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: June 30, 1998 Commission file number: 001-11981
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 16,878,631 Growth Shares outstanding as of August 4, 1998,
the latest practicable date.
1
<PAGE>
8/5/98 MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
INDEX TO FORM 10-Q
Part I- FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,998 $ 7,370
Interest receivable 2,056 1,472
Investment in mortgage revenue bonds, net (Note 2) 147,508 182,035
Investment in mortgage revenue bonds pledged, net (Note 2) 77,257 -
Investment in other bond related investments, net (Note 3) 42,209 38,926
Investment in parity working capital loans, demand
notes and other loans, net (Note 4) 29,088 11,491
Other assets 331 477
Restricted assets 1,330 1,330
--------- --------
Total assets $ 307,777 $ 243,101
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,302 $ 1,000
Distributions payable 5,462 -
Unearned revenue 898 702
--- ---
Total liabilities 7,662 1,702
----- -----
Commitments and contingencies - -
Shareholders' equity:
Preferred shares:
Series I ( 15,590 and 16,329 shares issued and outstanding, respectively) 10,794 11,308
Series II ( 7,350 and 7,637 shares issued and outstanding, respectively) 6,003 6,230
Preferred capital distribution shares:
Series I (8,325 and 8,909 shares issued and outstanding, respectively) 4,264 4,559
Series II (3,535 and 3,809 shares issued and outstanding, respectively) 1,978 2,126
Term growth shares (2,000 shares issued and outstanding) 126 97
Growth shares (14,437,586 shares, including 14,416,334 issued, 4,956
deferred, and 16,296 restricted shares at June 30, 1998 and
11,166,227 shares, including 11,153,168 issued, 3,685
deferred, and 9,374 restricted shares at December 31, 1997) 252,104 192,504
Less growth shares held in treasury at cost (59,534
and 60,077 shares, respectively) (915) (922)
Less unearned compensation - restricted shares (1,836) (1,865)
Accumulated other comprehensive income 27,597 27,362
------ ------
Total shareholders' equity 300,115 241,399
--------- ---------
Total liabilities and shareholders' equity $ 307,777 $ 243,101
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME:
Interest on mortgage revenue bonds and other bond related investments $ 5,829 $ 4,124 $ 11,121 $ 8,143
Interest on parity working capital loans, demand notes and other loans 1,135 751 2,215 1,556
Interest on short-term investments 168 200 540 470
Net gain on sale 203 - 524 -
Other income 346 251 614 501
--- --- --- ---
Total income 7,681 5,326 15,014 10,670
----- ----- ------ ------
EXPENSES:
Operating expenses 1,328 739 2,488 1,551
----- --- ----- -----
Total expenses 1,328 739 2,488 1,551
----- --- ----- -----
Net income allocated to: $ 6,353 $ 4,587 $ 12,526 $ 9,119
======= ======= ======== =======
Preferred shares:
Series I $ 212 $ 229 $ 430 $ 450
===== ===== ===== =====
Series II $ 111 $ 121 $ 257 $ 244
===== ===== ===== =====
Preferred capital distribution shares:
Series I $ 96 $ 99 $ 192 $ 199
==== ==== ===== =====
Series II $ 40 $ 44 $ 98 $ 92
==== ==== ==== ====
Term growth shares $ 126 $ 94 $ 251 $ 185
===== ==== ===== =====
Growth shares $ 5,768 $ 4,000 $ 11,298 $ 7,949
======= ======= ======== =======
Basic net income per share:
Preferred shares:
Series I $ 13.63 $ 14.00 $ 27.59 $ 27.55
======= ======= ======= =======
Series II $ 15.18 $ 15.90 $ 34.96 $ 31.95
======= ======= ======= =======
Preferred capital distribution shares:
Series I $ 11.50 $ 11.18 $ 23.05 $ 22.36
======= ======= ======= =======
Series II $ 11.33 $ 11.61 $ 27.79 $ 24.22
======= ======= ======= =======
Net income per growth share:
Basic $ 0.40 $ 0.36 $ 0.82 $ 0.72
====== ====== ====== ======
Diluted $ 0.39 $ 0.36 $ 0.80 $ 0.72
====== ====== ====== ======
Weighted average growth shares outstanding:
Basic 14,363,999 11,094,441 13,853,289 11,093,931
=========== ============= ============== ============
Diluted 15,547,150 11,103,938 14,825,493 11,099,559
=========== ============= ============== ============
</TABLE>
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MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 6,353 $ 4,587 $ 12,526 $ 9,119
------- ------- -------- -------
Other comprehensive income (loss):
Unrealized gains on investments:
Unrealized holding gains arising during the period 102 960 706 960
Less: reclassification adjustment for gains included in net income (203) - (471) -
---- --- --- ---
Other comprehensive income (loss) (101) 960 235 960
---- --- --- ---
Comprehensive income $ 6,252 $ 5,547 $ 12,761 $ 10,079
======= ======= ======== ========
</TABLE>
5
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MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1998 THROUGH JUNE 30, 1998
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Preferred Capital Accumulated
Preferred Shares Distribution Shares Term Other
---------------- ------------------- Growth Growth Treasury Unearned Comprehensive
Series I Series II Series I Series II Shares Shares Shares Compensation Income Total
-------- --------- -------- --------- ------ ------ ------ ------------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 11,308 $ 6,230 $ 4,559 $ 2,126 $ 97 $ 192,504 $ (922) $(1,865)$ 27,362 $ 241,399
Comprehensive income:
Net income 430 257 192 98 251 11,298 - - - -
Unrealized gains on investments,
net of reclassification - - - - - - - - 235 -
Total comprehensive income 12,761
Distributions (432) (250) (188) (93) (222) (14,990) - - - (16,175)
Reissuance of treasury stock - - - - - 3 7 - - 10
Options exercised - - - - - 288 - - - 288
Deferred shares issued under the
Non-Employee Directors' Share Plan - - - - - 30 - - - 30
Issuance of growth shares - - - - - 62,714 - - - 62,714
Retirement of preferred shares (512) (234) (299) (153) - 154 - - - (1,044)
Restricted share grants - - - - - 103 - (103) - -
Amortization of unearned
compensation - - - - - - - 132 - 132
-------- ------- ------- ------- ----- --------- ------ -------- -------- ---------
Balance, June 30, 1998 $ 10,794 $ 6,003 $ 4,264 $ 1,978 $ 126 $ 252,104 $ (915)$ (1,836)$ 27,597 $ 300,115
======== ======= ======= ======= ===== ========= ====== ======== ======== =========
SHARE ACTIVITY:
Balance, January 1, 1998 16,329 7,637 8,909 3,809 2,000 11,106,150 60,077
Reissuance of treasury stock - - - - - 534 (534)
Issuance of growth shares - - - - - 3,246,000 -
Retirement of preferred shares (739) (287) (584) (274) - - -
Options exercised - - - - - 17,166 -
Deferred shares issued under the
Non-Employee Directors' Share Plan - - - - - 1,271 -
Vesting of restricted shares - - - - - 6,922 -
------ ----- ----- ----- ----- ---------- ------
Balance, June 30, 1998 15,590 7,350 8,325 3,535 2,000 14,378,043 59,543
====== ===== ===== ===== ===== ========== ======
The accompanying notes are an integral part of these financial statements.
</TABLE>
6
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,526 $ 9,119
Adjustments to reconcile net income and comprehensive income to net cash
provided by operating activities:
Net gain on sale of bonds (524) -
Decrease in valuation allowance on parity working
capital loans, net - (11)
Net amortization of premiums, discounts and fees on investments 35 30
Depreciation 9 3
Restricted share compensation expense 132 13
Deferred shares issued under the Non-Employee Directors' Share Plan 30 40
Director fees paid by reissuance of treasury shares 10 8
Increase in interest receivable (584) (239)
(Increase) decrease in other assets 162 (113)
Increase (decrease) in accounts payable and accrued expenses 302 (139)
Increase in unearned fees collected, net 214 127
-------- --------
Net cash provided by operating activities 12,312 8,838
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage revenue bonds and other bond related investments (79,403) (18,130)
Origination of other loans (17,602) (943)
Net proceeds from sale of bond related investments 33,988 -
Purchases of furniture and equipment (25) (64)
Investment in MMACap, LLC - (1,000)
Principal payments received 113 20
-------- --------
Net cash used in investing activities (62,929) (20,117)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of growth shares 62,714 -
Retirement of preferred shares (1,044) -
Proceeds from stock options exercised 288 -
Distributions (10,713) (12,038)
-------- --------
Net cash provided by (used in) financing activities 51,245 (12,038)
-------- --------
Net increase (decrease) in cash and cash equivalents 628 (23,317)
Cash and cash equivalents at beginning of period 7,370 34,817
-------- --------
Cash and cash equivalents at end of period $ 7,998 $ 11,500
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
7
<PAGE>
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage revenue
bonds which are issued by state and local government authorities to finance
multifamily housing developments and are secured by nonrecourse mortgage loans
on the underlying properties. The Company, organized in July 1995 as a limited
liability company under Delaware law, is the successor to the business of the
SCA Tax Exempt Fund Limited Partnership (the "Partnership"), which was merged
into the Company effective August 1, 1996 (the "Merger").
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission 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 Company's 1997 Annual Report on
Form 10-K, as amended (the "Company's 1997 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. The accompanying financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's 1997
Form 10-K.
NOTE 2 - INVESTMENT IN MORTGAGE REVENUE BONDS
The Company invests in various mortgage revenue bonds and other bond
related investments, the proceeds of which are used to make nonrecourse mortgage
loans on multifamily housing developments. The Company'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
are described in Note 6 to the Company's 1997 Form 10-K.
The following table provides certain information with respect to each
of the bonds held by the Company at June 30, 1998.
8
<PAGE>
<TABLE>
<CAPTION
June 30, 1998 December 31,1997
---------------------------------- -----------------------------------
Base Face Amortized Unrealized Fair Face Amortized Unrealized Fair
Investment in Mortgage Year Interest Maturity Amount Cost Gain (Loss) Value Amount Cost Gain (Loss) Value
Revenue Bonds Acquired Rate Date (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s)
- ---------------------- ------- -------- -------- -------- --------- ---------- ------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Participating Bonds (1):
Alban Place ....... (2),(4) 1986 7.875 Oct. 2008 $ 10,065 10,065 ($ 1,083) $ 8,982 $ 10,065 $ 10,065 ($1,170) $8,895
Creekside Village . (2) 1987 7.500 Nov. 2009 11,760 7,396 143 7,539 11,760 7,396 190 7,586
Emerald Hills ..... (2) 1988 7.750 Apr. 2008 6,725 6,725 579 7,304 6,725 6,725 579 7,304
Lakeview Garden ... (2) 1987 7.750 Aug. 2007 9,003 5,340 -- 5,340 9,003 5,340 - 5,340
Newport-on-Seven .. (2) 1986 8.125 Aug. 2008 10,125 7,898 1,265 9,163 10,125 7,898 1,265 9,163
North Pointe ...... (2),(4) 1986 7.875 Aug. 2006 25,185 12,738 3,717 16,455 25,185 12,738 3,717 16,455
Northridge Park ... (2) 1987 7.500 June 2012 8,815 8,815 (1,713) 7,102 8,815 8,815 (1,547) 7,268
Riverset .......... (2),(4) 1988 7.875 Nov. 1999 19,000 19,000 1,116 20,116 19,000 19,000 1,116 20,116
Southfork Village . (2),(4) 1988 7.875 Jan. 2009 10,375 10,375 2,084 12,459 10,375 10,375 2,084 12,459
Villa Hialeah ..... (2) 1987 7.875 Oct. 2009 10,250 8,004 (117) 7,887 10,250 8,004 (117) 7,887
Willowgreen ....... (2) 1986 8.000 Dec. 2010 9,275 6,770 132 6,902 9,275 6,770 2 6,772
The Crossings ..... 1997 8.000 July 2007 7,006 6,911 245 7,156 6,940 6,940 245 7,185
------ ----- ------- ------- ----- -------
Subtotal participating bonds ........ 110,037 6,368 116,405 110,066 6,364 116,430
------- ----- ------- ------- ----- -------
Non-Participating Bonds:
Riverset II .......... 1996 9.500 Oct. 2019 110 105 15 120 110 105 15 120
Charter House ........ 1996 7.450 July 2026 35 35 1 36 35 35 1 36
Hidden Valley ........ 1996 8.250 Jan. 2026 1,690 1,690 93 1,783 1,700 1,700 77 1,777
Oakbrook ............. 1996 8.200 July 2026 3,180 3,211 176 3,387 3,195 3,226 161 3,387
Torries Chase ........ 1996 8.150 Jan. 2026 2,060 2,060 165 2,225 2,070 2,070 155 2,225
Gannon Portfolio .... 1998 12.000 Dec. 2029 3,500 3,500 -- 3,500 - - - -
Italian Gardens ... (5) 1998 7.800 May 2030 8,000 7,985 55 8,040 - - - -
Coleman Manor ..... (5) 1998 8.000 May 2030 8,050 8,035 55 8,090 - - - -
Nantucket Cove ..... (4),(5) 1998 5.800 Apr. 2034 19,150 19,054 191 19,245 - - - -
Orangevale ......... 1998 7.O00 Oct. 2013 2,543 2,543 (25) 2,518 - - - -
-------- ----- -------- ----- ------ -----
Subtotal non-participating bonds .... 48,218 726 48,944 7,136 409 7,545
------ ----- -------- ----- ------ -----
Participating Subordinate Bonds (1):
Barkley Place ...... (3) 1995 16.000 Jan. 2030 3,480 2,445 1,809 4,254 3,480 2,445 1,430 3,875
Gilman Meadows ..... (3) 1995 3.000 Jan. 2030 2,875 2,530 1,784 4,314 2,875 2,530 1,409 3,939
Hamilton Chase ..... (3) 1995 3.000 Jan. 2030 6,250 4,140 189 4,329 6,250 4,140 98 4,238
Mallard Cove I ..... (3) 1995 3.000 Jan. 2030 1,670 798 645 1,443 1,670 798 645 1,443
Mallard Cove II .... (3) 1995 3.000 Jan. 2030 3,750 2,429 1,599 4,028 3,750 2,429 1,599 4,028
Meadows ............ (3) 1995 16.000 Jan. 2030 3,635 3,716 451 4,167 3,635 3,716 451 4,167
Montclair .......... (3) 1995 3.000 Jan. 2030 6,840 1,691 3,914 5,605 6,840 1,691 3,914 5,605
Newport Village .... (3) 1995 3.000 Jan. 2030 4,175 2,973 1,978 4,951 4,175 2,973 1,803 4,776
Nicollet Ridge ..... (3) 1995 3.000 Jan. 2030 12,415 6,075 2,397 8,472 12,415 6,075 2,325 8,400
Steeplechase Falls . (3) 1995 16.000 Jan. 2030 5,300 5,852 744 6,596 5,300 5,852 744 6,596
Whispering Lake .... (3) 1995 3.000 Jan. 2030 8,500 4,779 3,234 8,013 8,500 4,779 3,234 8,013
Riverset II ........ 1996 10.000 Oct. 2019 1,489 - 1,452 1,452 1,489 - 1,229 1,229
------ ------ ------ ------ ------ ------
Subtotal participating subordinate bonds ... 37,428 20,196 57,624 37,428 18,881 56,309
------ ------ ------ ------ ------ ------
Independence Ridge .. 1996 12.500 Dec. 2015 1,045 1,045 52 1,097 1,045 1,045 21 1,066
Locarno ............. 1996 12.500 Dec. 2015 675 675 20 695 675 675 10 685
----- ------ ----- ----- ----- -----
Subtotal non-participting subordinate bonds 1,720 72 1,792 1,720 31 1,751
========= ======= ======== ========= ======= ========
Total investment in mortgage revenue bonds .... $ 197,403 $27,362 $224,765 $ 156,350 $25,685 $182,035
========= ======= ======== ========= ======= ========
(1) These bonds also contain additional interest features contingent on
available cash flow, except for Barkley Place, Meadows and Steeplechase
Falls.
(2) One of the original 22 bonds.
(3) Series B Bonds derived from original 22 bonds.
(4) These assets were pledged as collateral.
(5) The interest rate represents the rate during the construction period
which is anticipated to be fifteen months for Italian Gardens and Coleman
Manor and one year for Nantucket Cove. The permanent interest rate will
be 7.25% for Italian Gardens and Coleman Manor and 7.725% for Nantucket
Cove.
</TABLE>
9
<PAGE>
In the second quarter, the Company originated $37.7 million tax-exempt
mortgage revenue bonds collateralized by 4 multifamily apartment communities
with 993 units. Two of the four communities are new construction communities and
two are existing communities that are undergoing rehabilitation. The weighted
average permanent interest rate of these investments is 7.47% and the maturity
dates range from 2013 to 2034. On certain transactions, the Company
negotiated construction administration or origination fees, $0.4 million in the
aggregate, that are recognized into income over the life of the construction
period or the life of the bond.
In addition, during the second quarter, the Company originated, for a
fee of $51,000, a $10.2 million tax-exempt mortgage revenue bond collateralized
by a 156 unit to-be-built multifamily apartment community known as The Villas at
Sonterra located in San Antonio, Texas. The Company then sold this bond to
Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") (see further
discussion in Note 3) at a gain of $51,000. Additionally, the Company received a
$150,000 construction administration fee which is being amortized into income
over the anticipated construction period.
NOTE 3 - OTHER BOND RELATED INVESTMENTS
The Company's other bond related investments are primarily investments
in RITES(sm), a security offered by Merrill Lynch through its P-FLOATs(sm)
Program. The RITES(sm) are part of a program under which a bond is placed into a
trust and two types of securities are sold by the trust, P-FLOATs(sm) and
RITES(sm). The P-FLOATs(sm) are the senior security and bear interest at a rate
that is reset weekly by the Remarketing Agent, Merrill Lynch, to result in the
sale of the P-FLOATs(sm) at par. The RITES(sm) are the subordinate security and
receive the residual interest. The residual interest is the remaining interest
on the bond after payment of all fees and the P-FLOATs(sm) interest. In
conjunction with the purchase of the RITES(sm) with respect to fixed rate bonds,
the Company enters into interest rate swap contracts to hedge against interest
rate exposure on the Company's investment in the RITES(sm). The following table
provides certain information with respect to each of the other bond related
investments.
10
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------------------------- --------------------------------------
Face Amortized Unrealized Fair Face Amortized Unrealized Fair
Year Amount Cost Gain (Loss) Value Amount Cost Gain (Loss) Value
Other Bond Related Investments: Acquired (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s)
- ------------------------------- -------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RITES-Hunters Ridge/South Pointe . (1) 1996 $ - $ - $ - $ - $ 3,560 $ 4,248 $ 700 $ 4,948
Interest Rate swap on Hunters Ridge/
South Pointe (1),(2) 1996 - - - - 7,200 - (427) (427)
RITES-Indian Lake ................. 1997 3,340 3,500 441 3,941 3,360 3,530 363 3,893
Interest rate swap on Indian Lakes (2) 1997 6,500 - (250) (250) 6,500 - (202) (202)
RITES-Charter House ............... 1996 80 361 97 458 1,930 2,196 76 2,272
RITES-Southgate ................... 1997 110 673 124 797 2,760 3,178 217 3,395
RITES-Southwood ................... 1997 440 264 434 698 10,320 10,308 166 10,474
Stone Mountain ....................(3) 1997 33,900 34,125 792 34,917 10,140 10,366 661 11,027
RITES-Riverset ..................... 1996 75 618 170 788 1,875 2,222 328 2,550
$58M Interest rate swap ...........(2) 1997 58,000 - (1,250) (1,250) 58,000 - (493) (493)
Stone Mountain I/O Strip ..........(4) 1997 - 1,180 (1,180) - - 1,201 76 1,277
Cinnamon ridge total return swap (2),(5) 1997 10,570 - 317 317 10,570 - 264 264
Cinnamon ridge interest rate swap(2),(5) 1997 7,000 - (148) (148) 7,000 - (52) (52)
RITES-Gannon ...................... 1998 814 1,071 1,011 2,082 - - - -
Gannon swap .......................(2) 1998 73,000 - (303) (303) - - - -
Interest rate swap (1 year) ..... (2) 1998 9,675 - (15) (15) - - - -
Interest rate swap (10 year) .... (2) 1998 9,675 - (119) (119) - - - -
RITES-Villas at Sonterra ......... 1998 5 35 (30) 5 - - - -
RITES-Seasons at Cherry Creek .... 1998 5 147 144 291 - - - -
--- --- --- ----- ----- ------
Total other bond related investments $41,974 $235 $42,209 $37,249 $1,677 $38,926
====== === ====== ====== ===== ======
(1) The Company sold its investments in these RITES, and the related swap,
during the first quarter for a gain of $321,000.
(2) Face amount represents notional amount of swap agreements.
(3) The underlying bonds are held in a trust; the Company owns all of the
custodial receipts related to the underlying bonds at June 30, 1998.
(4) Custodial receipt which represents the interest generated on the
underlying bond in excess of 7.875%
(5) The Company has entered into a total return and interest rate swap on the
Cinnamon Ridge Mortgage Bond. During the term of the total return swap,
the Company will receive income approximating .625% of the face amount of
the bond.
</TABLE>
11
<PAGE>
From time to time, the Company may purchase or sell in the open market
interests in bonds that it has securitized depending on the Company's capital
position and needs. In February and March, the Company used uninvested equity
offering proceeds to purchase interests in three bonds that were securitized in
December 1997. In April 1998, the Company sold some of these interests. Also,
the Company raised capital through the sale of interests in two other
securitized bonds.
As discussed in Note 2, during the second quarter the Company sold the
$10.2 million bond collateralized by The Villas at Sonterra Apartment community
to Merrill Lynch. Merrill Lynch securitized this bond into $10.2 million in
P-FLOATs(sm) and $5,000 in RITES(sm). The Company retained the RITES(sm)
investment.
Also in the second quarter, the Company purchased a $5,000 (par value)
RITES(sm) interest for $148,000 in The Seasons at Cherry Creek ("Cherry Creek").
Cherry Creek is a 437 unit apartment community located in Denver, Colorado which
serves as collateral for a $28.6 million multifamily mortgage revenue bond. The
bond was placed into a trust by Merrill Lynch whereby P-FLOATs(sm) and RITES(sm)
were sold. The bond bears interest at a floating rate equal to The Bond Market
Association Municipal Swap Index plus 165 basis points. In June 1998, the
Company also pledged one additional bond to the pool of collateral for the
senior interests in certain trusts in which the Company owns the RITES(sm)
position.
NOTE 4 - INVESTMENT IN PARITY WORKING CAPITAL LOANS, DEMAND NOTES
AND OTHER LOANS
In June 1998, the Company originated a $8.3 million taxable mortgage
loan collateralized by a 264 unit multifamily apartment community known as Olde
English Manor located in Wichita, Kansas. The mortgage loan bears interest at a
stated annual rate of 9.0%. The three month loan was made as short term
financing pending issuance, by the City of Wichita, of two tax-exempt mortgage
revenue bonds. The Company has committed to acquire interests in these bonds
when issued.
12
<PAGE>
NOTE 5 - EARNINGS PER SHARE
The following tables reconcile the numerators and denominators in the
basic and diluted EPS calculations for Growth Shares for the three and six
months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the three months ended June 30, 1998 For the three months ended June 30, 1997
(in thousands) (in thousands),
(except share and per share data) (except share and per share data)
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income allocable to growth shares$ 5,768 14,363,999 $ 0.40 $ 4,000 11,094,441 $ 0.36
=========== ===========
Effect of Dilutive Securities
Options and restricted shares - 229,051 - 9,497
Convertible preferred shares
to the extent dilutive
(Series I and Series II Preferred Shares, and
Series II Preferred CD Shares) 363 954,100 - -
--- ------- ----- -------
Diluted EPS
Income allocable to growth shares
plus assumed conversions $ 6,131 15,547,150 $ 0.39 $ 4,000 11,103,938 $ 0.36
========= =========== =========== =========== =========== ===========
For the six months ended June 30, 1998 For the six months ended June 30, 1997
(in thousands) (in thousands),
(except share and per share data) (except share and per share data)
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income allocable to growth share$ 11,298 13,853,289 $ 0.82 $ 7,949 11,093,931 $ 0.72
=========== ===========
Effect of Dilutive Securities
Options and restricted shares - 223,802 - 5,628
Convertible preferred shares
to the extent dilutive 582 748,402 - -
--- ------- ----- ------
Diluted EPS
Income allocable to growth shares
plus assumed conversions $ 11,880 14,825,493 $ 0.80 $ 7,949 11,099,559 $ 0.72
=========== =========== =========== =========== =========== ===========
</TABLE>
For the three and six months ended June 30, 1997, the effect of the potential
dilution from the conversion of the preferred shares is not included in the
calculation of diluted EPS because the effect of the conversion would have been
anti-dilutive.
13
<PAGE>
NOTE 6 - DISTRIBUTIONS
On June 24, 1998, a distribution for the three months ended June 30,
1998 was declared for growth shareholders of record on July 6, 1998.
Additionally, on July 8, 1998, distributions for the three months ended June 30,
1998 were declared for preferred and term growth shareholders of record on July
20, 1998. All distributions were paid on August 3, 1998. The per share
distributions are shown in the following table:
<TABLE>
<CAPTION>
Preferred Capital
Preferred Shares Distribution Shares
Growth ---------------- -------------------
Shares Series I Series II Series I Series II
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Distributions paid on May 4, 1998
to holders of record on April 20, 1998:
For the three months ended
March 31, 1998 .................... $ 0.3750 $ 13.96 $ 17.13 $ 11.39 $ 13.34
Distributions paid on August 3, 1998
to holders of record on July 6, 1998:
For the three months ended
June 30, 1998 ..................... 0.3800 - - - -
Distributions paid on August 3, 1998
to holders of record on July 20, 1998:
For the three months ended
June 30, 1998 ..................... - 13.96 17.13 11.39 13.34
------ ----- ----- ----- -----
Total Year-to-Date June 30, 1998 $0.7550 $27.92 $34.26 $22.78 $26.68
====== ===== ===== ===== =====
</TABLE>
14
<PAGE>
NOTE 7 - SUBSEQUENT EVENTS
New Acquisitions
In July 1998, the Company received an origination fee of $63,000 for
participating in a transaction whereby Merrill Lynch purchased a $6.25 million
multifamily revenue bond collateralized by a 110 unit apartment community known
as Queen Anne IV Apartments located in Weymouth, Massachusetts. The Company
anticipates purchasing a RITES position related to this bond in August after
Merrill Lynch securitizes this bond into P-FLOATs(sm) and RITES(sm). In
conjunction with this transaction, the Company originated a $50,000 taxable loan
on the property. The loan bears interest at a stated rate of 8.5%. Principal
payments begin in September 1998 through maturity in August 2001.
In February 1998, the Company originated a $9.5 million taxable
mortgage loan collateralized by a 328 unit multifamily apartment community known
as Palisades Park located in Universal City, Texas. This short term financing
was made pending issuance, by the Bexar County Housing Finance Corporation, of a
tax-exempt mortgage revenue bond. In July 1998, this participating bond was
issued in the amount of $9.75 million and the $9.5 million taxable mortgage loan
was retired. The bond has a stated interest rate of 8.5% of which 7.125% must be
paid currently and the remaining 1.375% is paid from 25% of net cash flow. To
the extent that the interest payments for the year do not equal 8.5%, the
difference is deferred and accrues interest at 8.5%. For accounting purposes,
any interest received over the base rate of 7.125% will be recognized as
interest income when received.
Equity Offering
On July 22, 1998, The Company sold to the public 2.5 million Growth
Shares at a price of $21.125 per share and granted the underwriters an option to
purchase up to an aggregate of 375,000 Growth Shares at the same price. As of
August 1, 1998, the underwriters have not exercised this option. Net proceeds
generated from the offering of the 2.5 million Growth Shares approximated $49.7
million. The net proceeds from this offering will be used for general corporate
purposes, including new investments and working capital.
15
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Business
Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage revenue
bonds issued by state and local government authorities to finance multifamily
housing developments. The Company is a limited liability company that, as a
result of a merger effective August 1, 1996 (the "Merger"), is the successor to
the business of SCA Tax Exempt Fund Limited Partnership (the "Partnership").
The Company is required to distribute to the holders of Preferred
Shares and Preferred Capital Distribution Shares ("Preferred CD Shares") cash
flow attributable to such shares (as defined in the Company's Amended and
Restated Certificate of Formation and Operating Agreement). The Company is
required to distribute 2.0% of the net cash flow to the holders of Term Growth
Shares. The balance of the Company's net income is allocated to Growth Shares
(or "Common Shares") and the Company's current policy is to distribute to Common
Shareholders at least 80% of the cash flow associated with this income. This
payout ratio has approximated 95% for the Company's first six quarters.
Certain of the bonds held by the Company are participating bonds that
provide for payment of contingent interest, based upon the performance of the
underlying properties, in addition to base interest at a fixed rate. Because the
mortgage loans underlying all of the bonds held by the Company are nonrecourse,
all debt service on the bonds, and therefore cash flow available for
distribution to all shareholders, is dependent upon the performance of the
underlying properties.
On June 25, 1998, the Company's Common Shares began trading on the New
York Stock Exchange. Prior to that date, the Common Shares were traded on the
American Stock Exchange.
Results of Operations
Quarterly Results Analysis
Total income for the three months ended June 30, 1998 increased by
approximately $2.4 million over the same period last year due primarily to an
increase in interest income earned on investments of approximately $2.1 million
and a gain on the sale of investments of approximately $0.2 million.
Operating expenses for the three months ended June 30, 1998 increased
by approximately $0.6 million from the prior year due primarily to (1) an
increase in salary and benefits expense as a result of an increase in the number
of employees, (2) an increase in professional fees due to growth in investment
activity, and (3) an initial filing fee of approximately $116,000 for listing
the Common Shares on the New York Stock Exchange.
16
<PAGE>
Year-to-Date Results Analysis
Total income for the six months ended June 30, 1998 increased by
approximately $4.3 million over the same period last year due primarily to an
increase in interest income earned on investments of approximately $3.6 million
and a gain on the sale of investments of approximately $0.5 million.
Operating expenses for the six months ended June 30, 1998 increased by
approximately $0.9 million from the prior year due primarily to (1) an increase
in salary and benefits expense as a result of an increase in the number of
employees, (2) an increase in professional fees due to growth in investment
activity, and (3) an initial filing fee of approximately $116,000 for listing
the Common Shares on the New York Stock Exchange.
Liquidity and Capital Resources
The Company's primary objective is to maximize shareholder value
through increases in distributable cash flow per Common Share and appreciation
in the value of its Common Shares. The Company seeks to achieve its growth
objectives by acquiring, servicing and managing diversified portfolios of
mortgage bonds and other bond related investments. In order to facilitate this
growth strategy, the Company will require additional capital in order to pursue
acquisition opportunities. The Company expects to finance its acquisitions
through a financing strategy that (1) takes advantage of attractive financing
available in the tax-exempt securities markets; (2) minimizes exposure to
fluctuations of interest rates; and (3) maintains maximum flexibility to manage
the Company's short-term cash needs. To date, the Company has primarily used two
sources, securitizations and Common Share equity offerings, to finance its
acquisitions.
In the second quarter, the Company participated in $84.8 million in
investment transactions. Of this amount, $46.0 million of these transactions
were bond or loan originations retained by the Company. The remaining investment
transactions involved the securitizations discussed below.
Securitizations
Through securitizations, the Company seeks to enhance its overall
return on its investments and to generate proceeds which, along with equity
offering proceeds, facilitate the acquisition of additional investments. The
Company securitizes bonds through the sale of bonds to an investment bank which,
in turn, deposits the bonds into a trust. Short term floating rate interests in
the trust, which have first priority on the cash flow from the bonds, are sold
to accredited qualified third party investors. The Company purchases the
residual interests in the trust and receives the proceeds from the sale of the
floating rate interests less certain transaction costs. The Company may also
purchase, for investment purposes, residual interest in bonds that it did not
own, in which case no proceeds are received. The residual interests are the
subordinate security and receive the residual income after the payment of all
fees and the floating rate obligation. The Company recognizes taxable capital
gains (or losses) upon the sale of the bonds.
Since the bonds securitized generally bear fixed rates of interest, the
residual interest in the trust created by the securitizations may create
interest rate risks. To reduce the Company's exposure to interest rate risks on
fixed rate bonds securitized, the Company enters into interest rate swaps,
17
<PAGE>
which are contracts exchanging an obligation to pay a floating rate
approximating the rate on the senior floating rate security for an obligation to
pay a fixed rate. Net swap payments received, if any, will be taxable income,
even though the investment being hedged pays tax-exempt interest. The interest
rate swaps are for limited time periods which generally match the term of the
securitization trust. However, there is no certainty that prepayment will occur
at the end of the swap period. There can be no assurance that the Company will
be able to acquire interest rate swaps at favorable prices, or at all, when the
existing arrangements expire, in which case the Company would be fully exposed
to interest rate risk to the extent the anticipated prepayment does not occur.
From time to time, the Company may purchase or sell on the open market
interests in bonds that it has securitized depending on the Company's capital
position and needs. In February, the Company used uninvested equity offering
proceeds to purchase interests in four bonds that were securitized in December
1997. In April 1998, the Company sold some of these interests. Also, the Company
raised capital through the sale of interests in two other securitized bonds.
Through the use of securitizations, the Company expects to employ
leverage and maintain overall leverage ratios in the 40% to 55% range, with
certain assets at significantly higher ratios, up to approximately 99%, while
not leveraging other assets at all. The Company calculates leverage by dividing
the total amount of senior interests in its investments, which it considers the
equivalent of off-balance sheet financing, by the sum of total assets owned by
the Company plus senior interests owned by others. Under this method, the
Company's leverage ratio at June 30, 1998 was approximately 46%.
In order to facilitate the securitization of certain assets at higher
leverage ratios, the Company has pledged additional bonds to the pool that
collateralizes the senior interests in the trust.
Public Offering
On July 22, 1998, The Company sold to the public 2.5 million Common
Shares at a price of $21.125 per share and granted the underwriters an option to
purchase up to an aggregate of 375,000 Common Shares at the same price. As of
August 1, 1998, the underwriters have not exercised this option. Net proceeds
generated from the offering of the 2.5 million Common Shares approximated $49.7
million. The net proceeds from this offering will be used for general corporate
purposes, including new investments and working capital.
Cash Flow
At June 30, 1998, the Company had cash and cash equivalents of
approximately $8.0 million.
Cash flow from operating activities was $12.3 million and $8.8 million
for the six months ended June 30, 1998 and 1997, respectively. The increase in
cash flow for 1998 versus 1997 is due primarily to an increase in income from
investment of the 1995 Financing proceeds and the 1998 Equity Offering proceeds.
18
<PAGE>
The Company uses Cash Available for Distribution ("CAD") as the primary
measure of its dividend paying ability. CAD differs from net income because of
slight variations between generally accepted accounting principles ("GAAP")
income and actual cash received. There are two primary differences between CAD
and GAAP income. The first is the treatment of loan origination fees, which for
CAD purposes are recognized when received but for GAAP purposes are amortized
into income over the life of the associated loan. The second difference is the
noncash gain and loss recognized for GAAP associated with valuations and sales
of investments, which are not included in the calculation of CAD.
For the three months ended June 30, 1998 and 1997, cash available for
distribution to Common Shares was $5.7 million and $4.1 million, respectively.
Regular cash distributions to common shareholders attributable to the three
months ended June 30, 1998 and 1997 were $5.5 million and $3.9 million,
respectively. The Company's Common Share dividend for the three months ended
June 30, 1998 of $0.380 represents a payout ratio of 95.7% of CAD. The Company's
Common Share dividend for the three months ended June 30, 1997 of $0.350
represents a payout ratio of 95.3% of CAD. The increase in CAD for the three
months ended June 30, 1998 versus 1997, is due primarily to an increase in
interest income collected on investments of $2.1 million partially offset by an
increase in operating expenses of $0.6 million.
The Company expects to meet its cash needs in the short-term, which
consist primarily of funding new investments, operating expenses and dividends
on the Common Shares and other equity, from cash on hand, operating cash flow,
securitization and equity offering proceeds received in July 1998. The Company's
business plan includes making additional investments during the remainder of
1998 which will be funded through the July 1998 Common Share equity offering and
securitizations. Cash not used as set forth above may be used to reduce the
total amount of senior interests in the Company's securitized facilities.
19
<PAGE>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
At the annual meeting of the Company's shareholders held on June 18,
1998, the shareholders voted on several proposals in addition to the election of
the Company's directors. The shareholders voted to adopt a new 1998 Share
Incentive Plan providing for the issuance of up to 839,000 growth shares to
executive officers, other key employees and key independent contractors. The
votes cast on this proposal were as follows: 7,932,950 in favor; 895,436
opposed; 304,954 abstaining; and 4,494,149 broker non-vote. The shareholders
also voted to adopt a new 1998 Non-Employee Directors' Plan providing for the
issuance of up to 50,000 growth shares to non-employee directors. The votes cast
on this proposal were as follows: 7,912,246 in favor; 986,491 opposed; 332,349
abstaining; and 4,396,403 broker non-vote.
Item 5 - Other Information
On July 22, 1998, the Company sold to the public 2.5 million Common
Shares at a price of $21.125 per share and granted the underwriters an option to
purchase up to an aggregate of 375,000 Common Shares at the same price. As of
August 1, 1998, the underwriters have not exercised this option. Net proceeds
generated from the offering of the 2.5 million Common Shares approximated $49.7
million. The net proceeds from this offering will be used for general corporate
purposes, including new investments and working capital.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Certificate of Formation and
Operating Agreement of the Company (filed as Item 14
(c) Exhibit 3.1 to the Company's current report on
Form 10-K/A - Amendment #1, filed with the Commission
on May 29, 1998 and incorporated by reference
herein).
3.2 By-laws of the Company (filed as Item 16 Exhibit 4.2
to the Company's Registration Statement on Form S-3/A
- Amendment #1, File No. 333-56049, filed with the
Commission on June 29, 1998 and incorporated by
reference herein).
27 Financial Data Schedule
(b) Reports on Form 8-K:
On July 24, 1998, the Registrant filed a report on Form 8-K in
connection with the public offering of 2.5 million Common Shares.
20
<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
Chairman of the Board, Chief Executive Officer
(Principal Executive Officer), and Director
By: /s/ Gary Mentesana
Gary Mentesana
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
DATED: August 7, 1998
21
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document
3.1 Amended and Restated Certificate of Formation and
Operating Agreement of the Company (filed as Item 14
(c) Exhibit 3.1 to the Company's current report on
Form 10-K/A - Amendment #1, filed with the Commission
on May 29, 1998 and incorporated by reference
herein).
3.2 By-laws of the Company (filed as Item 16 Exhibit 4.2
to the Company's Registration Statement on Form
S-3/A - Amendment #1, File No. 333-56049, filed with
the Commission on June 29, 1998 and incorporated by
reference herein).
27 Financial Data Schedule
22
<PAGE>
<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>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 7,998
<SECURITIES> 0
<RECEIVABLES> 2,056
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,054
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 307,777
<CURRENT-LIABILITIES> 7,662
<BONDS> 0
0
23,165
<COMMON> 249,353
<OTHER-SE> 27,597
<TOTAL-LIABILITY-AND-EQUITY> 307,777
<SALES> 0
<TOTAL-REVENUES> 7,681
<CGS> 0
<TOTAL-COSTS> 1,328
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,353
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,353
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,353
<EPS-PRIMARY> .72<F1>
<EPS-DILUTED> .72<F1>
<FN>
<F1> The earnings per share reflects the earning per share of the
Growth Shares.
</FN>
</TABLE>
