|
37,396,669
|
|
|
|
37,394,169
|
|
Restricted common shares
|
|
|
60,000
|
|
|
|
20,000
|
|
|
|
22,500
|
|
LTIP shares
|
|
|
690,000
|
|
|
|
|
|
|
|
|
|
The Company has granted the Manager one performance share. The
performance share is entitled to a special allocation of profits
as described in note 3. The performance share is generally
not entitled to vote.
F-72
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
As a limited liability company, the shareholder interests noted
above are generally limited in their liability to the extent of
each shareholders investment in the Company. The Company
has no stated date of dissolution. The following tables show the
Companys share activity for the periods presented:
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
December 31,
|
|
|
Shares
|
|
|
June 30,
|
|
Membership interests
|
|
2009
|
|
|
Vested
|
|
|
2010
|
|
|
Unrestricted common shares
|
|
|
37,394,169
|
|
|
|
2,500
|
|
|
|
37,396,669
|
|
Restricted common shares
|
|
|
22,500
|
|
|
|
(2,500
|
)
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,416,669
|
|
|
|
|
|
|
|
37,416,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rollforward
of Components of Members Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Incentive
|
|
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
Compensation
|
|
|
Earnings
|
|
|
2010
|
|
|
Unrestricted common shares
|
|
$
|
186,656,412
|
|
|
$
|
5,425
|
|
|
$
|
|
|
|
$
|
186,661,837
|
|
Restricted common shares
|
|
|
8,375
|
|
|
|
2,411
|
|
|
|
|
|
|
|
10,786
|
|
Earnings/(deficit)
|
|
|
(84,796,238
|
)
|
|
|
|
|
|
|
4,351,620
|
|
|
|
(80,444,618
|
)
|
Performance share allocation
|
|
|
(5,920,448
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,920,448
|
)
|
Distributions
|
|
|
(5,732,992
|
)
|
|
|
|
|
|
|
(1,122,500
|
)
|
|
|
(6,855,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,215,109
|
|
|
$
|
7,836
|
|
|
$
|
3,229,120
|
|
|
$
|
83,452,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10)
|
Net
Increase in Net Assets from Operations Per Share
|
The Company calculates basic and diluted net increase in net
assets from operations per share by dividing net increase in net
assets from operations for the period by the weighted average
shares of its common shares outstanding for the period, which
includes common shares outstanding, as well as vested and
unvested restricted common shares and vested and unvested LTIP
shares.
As of June 30, 2010, 20,000 restricted shares had not
vested. Both basic and fully diluted shares outstanding include
the unvested restricted common shares outstanding during the six
months ended June 30, 2010.
The Company does not include the performance share issued to the
Manager in either the fully diluted net increase in net assets
from operations per share or basic net increase in net assets
from operations per share calculation as it does not participate
in the net profits or distributions of the Company.
F-73
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
Basic and diluted net increase in net assets from operations per
share were calculated using the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net increase in net assets resulting from operations before
performance share allocation Basic
|
|
$
|
1,726,962
|
|
|
$
|
13,892,752
|
|
|
$
|
4,351,620
|
|
|
$
|
22,875,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations before
performance share allocation Diluted
|
|
$
|
1,726,962
|
|
|
$
|
13,892,752
|
|
|
$
|
4,351,620
|
|
|
$
|
22,875,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic EPS
|
|
|
37,416,669
|
|
|
|
27,320,847
|
|
|
|
37,416,669
|
|
|
|
26,293,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for diluted EPS
|
|
|
37,416,669
|
|
|
|
27,320,847
|
|
|
|
37,416,669
|
|
|
|
26,293,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11)
|
Commitments
and Contingencies
|
In the normal course of business, the Company enters into
contracts that contain a variety of indemnifications. The
Companys maximum exposure under these arrangements is
unknown. However, the Company does not expect claims or losses
pursuant to these contracts and expects the risk of loss to be
remote. Thus no amounts have been accrued related to such
indemnifications.
As described in note 8, the NPPF II trust was originally
scheduled to auction its assets in February 2009. The Company
has executed an amendment to the trust agreement which extends
the auction until February 2011 with an option to extend to
February 2012.
In the ordinary course of business, the Company manages a
variety of risks including market risk and credit risk. The
Company identifies, measures, and monitors risk through various
control mechanisms including diversifying exposures and
activities across a variety of instruments, markets, and
counterparties.
Market risk is the risk of potential adverse changes in the
value of financial instruments and their derivatives because of
changes in market conditions, such as interest rate movements
and volatility in security prices. The Company manages market
risk through the use of risk management strategies and various
analytical monitoring techniques that evaluate the effect of
cash instruments and derivative contracts.
Credit risk is the risk the counterparties may fail to fulfill
their obligations or that the collateral value becomes
inadequate. The Company attempts to minimize its counterparty
risk exposure by monitoring the size of its credit exposure to
and the creditworthiness of its counterparties.
|
|
(13)
|
Concentrations
of Credit Risk
|
Cash and Cash Equivalents. As of June 30,
2010, the Company held substantially all of its cash and cash
equivalents with U.S. Bank. If U.S. Bank failed under
its obligation as custodian of these funds, the Company could
lose a portion or all of its unrestricted cash balances with
U.S. Bank.
F-74
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
The Company paid cash distributions as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Common shareholders
|
|
$
|
1,121,825
|
|
|
$
|
|
|
Restricted common shareholders
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,122,500
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15)
|
Financial
Highlights
|
In accordance with the Audit Guide, the per share information
and ratios to average net assets are presented below for each
period:
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning net asset value
|
|
$
|
2.41
|
|
|
$
|
1.64
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.08
|
|
|
|
0.15
|
|
Net realized losses
|
|
|
|
|
|
|
(0.51
|
)
|
Net unrealized gains
|
|
|
0.04
|
|
|
|
1.46
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.12
|
|
|
|
1.10
|
|
Issuance of rights offering, net
|
|
|
|
|
|
|
1.19
|
|
Other share transactions
|
|
|
|
|
|
|
0.12
|
|
Dilutive effect of rights offering and other
|
|
|
|
|
|
|
(1.48
|
)
|
Distributions to shareholders
|
|
|
(0.03
|
)
|
|
|
|
|
Performance share allocations
|
|
|
|
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
Ending net asset value per share outstanding
|
|
$
|
2.50
|
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
|
|
The per share amounts above are calculated based on the
Companys shares outstanding as well as its unvested
restricted stock and its vested and unvested LTIP shares. The
LTIP shares are included because they are eligible to receive
distributions and the performance share is excluded.
Ratios to
Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Management fee
|
|
|
0.75
|
%
|
|
|
1.53
|
%
|
Interest expense
|
|
|
0.10
|
|
|
|
|
|
Other expenses
|
|
|
0.27
|
|
|
|
2.67
|
|
Noncash incentive compensations
|
|
|
0.01
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
1.13
|
%
|
|
|
4.95
|
%
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
3.00
|
%
|
|
|
8.71
|
%
|
Total return
|
|
|
1.78
|
%
|
|
|
20.84
|
%
|
F-75
MUNI
FUNDING COMPANY OF AMERICA, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30,
2010
The above ratios for the six months ended June 30, 2010 and
for the year ended December 31, 2009 are calculated by
dividing income or expenses as applicable by the monthly average
of net assets ($92.4 million and $63.0 million,
respectively).
Total return is calculated by dividing the quarterly net
increase in net assets from operations by beginning net assets
for the period on a compounded basis.
The per share information, ratios and total return above are
calculated based on the shareholder group taken as a whole. An
individual shareholders results may vary from those shown
above due to the timing of capital transactions.
Subsequent events have been evaluated through November 8,
2010, the issuance date of our financial statements. On
May 13, 2010 the Company filed
Form S-1,
Registration Statement under the Securities Act of 1933, for an
initial public offering of Class A common shares of the
Company, Amendment No. 1 was filed on August 13, 2010,
and Amendment No. 2 was filed on November 8, 2010.
Following the offering, the Company will have two classes of
shares; Class A common shares and Class B common shares.
The rights of all shareholders will be identical, except with
respect to voting and conversion rights. Each Class A
common share will be entitled to one vote per share. Each
Class B common share will be entitled to ten votes per
share and will be convertible at any time into one Class A
common share. The proposed maximum offering is $28,750,000. The
commencement of the proposed sale to the public will be as soon
as practicable after the effective date of the registration.
On July 28, 2010, the board of directors declared a
distribution of three cents per share to holders of our common
shares of record on August 18, 2010, payable on
September 1, 2010.
On August 11, 2010, the Company made a loan to Tiptree, the
holder of approximately 73.81% of our outstanding class B
common shares and an affiliate of our manager, in the original
principal amount of $23,000,000. The purpose of the loan was to
partially finance an escrow deposit in connection with
Tiptrees acquisition of at least a majority of issued and
outstanding common stock of a publicly-traded real estate
investment trust focused on health care-related real estate
interests. The loan is secured by a pledge of all the assets of
Tiptree and is fully recourse to Tiptree, but not the partners
of Tiptree. The loan bears interest at an initial rate of 5% per
annum and initially matures on December 11, 2010; provided,
that Tiptree has the sole option to extend the loan for an
additional four-month period, with the interest rate increasing
to 9% per annum. The current principal balance outstanding of
the loan is $18,234,518.
On August 16, 2010, a special meeting of shareholders was
held to consider an amendment to the definition of
Performance Share Distribution in the Companys
First Amended and Restated Limited Liability Company Agreement.
Under the new definition, the Company will distribute to its
manager quarterly 20% of any increase in the Companys book
value, after giving effect to the recovery of any previous
reduction in the Companys book value, if the
Companys net appreciation for the applicable quarter
exceeds an annualized hurdle rate of 5% and to the extent the
distribution does not cause the Companys net appreciation
to fall below the hurdle rate. The amendment was approved by
shareholders representing 30,130,720 shares of the
36,517,528 shares that were represented at the meeting by
proxy.
F-76
$25,000,000
MUNI FUNDING COMPANY OF
AMERICA, LLC
Class A Common
Shares Representing Limited Liability Company
Interests
PROSPECTUS
LADENBURG THALMANN &
CO. INC.
Until ,
2010 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our securities, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
,
2010
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
References to the company, the
Registrant, we, us,
our and similar expressions in this Part II
refer to Muni Funding Company Of America, LLC.
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the costs and expenses, other
than the underwriting discount, payable by us in connection with
the offering of the securities being registered. All amounts are
estimates except the Securities and Exchange Commission
registration fee and the Financial Industry Regulatory Authority
filing fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
2,049.88
|
|
FINRA filing fee
|
|
$
|
3,375.00
|
|
NASDAQ Stock Market LLC application and listing fees
|
|
|
|
|
Accounting fees and expenses
|
|
|
|
|
Legal fees and expenses
|
|
|
|
|
Printing and engraving expenses
|
|
|
|
|
Miscellaneous
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 18-108
of the Delaware Limited Liability Company Act provides that a
limited liability company may indemnify any member or manager or
other person from and against any and all claims and demands
whatsoever. The section of the prospectus entitled
Description of Securities Operating Agreement
and Bylaws Limitations on Liability and
Indemnification of Our Directors and Officers is
incorporated herein by reference.
We currently maintain liability insurance for our directors and
officers. Such insurance would be available to our directors and
officers in accordance with its terms.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
On June 12, 2007, 17,250,100 common shares representing
membership interests, or common shares, were sold by us to
Friedman, Billings, Ramsey & Co. Inc. (the
Initial Purchaser), at the price of $10.00 per
share, in an offering exempt from registration pursuant to
Section 4(2) of the Securities Act. The Initial Purchaser
resold these common shares to qualified institutional
buyers, as defined in Rule 144A under the Securities
Act, and to certain persons outside the United States pursuant
to Regulation S under the Securities Act.
On June 12, 2007, pursuant to our 2007 Equity Incentive
Plan, we granted 30,000 restricted common shares. The recipients
of these restricted common shares did not pay any consideration
for these awards.
On June 26, 2007, pursuant to our 2007 Equity Incentive
Plan, we granted 345,000 LTIP shares. The recipients of these
LTIP shares did not pay any consideration for these awards.
On August 9, 2007, pursuant to our 2007 Equity Incentive
Plan, we granted 267,000 LTIP shares. The recipients of these
LTIP shares did not pay any consideration for these awards.
On November 15, 2007, pursuant to our 2007 Equity Incentive
Plan, we granted 25,000 LTIP shares. The recipients of these
restricted common shares did not pay any consideration for these
awards.
On April 14, 2009, pursuant to our 2007 Equity Incentive
Plan, we granted 7,500 restricted common shares. The recipients
of these restricted common shares did not pay any consideration
for these awards.
II-1
On April 14, 2009, we granted 553,407 common shares in lieu
of a cash distribution owed to our manager pursuant to its
ownership of the Performance Share. These shares were valued at
$2.17 per share. The sale of these common shares was exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
On June 26, 2009, we issued subscription rights to the then
holders of common shares and LTIP shares to purchase up to an
aggregate of 18,116,964 new common shares at the price of $1.20
per share. The sale of these common shares was exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and Regulation S
under the Securities Act. The exemption from registration
provided by Section 4(2) of the Securities Act was
available because (i) the transaction did not involve a
public offering, (ii) each of the investors other than the
investors that were issued subscription rights pursuant to
Regulation S was an accredited investor as defined in
Rule 501(a) under the Securities Act or a qualified
institutional buyer as defined in Rule 144A under the
Securities Act, (iii) the investors had access to
information about us and their investment and (iv) the
investors took the securities for investment and not resale.
On June 26, 2009, we consummated an exchange offer pursuant
to which one replacement LTIP share with a performance target of
$1.25 per share was issued in exchange for two then-outstanding
LTIP shares with a performance target of $10.00 per LTIP share.
LTIP shareholders exchanged 566,915 LTIP shares with a
performance target of $10.00 per LTIP share for 283,458 new LTIP
shares with a performance target of $1.25 per LTIP share
pursuant to such exchange offer. The exchange of these LTIP
shares was exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
On July 23, 2009, pursuant to our 2007 Equity Incentive
Plan, we granted 15,000 restricted common shares. The recipients
of these restricted common shares did not pay any consideration
for these awards.
On July 23, 2009, we granted 438,712 common shares in lieu
of a cash distribution owed to our manager pursuant to its
ownership of the Performance Share. These shares were valued at
$2.01 per share. The sale of these common shares was exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
On October 22, 2009, we granted 721,528 common shares in
lieu of a cash distribution owed to our manager pursuant to its
ownership of the Performance Share. These shares were valued at
$2.43 per share. The sale of these common shares was exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
During our 2009 fiscal year, 246,584 LTIP shares were converted
into 566,915 common shares valued at $3.50 per Share. The
exchange of these LTIP shares was exempt from registration under
the Securities Act in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving a
public offering.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
(a) The following exhibits are filed as part of this
Registration Statement:
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement*
|
|
3
|
.1
|
|
Certificate of Formation*
|
|
3
|
.2
|
|
First Amended and Restated Limited Liability Company Agreement*
|
|
3
|
.3
|
|
Amendment No. 1 to First Amended and Restated Limited
Liability Company Agreement*
|
|
3
|
.4
|
|
Bylaws*
|
|
4
|
.1
|
|
Specimen Share Certificate*
|
|
5
|
.1
|
|
Opinion of Schulte Roth & Zabel LLP*
|
|
8
|
.1
|
|
Tax Opinion of Ashurst LLP*
|
|
10
|
.1
|
|
Management Agreement, dated as of June 12, 2007, by and
between Muni Funding Company of America, LLC and Muni Capital
Management, LLC*
|
II-2
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.2
|
|
Assignment and Assumption Agreement, dated as of March 18,
2009, by and among Cohen Municipal Capital Management, LLC,
Cohen Brothers, LLC, Muni Capital Management, LLC and Tricadia
Capital Management, LLC*
|
|
10
|
.3
|
|
Equity Incentive Plan*
|
|
10
|
.4
|
|
Form of Registration Rights Agreement*
|
|
10
|
.5
|
|
Form of Director and Officer Indemnification Agreement*
|
|
10
|
.6
|
|
Interest Rate Swap Agreement, dated as of July 14, 2009,
between Tiptree Financial Partners, L.P. and Muni Funding
Company of America, LLC*
|
|
10
|
.7
|
|
Promissory Note, dated August 11, 2010, by Tiptree
Financial Partners, L.P. to Muni Funding Company of America, LLC*
|
|
10
|
.8
|
|
Security Agreement, dated August 11, 2010, between Tiptree
Financial Partners, L.P. and Muni Funding Company of America,
LLC*
|
|
21
|
.1
|
|
Subsidiaries of Muni Funding Company of America, LLC*
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP
|
|
23
|
.2
|
|
Consent of KPMG LLP
|
|
23
|
.3
|
|
Consent of Schulte Roth & Zabel LLP (included in
Exhibit 5.1)*
|
|
24
|
.1
|
|
Powers of Attorney (included on signature page of the initial
filing)
|
|
99
|
.1
|
|
Form of Charter of Audit Committee*
|
|
|
|
* |
|
To be filed by amendment. |
(b) No financial statement schedules are required to be
filed with this Registration Statement.
(a) The undersigned hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the
Registrant certifies that it has duly caused this Amendment
No. 2 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
New York, State of New York, on the 8th day of November,
2010.
MUNI FUNDING COMPANY OF AMERICA, LLC
Name: Michael Barnes
|
|
|
|
Title:
|
Chairman and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act, this
Registration Statement or Amendment has been signed by the
following persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
Barnes
Michael
Barnes
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer)
|
|
November 8, 2010
|
|
|
|
|
|
/s/ Julia
Wyatt
Julia
Wyatt
|
|
Chief Financial Officer
(Principal Accounting and Financial Officer)
|
|
November 8, 2010
|
|
|
|
|
|
/s/ Geoffrey
Kauffman
Geoffrey
Kauffman
|
|
Director
|
|
November 8, 2010
|
|
|
|
|
|
|
|
By:
|
|
*
Attorney-in-fact
Daniel G. Cohen
|
|
Director
|
|
November 8, 2010
|
|
|
|
|
|
|
|
By:
|
|
*
Attorney-in-fact
Andrew Gordon
|
|
Director
|
|
November 8, 2010
|
|
|
|
|
|
|
|
By:
|
|
*
Attorney-in-fact
Thomas J. Reilly, Jr.
|
|
Director
|
|
November 8, 2010
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Michael
Barnes
Michael
Barnes
Attorney-in-fact
|
|
|
|
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement*
|
|
3
|
.1
|
|
Certificate of Formation*
|
|
3
|
.2
|
|
First Amended and Restated Limited Liability Company Agreement*
|
|
3
|
.3
|
|
Amendment No. 1 to First Amended and Restated Limited Liability
Company Agreement*
|
|
3
|
.4
|
|
Bylaws*
|
|
4
|
.1
|
|
Specimen Share Certificate*
|
|
5
|
.1
|
|
Opinion of Schulte Roth & Zabel LLP*
|
|
8
|
.1
|
|
Tax Opinion of Ashurst LLP*
|
|
10
|
.1
|
|
Management Agreement, dated as of June 12, 2007, by and
between Muni Funding Company of America, LLC and Muni Capital
Management, LLC*
|
|
10
|
.2
|
|
Assignment and Assumption Agreement, dated as of March 18,
2009, by and among Cohen Municipal Capital Management, LLC,
Cohen Brothers, LLC, Muni Capital Management, LLC and Tricadia
Capital Management, LLC*
|
|
10
|
.3
|
|
Equity Incentive Plan*
|
|
10
|
.4
|
|
Form of Registration Rights Agreement*
|
|
10
|
.5
|
|
Form of Director and Officer Indemnification Agreement*
|
|
10
|
.6
|
|
Interest Rate Swap Agreement, dated as of July 14, 2009,
between Tiptree Financial Partners, L.P. and Muni Funding
Company of America, LLC*
|
|
10
|
.7
|
|
Promissory Note, dated August 11, 2010, by Tiptree
Financial Partners, L.P. to Muni Funding Company of America LLC*
|
|
10
|
.8
|
|
Security Agreement, dated August 11, 2010, between Tiptree
Financial Partners, L.P. and Muni Funding Company of America,
LLC*
|
|
21
|
.1
|
|
Subsidiaries of Muni Funding Company of America, LLC*
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP
|
|
23
|
.2
|
|
Consent of KPMG LLP
|
|
23
|
.3
|
|
Consent of Schulte Roth & Zabel LLP (included in
Exhibit 5.1)*
|
|
24
|
.1
|
|
Powers of Attorney (included on signature page of initial filing)
|
|
99
|
.1
|
|
Form of Charter of Audit Committee*
|
|
|
|
* |
|
To be filed by amendment. |