UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
Securities Exchange Act of 1934
For the period ended: September 30, 1996 Commission file number: 001-11981
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MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
- ------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1449733
- ----------------------- ------------------------------------
(State of organization) (I.R.S. Employer Identification No.)
218 North Charles Street, Suite 500, Baltimore, Maryland 21201
- --------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(410)962-8044
-------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The Company had 11,117,567 growth shares outstanding as of November
13, 1996, the latest practicable date.
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
INDEX TO FORM 10-Q
Part I- FINANCIAL INFORMATION
Item
1. Financial Statements
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II- OTHER INFORMATION
Item
6. Exhibits and Reports on Form 8-K
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
BALANCE SHEETS (Unaudited)
IN THOUSANDS, EXCEPT BAC/SHARE DATA
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $5,776 $9,810
Short-term investments 44,769 -
Interest receivable 898 434
Investment in mortgage revenue bonds (Note 3) 163,305 146,142
Investment in parity working capital loans and demand notes, net of
valuation allowance of $629 in 1996 and $600 in 1995 (Note 4 10,242 2,890
Investment in MLP II - 65,299
Other assets 179 240
--------------- ---------------
TOTAL ASSETS $225,169 $224,815
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $992 $544
Distributions payable 22 7,977
Due to affiliates (Note 5) 4 9
--------------- ---------------
TOTAL LIABILITIES 1,018 8,530
--------------- ---------------
Minority Interest - 3
--------------- ---------------
Shareholders' Equity
Unrealized gain (loss) on mortgage revenue bonds
available for sale, net 11,202 (981)
General partners - (477)
Limited partners:
Series I (beneficial assignee certificates- issued
and outstanding 200,000 certificates) - 141,111
Series II (beneficial assignee certificates- issued
and outstanding 96,256 certificates) - 76,629
Preferred Shares:
Series I ( 16,330 shares issued and outstanding) 11,476 -
Series II ( 7,618 shares issued and outstanding) 6,197 -
Preferred Capital Distribution Shares:
Series I (8,909 shares issued and outstanding) 4,661 -
Series II (3,809 shares issued and outstanding) 2,127 -
Term Growth Shares (2,000 shares issued and outstanding) 64 -
Growth Shares (11,153,965 shares issued and outstanding
including shares in treasury) 188,962 -
--------------- ---------------
224,689 216,282
Less growth shares held in treasury
at cost (36,398 shares) (Note6) (538) -
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 224,151 216,282
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 7) - -
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $225,169 $224,815
=============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
STATEMENTS OF INCOME (Unaudited)
IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCOME
Interest on mortgage revenue bonds $3,895 $2,670 $10,422 $9,624
Interest on parity working capital loans and
demand notes 496 45 602 208
Interest on short-term investments 368 88 522 285
Net gain on sale of A bond receipts - - - 623
Equity in MLP II 333 906 2,141 2,235
Other income 87 - 87 -
--------------- --------------- --------------- ---------------
TOTAL INCOME 5,179 3,709 13,774 12,975
--------------- --------------- --------------- ---------------
EXPENSES
Operating expenses 1,189 1,377 2,982 3,530
Minority interest 3 5 13 13
Other-than-temporary impairments related to investment in
mortgage revenue bonds (Note 3) - - 3,990 -
--------------- --------------- --------------- ---------------
TOTAL EXPENSES 1,192 1,382 6,985 3,543
--------------- --------------- --------------- ---------------
NET INCOME $3,987 $2,327 $6,789 $9,432
=============== =============== =============== ===============
NET INCOME PRIOR TO AUGUST 1, 1996 ALLOCATED TO:
General Partners $8 $24 $36 $95
=============== =============== =============== ===============
Limited Partners:
Series I $493 $1,436 $1,065 $6,404
=============== =============== =============== ===============
Series II $306 $867 $2,508 $2,933
=============== =============== =============== ===============
NET INCOME SUBSEQUENT TO JULY 31, 1996 ALLOCATED TO:
Preferred Shares:
Series I $166 $166
=============== ===============
Series II $85 $85
=============== ===============
Preferred Capital Distribution Shares:
Series I $78 $78
=============== ===============
Series II $34 $34
=============== ===============
Term Growth Shares $64 $64
=============== ===============
Growth Shares $2,753 $2,753
=============== ===============
NET INCOME PER SHARE/BAC:
PRIOR TO AUGUST 1, 1996:
Series I BACs $2.47 $7.18 $5.33 $32.02
=============== =============== =============== ===============
Series II BACs $3.18 $9.01 $26.05 $30.47
=============== =============== =============== ===============
SUBSEQUENT TO JULY 31, 1996:
Preferred Shares:
Series I $10.19 $10.19
=============== ===============
Series II $11.14 $11.14
=============== ===============
Preferred Capital Distribution Shares:
Series I $8.70 $8.70
=============== ===============
Series II $8.92 $8.92
=============== ===============
Growth Shares (11,144,380 weighted average
shares oustanding) $0.25 $0.25
=============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
STATEMENTS OF CASH FLOWS (Unaudited)
IN THOUSANDS
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, 1996September 30, 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,789 $9,432
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in MLP II net income (2,141) (2,235)
Income allocated to minority interest 13 13
Other-than-temporary impairments related to
investment in mortgage revenue bonds 3,990 -
Increase in valuation allowance on
parity working capital loans 29 -
Net realized gain on sale of A bond receipts - (2,347)
(Increase) decrease in interest receivable (15) 177
Decrease in other assets 61 167
Increase (decrease) in accounts payable
and accrued expenses 318 (496)
(Decrease) in due to affiliates (5) (58)
--------------- ---------------
Net cash provided by operating activities 9,039 4,653
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage revenue bonds (1,720) -
Principal payments on demand notes 77 -
Net decrease in short-term investments 4,705 -
Investment in MLP II - (61,000)
Distributions from MLP II 2,992 2,026
Proceeds from sale of A bond receipts - 67,700
--------------- ---------------
Net cash provided by investing activities 6,054 8,726
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (538) -
Distributions to partners (18,589) (15,682)
--------------- ---------------
Net cash used in financing activities (19,127) (15,682)
--------------- ---------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (4,034) (2,303)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 9,810 7,855
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,776 $5,552
=============== ===============
DISCLOSURE OF NON-CASH ACTIVITIES:
Net assets received upon dissolution of the MLP structure $64,448 -
=============== ===============
Contribution of parity working capital
loans and other assets to MLP II - $4,647
=============== ===============
The accompanying notes are an integral part of these financial statements.
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
FOR THE PERIOD DECEMBER 31, 1995 THROUGH SEPTEMBER 30, 1996
IN THOUSANDS
</TABLE>
<TABLE>
<CAPTION>
Realization of
Merger of SCA Change in other-than-
Tax Exempt market value temporary
Fund Into Purchase of mortgage impairment on
Balance, Distributions Municipal of revenue bonds mortgage revenue Balance,
December 31, Net to Mortgage and Treasury available for bonds available Sept 30,
1995 Income Shareholders Equity, L.L.C. Stock sale, net for sale, net 1996
------------ ---------- ------------ ------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General partners ($477) $36 ($75) $516 $0 $0 $0 $0
Limited partners:
Series I beneficial
assignee certificates 141,111 1,065 (5,250) (136,926) - - - -
Series II beneficial
assignee certificates 76,629 2,508 (2,647) (76,490) - - - -
Preferred shares:
Series I - 166 - 11,310 - - - 11,476
Series II - 85 (52) (1) 6,164 - - - 6,197
Preferred capital
distribution shares:
Series I - 78 (1,582) (1) 6,165 - - - 4,661
Series II - 34 (959) (1) 3,052 - - - 2,127
Term growth shares - 64 - - - - - 64
Growth shares - 2,753 - 186,209 - - - 188,962
Treasury shares - - - - (538) - - (538)
Unrealized gain(loss) on
mortgage revenue bonds
available for sale, net (981) - - - - 8,193 3,990 11,202
------------ ---------- ------------ ------------- ------------ -------------- --------------- ------------
Total $216,282 $6,789 ($10,565) $0 ($538) $8,193 $3,990 $224,151
============ ========== ============ ============= ============ ============== =============== ============
(1) August 15, 1996 distribution paid in accordance with the Company's Prospectus (see Note 2).
The accompanying notes are an integral part of these financial statements.
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
As a result of the merger transaction discussed in Note 2 below, on
August 1, 1996, Municipal Mortgage and Equity, L.L.C. (the "Company"
or the "LLC") succeeded to the business of the SCA Tax Exempt Fund
Limited Partnership (the "Partnership") and became the Registrant.
Accordingly, the accompanying financial statements represent the financial
position of the Partnership at December 31, 1995 and that of the Company
at September 30, 1996; results of operations include those of the
Partnership through July 31, 1996 and those of the Company from August
1 through September 30, 1996. The accompanying unaudited financial
statements have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission (the "SEC") and in the opinion
of management contain all adjustments (consisting of only normal recurring
accruals) necessary to present a fair statement of the results for the periods
presented. These results have been determined on the basis of accounting
principles and policies discussed in Note 2 to the Financial Statements
appearing in the Partnership's 1995 Annual Report on Form 10-K, as
amended (the "Form 10-K").
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
the accompanying financial statements be read in conjunction with the
financial statements and notes thereto included in the Partnership's 1995
Form 10-K.
NOTE 2 - THE MERGER
Beginning on June 18, 1996, beneficial assignee certificate ("BAC")
Holders were asked to vote on a proposed transaction (the "Transaction")
involving the Partnership, SCA Realty I, Inc., the managing general partner
of the Partnership (the "Managing General Partner"), SCA Associates 86
Limited Partnership, the associate general partner of the Partnership (the
"Associate General Partner," and together with the Managing General
Partner, the "General Partners") and their affiliates, and the Company, a
newly formed Delaware limited liability company. The Holders of the
outstanding Series I BACs and the Holders of the outstanding Series II
BACs, each series voting as a separate class, were asked to approve the
Transaction in the form of a merger between the Partnership and the
Company.
The consent solicitation period for the Transaction was closed on
August 1, 1996. Effective August 1, 1996, the Partnership merged into the
Company as a result of the approval of the Transaction by a majority of the
outstanding BACs with each series voting as a separate class. Specifically,
113,988 Series I BACs (56.99% of all Series I BACs) and 54,117 Series II
BACs (56.22% of all Series II BACs) voted to approve the proposed
Transaction. Of those BACs which voted in the Transaction, in excess of
88% in each Series voted to approve the Transaction.
As is outlined below, the Transaction provided BAC Holders with
a choice regarding the future of their investment to best match their
individual investment objectives. In addition to the preservation of the pass
through tax status of the primarily tax exempt income generated by the
Company's bonds, the Transaction also provides for self-management
through a Board of Directors, whose members will be elected by the
shareholders, and the alignment of the financial interests of the former
General Partners with the shareholders of the Company.
The Holders of each Series I BAC were entitled to elect whether to
convert each Series I BAC into 38.10 LLC growth shares ("Growth
Shares"), one LLC preferred share ("Preferred Shares") (Series I) or one
LLC preferred capital distribution share ("Preferred CD Shares") (Series I)
and the Holders of each Series II BAC were entitled to elect whether to
convert each Series II BAC into 43.95 Growth Shares, one Series II
Preferred Share or one Series II Preferred CD Share; or, to the extend
multiple BACs were held, a combination of Growth Shares and either
Preferred Shares or Preferred CD Shares. To the extent no election was
made, BACs were exchanged for Growth Shares.
The Preferred Shares allow its holders to retain an investment
comparable to his or her investment in BACs assuming that the
Partnership's financing transaction (the "Financing," which occurred in
February 1995 and is described in Note 3 to the Partnership's 1995 Form
10-K) had not occurred. The Preferred CD Shares allow its holders to
retain an investment substantially equivalent to his or her investment in
BACs recognizing that such Financing transaction did occur and that a
special capital distribution (the "Special Distribution") of the net Financing
proceeds would be made. On August 15, 1996, the Company paid the
Special Distribution of $170.91 and $235.30 per share to the Series I
Preferred CD Shareholders and the Series II Preferred CD Shareholders,
respectively. The Growth Shares, which are listed on the American Stock
Exchange and offer the liquidity of a publicly traded security, allow the
shareholder to participate in the risks and rewards of the Company's future
plans for growth. BAC Holders who received Growth Shares have
fundamentally changed the nature of their investment, and their rights are
different from their rights as BAC Holders of the Partnership.
The allocation of income and cash distributions as well as the rights
afforded to each class of shares in the Company are outlined in the
Company's Prospectus/Consent Solicitation (the "Prospectus") and
Amended and Restated Certificate of Formation and Operating Agreement
(the "Operating Agreement") and are summarized below. Specifically, the
Preferred and Preferred CD Shareholders, which retained their respective
BAC Series distinction and voting rights, each have priority claims on the
Company's income and assets over the other shares of the Company. While
the amount of income and cash distributions allocable to the Preferred
Shareholders will vary in accordance with the terms of their respective class
of shares (see below), the Preferred and Preferred CD Shareholders have
an equal pro rata claim on the Company's income and assets until their
respective claims are fully satisfied. The performance attributable to the
respective classes of preferred shares will be tracked in accordance the
Company's Operating Agreement.
Taking into account their respective Series distinction, the Preferred
Shareholders are allocated their proportionate share of income generated
by the original 23 bonds and working capital loans (collectively "original
bonds") of the Partnership as well as their share of the Company's expenses.
While the performance attributable to the Preferred Shares will take into
account the Refunding (as described in Note 3 to the Partnership's 1995
Form 10-K) and any future refundings of the original bonds, the Preferred
Shares will not be allocated any income or expense generated from the
Financing, any future financings or the merger.
Similar to the Preferred Shareholders, the Preferred CD
Shareholders retain their Series distinction and are allocated their
proportionate share of income generated by the Refunded original bonds
as well as their share of the Company's expenses. However, taking into
account the Special Distributions generated by the Financing (and any
future financings of the original bonds), the Preferred CD Shareholders are
allocated their proportionate share of the annual costs of the Financing (and
any future financings). Similar to Preferred Shareholders, the Preferred CD
Shareholders are not allocated any income or expense generated as a result
of the merger.
Growth Shareholders, unlike the holders of Preferred Shares and
Preferred CD Shares, did not retain their Series distinction. As the Growth
Shares are subordinate to the claims of the preferred shares, the Growth
Shareholders are essentially entitled to the balance of the Company's income
and cash distributions after satisfying the preferred claims. Consequently,
the Growth Shareholders will be allocated the balance of the Company's net
income and net cash generated from the original bonds, the Financing and
any future financings (after taking into consideration the Special
Distributions) and the merger. The value produced from the merger
consists of the additional income generated by the mortgage servicing fees
that were contributed by affiliates of the Managing General Partner in
exchange for 883,033 Growth Shares, discussed below. It should be noted
that the Growth Shares are subject to a payout ratio which is initially set at
95% of the total cash generated for the Growth Shareholders.
Through June 30, 1996, the MLP structure, as previously discussed
in the Partnership's 1995 Form 10-K, included MLP III Investment Limited
Partnership, ("MLP III"), MLP II Acquisition Limited Partnership ("MLP
II"), and MLP I LLC ("MLP I"). MLP III was owned by the Partnership
through a 99% general partner interest and SCA Limited Partner
Corporation ("SCALPC"), an affiliate of the Managing General Partner,
through a 1% limited partner interest. MLP II was owned by MLP III
through a 98.99% limited partner capital interest (39.996% annual profits
and annual distributions interest), SCALPC through a .01% limited partner
capital interest (.004% annual profits and annual distributions interest) and
MLP I through a 1% general partner capital interest (60% annual profits
and annual distributions interest). MLP I's members comprise the operating
partnerships that are the ultimate debtors in the bonds involved in the
Financing.
Effective July 1, 1996, MLP I's general partner profits interest in
MLP II was reduced to one percent (1%) in exchange for the assumption
by MLP II of certain MLP I obligations. Accordingly, the profits interest
of MLP III increased to 98.996%. Also, effective July 1, 1996, the
members of MLP I entered into a Cross-Equity Agreement which
effectively cross-collateralizes the operating partnerships' (included in the
Financing) B Bond obligations.
In anticipation of the merger and in order to reduce administrative
burden and complexity, effective July 31, 1996 the partners of MLP II
elected to dissolve MLP II and to terminate MLP II effective immediately.
Upon dissolution, all of the assets of MLP II were distributed to its
partners in accordance with their capital accounts. Also on July 31, 1996,
the partners of MLP III elected to dissolve and immediately terminate MLP
III and distribute all the assets of MLP III to its partners in accordance with
their capital accounts. Finally, on July 31, 1996 the members of MLP I
elected to dissolve and immediately terminate MLP I and distribute all of
the assets of MLP I to its members in accordance with their capital
accounts.
As a result of the above transactions, at the close of business on July
31, 1996, the Partnership was the owner of substantially all of the net assets
of MLP II and MLP III. Accordingly, MLP II's assets, liabilities and results
of operations are included directly in the financial statements of the
Company rather than being accounted for on the equity method as they
were in the Partnership's financial statements. On a pro forma basis, these
MLP transactions had an insignificant impact on the net assets of the
Partnership as of July 31, 1996 and on net income of the Partnership for the
nineteen months then ended. The primary pro forma income statement
impact would be the following approximate reclassifications (millions):
Year ended Nine months
December 31, ended September 30,
1995 1996
------------ -------------------
Interest on mortgage revenue bonds ( $2.3) ( $1.4)
Equity in income of MLP II ( 3.2) ( 2.1)
Interest on short-term investments
and demand notes 5.5 3.5
In connection with the merger, the Company authorized the
issuance of up to 200,000 Series I and 96,256 Series II Preferred Shares,
up to 200,000 Series I and 96,256 Series II Preferred CD Shares and up to
11,770,000 Growth Shares as merger consideration to the Partnership's
BAC Holders in exchange for their BAC's. The Company also authorized
the issuance of merger consideration in the form of 1,000 shares of a special
class of Growth Shares ("Term Growth Shares") to the General Partners,
in exchange for the relinquishment of their general partnership interests in
the Partnership, and 1,000 Term Growth Shares to a Merrill Lynch affiliate
in exchange for their subordinated BACs. Term Growth Shares are entitled
to an aggregate 2% interest in cash distributions from the Company
(subordinated to the rights of the Preferred and Preferred CD Shares, and
before distributions to Growth Shareholders).
Upon the consummation of the Transaction, the General Partners
and their affiliates contributed their rights to the acquisition and servicing
of mortgages in exchange for 883,033 Growth Shares. The Partnership
retained Robert A. Stanger & Co., Inc., an independent third party, to
render a fairness opinion that the allocation of Growth Shares and Term
Growth Shares was fair to the Series I and Series II BAC Holders, from a
financial point of view. As a result of the contribution of the acquisition
and servicing activities by the General Partners and their affiliates, the
Company, and more specifically, the Growth Shareholders, will receive
additional tax-exempt income.
The capitalization of the Company in accordance with the terms of
the Transaction is reflected in the accompanying financial statements.
Because the interests of a significant majority of the former Series I and
Series II BAC Holders have now been merged via their election of Growth
Shares, separate financial statements for Series I and Series II are no longer
presented as supplementary information. Results of operations are still
maintained by series, however, as required for those former Series I and
Series II BAC Holders electing either Preferred Shares or Preferred CD
Shares, and appropriate allocations of net income are reflected in the
accompanying financial statements.
NOTE 3 - INVESTMENT IN MORTGAGE REVENUE BONDS
The Partnership had invested in various mortgage revenue bonds,
the proceeds from which were used to make nonrecourse participating first
mortgage loans on multifamily housing developments. The Partnership's
rights and the specific terms of the bonds are defined by the various loan
documents which were negotiated at the time of settlement. The basic
terms and structure of each bond which had not been refunded were
described in Note 4 to the Partnership's 1995 Form 10-K. On February 14,
1995, the Partnership refunded 11 of the original mortgage revenue bonds
into 11 Series A Bonds and 11 Series B Bonds. As part of the Financing
consummated on February 14, 1995, custody receipts in the Series A Bonds
were sold to third party investors. A complete description of the Financing
and the bond terms is set forth in Note 3 to the Partnership's 1995 Form 10-K.
As of September 30, 1996, the Company held 26 mortgage revenue
bonds; of these, 12 are the original mortgage revenue bonds, 11 are Series
B Bonds and three bonds are new acquisitions discussed below. Five
original bonds and three Series B Bonds are delinquent on their debt service
obligations. Descriptions of the various mortgage revenue bonds owned by
the Company at September 30, 1996 are as follows:
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
---------------------------------- ----------------------------------
Base Face Amortized Unrealized Fair Amortized Unrealized Fair
Investment in Mortgage Interest Maturity Amount Cost Gain (Loss) Value Cost Gain (Loss) Value
Revenue Bonds (Note 3) Rate Date (000's) (000's) (000's) (000's) (000's) (000's) (000's)
- ------------------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Whole Bonds:
Alban Place 7.875 Oct. 2008 $10,065 $10,065 ($356) $9,709 $10,065 ($336) $9,729
Creekside Village 7.500 Nov. 2009 11,760 7,396 - 7,396 8,635 - 8,635
Emerald Hills 7.750 Apr. 2008 6,725 6,725 473 7,198 6,725 626 7,351
Lakeview Garden 7.750 Aug. 2007 9,003 5,674 - 5,674 6,988 - 6,988
Newport-on-Seven 8.125 Aug. 2008 10,125 7,898 581 8,479 7,898 - 7,898
North Pointe 7.875 Aug. 2006 25,185 12,738 2,036 14,774 12,739 1,170 13,909
Northridge Park 7.500 June 2012 8,815 8,815 (2,207) 6,608 8,815 (1,625) 7,190
Riverset- Series I 7.875 Nov. 1999 6,475 6,475 48 6,523 6,475 (778) 5,697
Riverset - Series II 7.875 Nov. 1999 12,525 12,525 137 12,662 12,525 (1,477) 11,048
Riverset II (1) 9.500 Oct. 2019 7,610 6,749 (11) 6,738 - - -
Southfork Village 7.875 Jan. 2009 10,375 10,375 1,578 11,953 10,375 492 10,867
Villa Hialeah 7.875 Oct. 2009 10,250 10,250 (2,214) 8,036 10,250 (725) 9,525
Willowgreen 8.000 Dec. 2010 9,275 6,770 - 6,770 7,901 - 7,901
--------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal Whole Bonds 138,188 112,455 65 112,520 109,391 (2,653) 106,738
--------- ---------- ---------- ---------- ---------- ---------- ----------
B Bonds:
Barkley Place 16.000 Jan. 2030 3,480 2,445 81 2,526 2,445 - 2,445
Gilman Meadows (3) 3.000 Jan. 2030 2,875 2,530 549 3,079 2,530 176 2,706
Hamilton Chase (3) 3.000 Jan. 2030 6,250 4,140 344 4,484 4,140 - 4,140
Independence Ridge (2) 12.500 Dec. 2015 1,045 1,045 - 1,045 - - -
Locarno (2) 12.500 Dec. 2015 675 675 - 675 - - -
Mallard Cove I (3) 3.000 Jan. 2030 1,670 798 74 872 942 80 1,022
Mallard Cove II (3) 3.000 Jan. 2030 3,750 2,429 179 2,608 2,590 284 2,874
Meadows 16.000 Jan. 2030 3,635 3,716 1,680 5,396 3,716 103 3,819
Montclair (3) 3.000 Jan. 2030 6,840 1,691 2,539 4,230 1,691 - 1,691
Newport Village (3) 3.000 Jan. 2030 4,175 2,973 2,128 5,101 2,973 287 3,260
Nicollet Ridge (3) 3.000 Jan. 2030 12,415 6,075 554 6,629 6,075 475 6,550
Riverset II (1) 10.000 Oct. 2019 1,489 500 - 500 - - -
Steeplechase Falls 16.000 Jan. 2030 5,300 5,852 1,879 7,731 5,851 267 6,118
Whispering Lake (3) 3.000 Jan. 2030 8,500 4,779 1,130 5,909 4,779 - 4,779
--------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal B Bonds 62,099 39,648 11,137 50,785 37,732 1,672 39,404
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total Investment in Mortgage
Revenue Bonds $200,287 $152,103 $11,202 $163,305 $147,123 ($981) $146,142
========= ========== ========== ========== ========== ========== ==========
(1) Riverset II Bond was purchased on January 19, 1996.
(2) Locarno and Independence Ridge Bonds were purchased on August 30, 1996.
(3) These bonds also contain additional interest features contingent on
available cash flow. For more detail, see Note 3 to the Partnerships' 1995 Form 10-K.
</TABLE>
<PAGE>
On January 19, 1996, the Partnership, through MLP II, acquired a
mortgage revenue bond for $7,238,000 collateralized by Riverset II, a
multifamily property located in Memphis, Tennessee. On July 31, 1996, the
Riverset II bond was distributed to the Company as part of the dissolution
of the MLP structure discussed in Note 2 above. On August 30, 1996 the
Company purchased two additional mortgage revenues bonds, with both
bonds providing a stated interest rate of 12.5% per annum: (1) Series B
mortgage revenue bond collateralized by Locarno Apartments, a
multifamily property located in Kansas City, Missouri for $675,000 and (2)
Series B mortgage revenue bond collateralized by Independence Ridge
Apartments, a multifamily property located in Jackson County, Missouri for
$1,045,000.
Under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," ("FAS 115"), investments in mortgage revenue bonds
are classified as available for sale securities and are carried at fair value.
In the absence of readily ascertainable market values, such fair values are
estimated by the Company. For the quarter ended September 30, 1996, the
net adjustment to unrealized gains and losses on mortgage revenue bonds
available for sale increased shareholders' equity by approximately $4.1
million.
Indicated impairments must be considered as other-than-temporary
when it becomes probable that all amounts due under a bond will not be
collected in accordance with the bond's contractual terms. For the quarter
ended September 30, 1996, there were no other-than-temporary
impairments. The Company will continue to use its best efforts in
estimating the fair value of its mortgage revenue bonds.
In conjunction with a review of the Partnership's financial statements
by the SEC Staff in 1995, the Partnership agreed that it would account for
all of its mortgage revenue bonds as debt securities under the provisions of
FAS 115 effective January 1, 1994, and restated its 1994 and 1995 financial
statements to reflect this change. Accordingly, effective January 1, 1994,
all investments in mortgage revenue bonds, regardless of their status, are
classified and accounted for as available for sale debt securities and carried
at fair value. The effect of adopting this accounting change was to increase
previously reported net income by approximately $4.6 million for the nine
months ended September 30, 1995.
NOTE 4 - INVESTMENT IN PARITY WORKING CAPITAL LOANS AND DEMAND NOTES
As of September 30, 1996, the Company held 11 parity working
capital loans, all relating to the 12 remaining original mortgage revenue
bonds. The terms of the loans are identical to the mortgage revenue bonds
to which they relate. A complete description is included in Note 5 to the
Partnership's 1995 Form 10-K.
As discussed in Note 2 above, all of the assets of MLP II and MLP
III were distributed to the Partnership. Accordingly, all of the accrued
interest demand notes, working capital demand notes and load loan demand
notes (collectively the "Notes") were included in that distribution. A
complete description of the Notes is included in Note 3 to the
Partnership's 1995 Form 10-K.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Partnership did not employ any personnel. All staff required by
the Partnership were employees of the Managing General Partner or its
affiliates which received direct reimbursement from the Partnership for all
costs related to such personnel including payroll taxes, workers'
compensation and health insurance and other fringe benefits, as summarized
in the table below. Amounts so charged to the Partnership prior to August
1, 1996 and attributed to Series I and Series II represent actual amounts
expended or allocations based on time spent, usage, original net offering
proceeds or other reasonable measures.
Upon the merger (See Note 2), all employees of the Managing
General Partner and its affiliates who were necessary for the prudent
operations of the Partnership became employees of the Company.
Therefore, the salary expenses of those employees are now paid directly by
the Company. Certain administrative services, including shared personnel,
are still performed by an affiliate which receives direct reimbursement from
the Company on a monthly basis. The expense associated with the shared
personnel was previously charged to salaries.
<PAGE>
<TABLE>
<CAPTION>
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
(Unaudited) September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
(in 000's)
<S> <C> <C> <C> <C>
Charged to Series I prior to August 1, 1996:
Salaries of noncontrolling persons &
related expenses $83 $113 $321 $307
Other administrative expenses 2 31 51 65
------------------ ------------------ ------------------ ------------------
Expenses reimbursed $85 $144 $372 $372
================== ================== ================== ==================
Charged to Series II prior to August 1, 1996:
Salaries of noncontrolling persons &
related expenses $40 $54 $154 $148
Other administrative expenses 1 15 25 31
------------------ ------------------ ------------------ ------------------
Expenses reimbursed $41 $69 $179 $179
================== ================== ================== ==================
Charged to Municipal Mortgage and
Equity, L.L.C. subseqent to July 31, 1996:
Other administrative expenses $21 $0 $21 $0
================== ================== ================== ==================
Total:
Salaries of noncontrolling persons &
related expenses $123 $167 $475 $455
Other administrative expenses 24 46 97 96
------------------ ------------------ ------------------ ------------------
Expenses reimbursed $147 $213 $572 $551
================== ================== ================== ==================
</TABLE>
Included in Due to Affiliates in the accompanying balance sheets are
amounts payable to the former Managing General Partner and its affiliates
related to such administrative and operating costs. At September 30, 1996
and December 31, 1995, the amounts due approximated $4,000 and
$9,000, respectively.
As previously detailed in the Prospectus, the Associate General
Partner received fees for mortgage servicing from the borrowing
partnerships owning the mortgaged properties. The fees paid by all
borrowing partnerships to the Associate General Partner approximated
$1.1 million for the period January 1, 1996 through July 31, 1996 and $1.5
million for the nine months ended September 30, 1995. As discussed in
Note 2, on August 1, 1996 the General Partners and their affiliates
contributed to the Company their rights to mortgage servicing fees in
exchange for Growth Shares. The Company in return receives the cash
flow associated with these fees. For the two months ended September 30,
1996, the cash flow associated with these fees paid to the Company
approximated $330,000.
The General Partners were entitled to an allocation of the Partnership's
profits, losses and cash distributions as specified in the Partnership
Agreement. For the six months ended June 30, 1996 the Partnership
declared a cash distribution of $75,000 to the General Partners. This
amount represents the General Partners' portion of the $7,972,000
($5,297,000 for Series I and $2,675,000 for Series II) semi-annual
distributions paid on July 31, 1996.
The operating expenses for several properties include property
management fees paid to affiliates of the former General Partners. During
the nine months ended September 30, 1996 and 1995, these fees
approximated $770,000 and $676,000, respectively, for 11 properties.
177061 Canada Ltd. (formerly Shelter Corporation of Canada
Limited), a general partner of the former Associate General Partner of the
Partnership, is contractually obligated under guarantees to the nonaffiliated
borrowers of North Pointe and Whispering Lake to fund operating deficits.
The unpaid balances due under the limited operating deficit guarantees,
including accrued interest as of September 30, 1996, approximated $97,000
and $133,000 for North Pointe and Whispering Lake, respectively.
Scheduled payments totaling $85,000 and $121,000 were received on the
North Pointe obligation and the Whispering Lake obligation, respectively,
during the first nine months of 1996 and 1995.
NOTE 6 - SHARE REPURCHASE PROGRAM
On August 28, 1996, the board of directors approved a share
repurchase program, principally because of the possibility of a temporary
imbalance in supply and demand for Growth Shares upon start up of their
trading, on the board's belief that the repurchase of Growth Shares would
be a good investment for the Company and in the best interests of the
Company and its shareholders. Under the program, up to 700,000 Growth
Shares can be repurchased from time to time over the next six months in the
open market and in privately negotiated transactions. In connection with
each repurchase by the Company, the Company officers may also
participate in the purchase of Growth Shares in a ratio of up to 10 (for the
Company) to one (for such officers). As of September 30, 1996, the
Company purchased 36,398 shares at an average price of $14.77.
NOTE 7 - NON-EMPLOYEE DIRECTORS' SHARE PLAN
On July 31, 1996, the Company approved the Non-Employee
Directors' Share Plan (the "Plan") for the purpose of providing a means to
attract and retain highly qualified persons to serve as non-employee
directors of the Company. An option to purchase 2,500 Growth Shares will
be automatically granted to each director when first elected or appointed
and each year thereafter on the date of the annual meeting of shareholders.
The exercise price per Growth Share will be equal to 100% of the fair
market value on the date of grant. Options expire at the earlier of ten years
after the date of grant or one year after the date a director ceases to serve
as a director of the Company for any reason. The Plan provides for up to
50,000 Growth Shares to be issued pursuant to options granted under the
plan. Options expiring, for any reason without being exercised in full, will
again be available for issuance under the Plan. As of September 30, 1996,
options to purchase 12,500 Growth Shares were granted at an exercise
price of $14.75.
The Plan also entitles each director to elect to be paid fees in the form
of Growth Shares or deferred growth shares ("Deferred Shares") in lieu of
cash payment of such fees. At any date on which fees are payable to a
director who elected to receive Growth Shares in lieu of cash payments, the
Company will issue a number of Growth Shares having an aggregate fair
market value at that date equal to the fees. At any date on which fees are
payable to a director who elected to defer fees in the form of Deferred
Shares, the Company will credit such director's deferral account with a
number of Deferred Shares equal to the number of Growth Shares having
an aggregate fair market value at that date equal to the fees that otherwise
would have been payable at such date. Whenever dividends are paid or
distributions are made, the deferral account of a director who elected to
receive Deferred Shares will be credited with dividend equivalents having
value equal to the amount of the dividend paid on a single Growth Share
multiplied by the number of Deferred Shares credited to his deferral account
as of the record date for such dividend. Such dividend equivalents shall be
credited to the deferral account as a number of Deferred Shares determined
by dividing the aggregate value of such dividend equivalents by the fair
market value of a Growth Share at the payment date of the dividend.
NOTE 8 - LITIGATION
As previously discussed in the Partnership's 1995 Form 10-K, on July
24, 1995, a class action and derivative action complaint was filed in the
District of Columbia Superior Court, Civil Division, Washington, D.C. The
complaint names as defendants the Managing General Partner, the
Associate General Partner and 177061 Canada Ltd. (formerly known as
Shelter Corporation of Canada Limited) (the "Defendants").
On September 22, 1995, Defendants removed the action to the United
States District Court for the District of Columbia. In November 1995, the
parties agreed to a settlement of the action in consideration of certain
modifications to the terms of and disclosure with respect to the Transaction,
as set forth in a stipulation of settlement filed with the court. The
settlement was conditioned on, among other things, the consummation of
the Transaction. On March 13, 1996, the court held a status conference in
the action. At that time, all conditions necessary for the settlement to
proceed had not yet occurred and, for reasons of case administration, the
court dismissed the action without prejudice and with leave to the parties
to reinstate the action on or before May 1, 1996 in order to proceed with
the settlement or the litigation.
On May 1, 1996, counsel for the plaintiffs made application to the court
to reinstate the action. On June 12, 1996, the parties executed an amended
stipulation, which is filed with the court, setting forth the terms and
conditions of the settlement. On June 20, 1996 the court preliminarily
approved the settlement. BAC Holders were sent a Notice of Class and
Derivative Action Determination, Settlement and Hearing on the Proposed
Settlement (the "Notice"), which explains the settlement and the rights of
the BAC Holders in connection therewith. The settlement is subject to the
approval of the court and other terms and conditions, as set forth in the
Notice. The court held a settlement and fairness hearing on August 29,
1996 to determine, among other things, whether the settlement is fair,
reasonable and adequate, and should be approved. As of October 29, 1996,
the court has not rendered its decision regarding final approval of the
settlement.
In the opinion of management, after consultation with counsel, the
ultimate outcome of this litigation is not expected to have a material
adverse effect on the consolidated financial statements and results of
operations of the Company.
NOTE 9 - SUBSEQUENT EVENT
On October 15, 1996, the Company acquired a $4.1 million subordinate interest
in two additional mortgage revenue bonds collateralized by the South Pointe
and Hunters Ridge multifamily apartments located in St. Louis County, Missouri.
The Company will recognize a yield on the South Pointe and Hunters Chase bonds
of approximately 8.50%.
On November 12, 1996, the Company committed to purchase a
$33,900,000 mortgage revenue bond to be issued by the Dekalb County
Housing Authority (the "Authority") for the 722 unit multifamily apartment
project known as the Village of Stone Mountain located in suburban
Atlanta, Georgia. This commitment, which is subject to the approval of the
independent members of the Company's board of directors, will result in the
Company's acquisition of the bond once the Authority has issued the bond.
During the interim period prior to the acquisition of the bond, which is
anticipated to last until early 1998 when the conditions for issuing the bonds
are expected to be met, the Company will guarantee a bridge financing to be
provided by NationsBank for an origination fee of 1.0% of the loan
amount and an annual fee of 1.0%. Interest payable on the bonds will be 8.75%.
Additionally, contingent interest up to 7.25% will be payable out of 50% of
project cash flow in excess of 8.75%, if any.
The borrower under this bond financing will be the Shelter Foundation (the
"Foundation"), a public non-profit foundation. The Foundation provides
housing and related services to families of low and moderate income. The
Foundation owns interests in seven apartment communities totaling over
1,300 units. Approximately 20% of the units at the Village of Stone
Mountain will be occupied by low and moderate income people.
Mark K. Joseph, the Chairman and Chief Executive Officer of the
Company, sits on the board of directors of the Shelter Foundation. Other
members of the Foundation's board of directors include: Robert C. Embry,
Jr., former HUD Assistant Secretary for Community Planning and
Development and now President of the Abell Foundation; Walter
Sondheim, a senior advisor to the Greater Baltimore Committee who
recently chaired the Maryland Commission of Higher Education and who
serves on the Maryland Board of Education; Leonard Sachs, Chairman
of Maryland Office Interiors and Vice Chairman of Maryland Economic Development
Corportation; Shale Stiller, a partner in the law firm of Piper and Marbury
who has served as a Trustee of the Weinberg Foundation and the Johns Hopkins
University.
Mr. Joseph owns a minority interest in Shelter Development, LLC and
Shelter Properties, LLC. Shelter Development, LLC will serve as the
Foundation's consultant for a closing fee of 1.0% of the loan amount.
Shelter Properties, LLC will property manage the apartment project for a
fee anticipated to be 3.0% of annual gross property receipts. These fees
were compared to similar transactions in the marketplace and determined by
management to be at or below market rates.
Item 2- Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition and Liquidity
As of September 30, 1996, the Company's capital was primarily
invested in 26 mortgage revenue bonds and related parity working capital
loans with a carrying value of $166,167,000. Of these investments, 23
bonds and related parity working capital loans (collectively "original
bonds") having a carrying value of $157,209,000, were acquired with the
original offering proceeds of the SCA Tax Exempt Fund Limited
Partnership (the "Partnership") and three bonds ("new bonds"), having a
carrying value of $8,958,000, were purchased from proceeds raised in the
Financing.
Distributions to all shareholders are affected by the Company's ability
to collect interest from the cash flow of the properties securing the bonds
and the ability of the Company to control operating expenses. Cash
collected by the Company does not necessarily reflect property operating
results to the extent that debt service can be paid from other sources,
including property reserves and guarantees. Similarly, some of the cash
generated by property operations may not be available to pay debt service
as it may be utilized for capital expenditures, escrows or prepaid expenses.
Additionally, Growth and Preferred CD Shareholders are subject to the
terms of the Financing. Thus, a portion of the cash generated from
property operations will be utilized to pay Series A Bond interest and
principal (amortization begins in the Year 2001) and related costs.
Distributions to Growth Shareholders are also affected by the investment
income generated by the net Financing proceeds.
On July 31, 1996, the Partnership paid its semi-annual distribution to
the Partnership's BAC Holders of $26.25 and $27.50 per BAC in Series I
and Series II, respectively. This distribution represented the cash generated
from operations for the six months ended June 30, 1996. The distribution
for the one month ended July 31, 1996 will be included in the semi-annual
distribution to shareholders on February 15, 1997.
On August 15, 1996, the Company made a one-time distribution to
Preferred CD Shareholders in the amount of $177.59 per share in Series I
and $252.03 per share in Series II. These amounts consisted of: (1) a
return of capital representing each shareholder's allocable share of the net
proceeds from the Financing and (2) a reimbursement for each shareholder's
pro-rata share of the Transaction expenses incurred and paid for by the
Partnership. In addition, on August 15, 1996, the Company made a one-time
distribution to Series II Preferred Shareholders of $6.84 per share, in
accordance with the Prospectus, representing a reimbursement for each
Preferred Shareholder's pro-rata share of the Financing and Transaction
expenses incurred, net of working capital reserves (established from the net
Financing proceeds) used to supplement distributions, and paid for by the
Partnership from operating cash flow. For Series I, however, these
expenses were approximately equal to the working capital reserves
established from the net Financing proceeds used to supplement
distributions, and therefore, resulted in no one-time distribution.
Working capital reserves are created at the discretion of management.
These working capital reserves are available to make additional working
capital loans to borrowers, to pay unanticipated and unusual costs of
operating the Company and to reduce fluctuations in cash distributions to
shareholders.
After payment of the one-time distributions to the Preferred and
Preferred CD Shareholders discussed above, all cash allocable to these
shareholders through June 30, 1996 has been paid. Therefore, as of
September 30, 1996, no working capital reserves exist for the Preferred or
Preferred CD Shareholders. For Growth Shares, all previously established
working capital reserves are now available to make permanent investments
in accordance with the Company's investment objectives.
At September 30, 1996, the Company's cash and cash equivalents
approximated $5.8 million. These funds primarily consist of undistributed
funds generated from operations during the quarter ended September 30,
1996. In addition, through the subsequent dissolution of the MLP structure
discussed in Note 2 to the financial statements included herein, the
Company has $44.8 million of net Financing proceeds available for
permanent investment in accordance with the Company's investment
objectives. On October 15, 1996, the Company acquired a $4.1 million
subordinate interest in two additional mortgage revenue bonds
collateralized by the South Pointe and Hunters Ridge multifamily
apartments located in St. Louis County, Missouri. The Company will
recognize a yield on the South Pointe and Hunters Ridge bonds of
approximately 8.50%.
On November 12, 1996, the Company committed to purchase a $33,900,000 mortgage
revenue bond to be issued by the Dekalb County Housing Authority (the
"Authority") for the 722 unit multifamily apartment project known as the Village
of Stone Mountain located in suburban Atlanta, Georgia. This commitment, which
is subject to the approval of the independent members of the Company's board
of directors, will result in the Company's acquisition of the bond once the
Authority has issued the bond. During the interim period prior to the
acquisition of the bond, which is anticipated to last until early 1998 when the
conditions for issuing the bonds are expected to be met, the Company will
guarantee a bridge financing to be provided by Nationsbank for an origination
fee of 1.0% of the loan amount and an annual fee of 1.0%. Interest payable on
the bonds will be 8.75%. Additionally, contingent interest up to 7.25% will be
payable out of 50% of project cash flow in excess of 8.75%, if any.
The borrower under this bond financing will be the Shelter Foundation (the
"Foundation"), a public non-profit foundation. The Foundation provides housing
and related services to families of low and moderate income. The Foundation
owns interests in seven apartment communities totaling over 1,300 units.
Approximately 20% of the units at the Village of Stone Mountain will be occupied
by low and moderate income people. Mark K. Joseph, the Chairman and Chief
Executive Officer of the Company, sits on the board of directors of the Shelter
Foundation.
Mr. Joseph owns a minority interest in Shelter Development, LLC Shelter
Properties, LLC. Shelter Development, LLC will serve as the Foundation's
consultant for a closing fee of 1.0% of the loan amount. Shelter Properties,
LLC will property manage the apartment project for a fee anticipated to be
3.0% of annual gross property receipts. These fees were compared to similar
transactions in the marketplace and determined by management to be at or
below market rates.
Results of Operations
Revenues
Quarterly Results Analysis
For the quarter ended September 30, 1996, interest on mortgage
revenue bonds increased by approximately $1.2 million versus the same
period last year. The borrowing partnerships were able to pay additional
interest primarily due to: 1) an increase in cash generated by property
operations, 2) an increase in cash available to pay debt service due to a
decrease in interest and principal due on demand notes, and 3) an increase
in cash available to pay debt service as a result of the former General
Partners' contribution to the Company of their rights to receive mortgage
servicing fees from the borrowing partnerships. First, debt service
payments for the third quarter of 1996 as compared to the third quarter of
1995 from properties operations increased by approximately $760,000;
more specifically, North Pointe ($59,000), Montclair ($61,000), Newport
Village ($62,000), Nicollet ($103,000), Steeplechase ($64,000) and
Hamilton ($93,000). Second, the interest and principal due on demand
notes was less in the third quarter of 1996 versus the same period last year
by approximately $280,000 all of which was used to pay interest on Series
B bonds. Lastly, as a result of the affiliates' contribution of mortgage
servicing fees, interest income increased by approximately $246,000 for the
three months ended September 30, 1996 versus the same period last year.
The dissolution of the MLP structure effective July 31, 1996, caused
a re-characterization of income. Income that was previously recorded as
equity in MLP II is now recorded as interest on short-term investments,
interest on demand notes or interest on mortgage revenue bonds. As a
result of this change, equity from MLP II decreased in the third quarter of
1996 versus the same period last year while interest on short-term
investments, demand notes and mortgage revenue bonds increased
accordingly.
Year to Date Results Analysis
For the nine months ended September 30, 1996, interest on mortgage
revenue bonds increased by approximately $798,000 versus the same
period last year. The increase is primarily due to : 1) an increase in
distributions from MLP I of approximately $746,000 primarily due to the
timing of maturing investments; 2) an increase in the earnings generated by
the interest rate swap agreements owned by the operating partnerships of
approximately $453,000 due to an additional two months of swap income
in 1996 and a more favorable interest rate environment as the average PSA
Municipal Swap Index, on which the interest is calculated, averaged 3.40%
for the first nine months of 1996 versus 3.89% for the period February 14,
1995 through September 30, 1995; 3) an increase in interest paid from
property operations at North Pointe ($400,000); and 4) an increase of
approximately $246,000 as a result of the affiliates' contribution of
mortgage servicing fees. These increases were partially offset by: 1) the
change in timing of interest payments on the Series B bonds from in arrears
to current, which served to increase the interest revenue for the first nine
months of 1995 by approximately $710,000 and 2) the use of excess funds
in property reserves which increased interest revenue for the nine months
ended September 30, 1995 by approximately $482,000.
As a result of the Financing transaction consummated in February 1995,
the Partnership recorded a net gain on sale of A bond receipts during the
first quarter of 1995. Included in this amount is a portion of the net
unrealized gain associated with the refunded bonds of approximately $2.3
million, net of selling expenses of approximately $1.7 million. A complete
description of the Financing is included in the Partnership's 1995 Form 10-K.
For the nine months ended September 30, 1996, equity in MLP II
decreased by approximately $94,000 as compared to the same period last
year. The nine months ended September 30, 1995 includes income for the
period February 15, 1995 (the date of the Financing transaction) through
September 30, 1995 while the nine months ended September 30, 1996 only
includes income for the period January 1, 1996 through July 31, 1996, the
date the MLP II structure was collapsed. The collapse of the MLP
structure caused a re-characterization of income whereby income previously
recorded as equity in MLP II is now recorded as interest on short-term
investments, interest on demand notes or interest on mortgage revenue
bonds. As a result of this change, equity from MLP II decreased for the
nine months ended September 30, 1996 versus the same period last year
which served to increase interest on short-term investments, demand notes
and mortgage revenue bonds.
Expenses
For the three months ended September 30, 1996, Company operating
expenses decreased by approximately $188,000 versus the same period in
1995. The decrease is primarily due to a decrease in expenses related to the
Transaction of approximately $600,000. This decrease is partially offset by
an increase in accounting fees related to the annual audit ($110,000), an
increase in legal and settlement fees related to the class action complaint
($160,000), and an increase in costs related to the merger ($230,000),
including additional expenses for investor servicing, printing and salaries
and benefits for employees of the former General Partner.
The Company's operating expenses decreased by approximately
$548,000 for the first nine months of 1996 versus the same period in 1995.
For the nine months ended September 30, 1995, the Company incurred
approximately $1.1 million associated with the Financing transaction.
Additionally, expenses related to the Prospectus were approximately
$390,000 higher for the first nine months of 1995 versus 1996. These
decreases were partially offset by increases during the nine months ended
September 30, 1996 due to: 1) accounting fees related to the restatement
of prior period financial statements ($170,000); 2) legal and settlement fees
related to the class action complaint ($280,000); 3) directors and officers
insurance ($105,000) which includes nine months of premiums for 1996
versus five months for 1995; 4) costs related to the merger ($310,000),
including additional expenses for investor servicing, printing and salaries
and benefits for employees of the former General Partners; and 5)
accounting fees related to the annual audit ($110,000).
Other
Under the provisions of FAS 115, investments in mortgage revenue
bonds are classified as available for sale securities and are recorded at fair
value. In the absence of readily ascertainable market values, such fair
values are estimated by the Managing General Partner. For those
mortgage revenue bonds where estimated fair value has declined to an
amount below amortized cost, the Managing General Partner considers the
following in determining whether the indicated decline is other-than
temporary. With respect to bonds that are not performing in accordance
with their contractual terms established at the time of issuance, the
Partnership considers declines in excess of amortized cost, if any, to be
other-than-temporary under the provisions of FAS 115. Indicated
impairments of performing bonds are evaluated on an individual basis, but,
in the absence of contrary evidence, are generally considered to be
temporary.
For the quarter ended September 30, 1996, the net adjustment to
unrealized gains and losses on mortgage revenue bonds available for sale
increased shareholders' equity by approximately $4.1 million. For the nine
months ended September 30, 1996, the net adjustment to unrealized gains
and losses on mortgage revenue bonds available for sale increased
shareholders' equity by $8.2 million. The Partnership recorded
other-than-temporary impairments totaling $3,990,000 on five bonds (Creekside
($1,239,000), Lakeview ($1,315,000), Willowgreen ($1,131,000), Mallard
I (143,000) and Mallard II ($162,000) during the nine months ended
September 30, 1996.
The other-than-temporary impairments discussed above do not affect
the cash flow generated from property operations, distributions to
shareholders, the characterization of the tax-exempt income stream nor the
financial obligations under the bonds. The Company will continue to
evaluate the need for other-than-temporary impairments in the future as
circumstances change.
Earnings Per Share
For the two months ended September 30, 1996, earnings per Growth
Share were $0.25. On an annualized basis, the earnings per share for the
two months ended September 30, 1996 associated with the Growth Shares
is on target with the previously disclosed expected dividend on Growth
Shares for the five months ended December 31, 1996 of approximately
$0.56 per share, or $1.35 per share on an annualized basis. The Company
does not expect to announce similar estimated information in the future.
Comparative information for all shares (Growth, Preferred and Preferred
CD Shares) are not applicable as a result of the merger consummated on
August 1, 1996.
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K for the period
covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
(Registrant)
By: [S] Mark K. Joseph
------------------
Mark K. Joseph
President and Chief Financial Officer
DATED: November 14, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THOSE FINANCIAL STATEMENTS AND THE FOOTNOTES PROVIDED
WITHIN THIS SCHEDULE.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,776,000
<SECURITIES> 44,769,000
<RECEIVABLES> 898,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,443,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 225,169,000
<CURRENT-LIABILITIES> 1,018,000
<BONDS> 0
<COMMON> 188,424,000
0
24,525,000
<OTHER-SE> 11,202,000
<TOTAL-LIABILITY-AND-EQUITY> 225,169,000
<SALES> 0
<TOTAL-REVENUES> 13,774,000
<CGS> 0
<TOTAL-COSTS> 6,985,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,789,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,789,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,789,000
<EPS-PRIMARY> .25<F1>
<EPS-DILUTED> .25<F1>
<FN>
<F1> The earnings per share reflects the earning per share of the
Growth Shares.
</FN>
</TABLE>
