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 quarterly period ended: Commission file number:
September 30, 1999 001-11981
------------------- ---------
MUNICIPAL MORTGAGE & EQUITY, LLC
(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 17,401,202 Common Shares outstanding as of November 5, 1999, the
latest practicable date.
<PAGE>
MUNICIPAL MORTGAGE & EQUITY, LLC
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
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited)
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C>
ASSETS
Cash and cash equivalents $ 31,450 $ 23,164
Interest receivable 3,862 2,859
Investment in mortgage revenue bonds, net (Note 4) 285,913 201,858
Investment in mortgage revenue bonds pledged, net (Note 4) 148,442 96,566
Investment in other bond related investments, net (Note 5) 7,892 16,419
Investment in parity working capital loans, demand
notes and other loans, net 28,253 17,246
Other assets 1,349 682
Restricted assets 7,479 5,367
----------------- -----------------
Total assets $ 514,640 $ 364,161
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,813 $ 2,484
Unearned revenue 1,111 721
Guaranty liability 5,527 5,504
Long-term debt (Note 3) 67,000 -
----------------- -----------------
Total liabilities 76,451 8,709
----------------- -----------------
Commitments and contingencies - -
Preferred shareholders' equity in a subsidiary company (Note 2) 81,597 -
Shareholders' equity:
Preferred shares:
Series I (14,933 and 15,590 shares issued and outstanding, respectively) 10,104 10,985
Series II (7,226 and 7,350 shares issued and outstanding, respectively) 5,740 5,970
Preferred capital distribution shares:
Series I (7,798 and 8,325 shares issued and outstanding, respectively) 3,755 4,351
Series II (3,164 and 3,535 shares issued and outstanding, respectively) 1,639 1,958
Term growth shares (2,000 shares issued and outstanding) 156 105
Common shares (16,947,215 shares, including 16,938,446 issued, and 8,769
deferred shares at September 30, 1999 and 16,944,882 shares, including
16,938,446 issued, and 6,436 deferred shares at December 31, 1998) 311,036 310,109
Less common shares held in treasury at cost (140,460 shares
and 153,832, respectively) (2,355) (2,555)
Less unearned compensation - deferred shares (2,447) (2,892)
Accumulated other comprehensive income 28,964 27,421
----------------- -----------------
Total shareholders' equity 356,592 355,452
----------------- -----------------
Total liabilities and shareholders' equity $ 514,640 $ 364,161
================= =================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(unaudited)
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
INCOME:
Interest on mortgage revenue bonds and other bond related
investments $ 10,144 $ 6,198 $ 26,251 $ 17,319
Interest on parity working capital loans, demand notes and
other loans 566 1,204 1,637 3,419
Interest on short-term investments 391 493 1,075 1,033
Net gain on sales - - 1,478 524
Other income 534 443 1,372 1,057
-------------- ---------------- --------------- --------------
Total income 11,635 8,338 31,813 23,352
-------------- ---------------- --------------- --------------
EXPENSES:
Operating expenses 1,989 1,014 4,749 3,502
Interest expense 846 - 1,746 -
-------------- ---------------- --------------- --------------
Total expenses 2,835 1,014 6,495 3,502
-------------- ---------------- --------------- --------------
Net income before distributions to preferred shareholders
in a subsidiary company
8,800 7,324 25,318 19,850
Income allocable to preferred shareholders in a subsidiary
company 1,444 - 1,989 -
-------------- ---------------- --------------- --------------
Net income $ 7,356 $ 7,324 $ 23,329 $ 19,850
============== ================ =============== ==============
Net income allocated to:
Preferred shares:
Series I $ 232 $ 229 $ 816 $ 659
============== ================ =============== ==============
Series II $ 123 $ 116 $ 408 $ 373
============== ================ =============== ==============
Preferred capital distribution shares:
Series I $ 96 $ 97 $ 352 $ 289
============== ================ =============== ==============
Series II $ 40 $ 41 $ 133 $ 139
============== ================ =============== ==============
Term growth shares $ 156 $ 149 $ 438 $ 400
============== ================ =============== ==============
Common shares $ 6,709 $ 6,692 $ 21,182 $ 17,990
============== ================ =============== ==============
Basic net income per share:
Preferred shares:
Series I $ 15.52 $ 14.66 $ 54.62 $ 42.25
============== ================ =============== ==============
Series II $ 17.07 $ 15.79 $ 56.51 $ 50.75
============== ================ =============== ==============
Preferred capital distribution shares:
Series I $ 12.40 $ 11.66 $ 45.18 $ 34.71
============== ================ =============== ==============
Series II $ 12.60 $ 11.47 $ 41.96 $ 39.26
============== ================ =============== ==============
Net income per common share:
Basic $ 0.40 $ 0.41 $ 1.26 $ 1.23
============== ================ =============== ==============
Diluted $ 0.39 $ 0.41 $ 1.24 $ 1.21
============== ================ =============== ==============
Weighted average common shares outstanding:
Basic 16,805,960 16,307,957 16,806,229 14,680,503
============== ================ =============== ==============
Diluted 17,508,274 16,487,050 17,338,361 15,388,337
============== ================ =============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Net income $ 7,356 $ 7,324 $ 23,329 $ 19,850
-------------- ------------ -------------- ------------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period (2,291) (236) 756 470
Less: reclassification adjustment for (gains) losses
included in net income - - 787 (471)
-------------- ------------ -------------- ------------
Other comprehensive income (loss) (2,291) (236) 1,543 (1)
-------------- ------------ -------------- ------------
Comprehensive income $ 5,065 $ 7,088 $ 24,872 $ 19,849
============== ============ ============== ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the nine months ended
September 30,
1999 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,329 $ 19,850
Adjustments to reconcile net income and comprehensive income to net cash
provided by operating activities:
Decrease in valuation allowance on loans (584) (6)
Net gain on sales (1,478) (524)
Income allocable to preferred shareholders of a subsidiary company 1,989 -
Net amortization of premiums and discounts on investments 223 83
Depreciation 44 15
Deferred share compensation expense 445 206
Deferred shares issued under the Non-Employee Directors' Share Plans 46 42
Director fees paid by reissuance of treasury shares 10 14
Increase in interest receivable (1,003) (628)
(Increase) decrease in other assets (651) 13
Increase in accounts payable and accrued expenses 329 693
Increase in unearned revenue, net 390 233
----------------- -----------------
Net cash provided by operating activities 23,089 19,991
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage revenue bonds and other bond related investments
and origination of other loans (126,993) (112,485)
Purchases of furniture and equipment (60) (192)
Net investment in restricted assets (2,112) (4,281)
Net proceeds from sale of investments 58,597 33,988
Principal payments received 390 217
----------------- -----------------
Net cash used in investing activities (70,178) (82,753)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares - 112,316
Issuance of preferred shares in a subsidiary company 80,153 -
Retirement of preferred shares (927) (1,044)
Proceeds from stock options exercised - 288
Purchase of treasury shares (289) -
Distributions (23,017) (16,832)
Distributions to preferred shares in a subsidiary company (545) -
----------------- -----------------
Net cash provided by financing activities 55,375 94,728
----------------- -----------------
Net increase in cash and cash equivalents 8,286 31,966
Cash and cash equivalents at beginning of period 23,164 7,370
----------------- -----------------
Cash and cash equivalents at end of period $ 31,450 $ 39,336
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid $ 1,290 $ -
================= =================
DISCLOSURE OF NON-CASH ACTIVITIES:
Investments and long-term debt recorded under SFAS No. 125 upon conversion
of P-FLOATS to Term Securitization Facility (see Note 3) $ 67,000 $ -
================= =================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1999 THROUGH SEPTEMBER 30, 1999
(In thousands, except share data)
(unaudited)
Accumulated
Preferred Capital Other
Preferred Shares Distribution Shares Term Growth Common 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, 1999 $ 10,985 $ 5,970 $ 4,351 $ 1,958 $ 105 $ 310,109 $(2,555)$ (2,892) $ 27,421 $ 355,452
Net income 816 408 352 133 438 21,182 - - - 23,329
Unrealized gains on
investments, net of
reclassifications - - - - - - - - 1,543 1,543
Distributions (1,234) (537) (673) (247) (387) (19,939) - - - (23,017)
Purchase of treasury
shares - - - - - - (289) - - (289)
Reissuance of treasury
shares - - - - - (479) 489 - - 10
Deferred shares issued
under the
Non-Employee Directors'
Share Plans - - - - - 46 - - - 46
Retirement of preferred
shares (463) (101) (275) (205) - 117 - - - (927)
Amortization of deferred
compensation - - - - - - - 445 - 445
-------- ------------ --------- -------- --------- --------- -------- ---------- --------- ------------
Balance, September 30, 1999 $ 10,104 $ 5,740 $ 3,755 $ 1,639 $ 156 $ 311,036 $(2,355) $ (2,447) $ 28,964 $ 356,592
========= ============ ======== ======== ========= ========= ======== ========== ========= ============
SHARE ACTIVITY:
Balance, January 1, 1999 15,590 7,350 8,325 3,535 2,000 16,791,050 153,832
Purchase of treasury
shares - - - - - (15,000) 15,000
Reissuance of treasury
shares - - - - - 28,372 (28,372)
Retirement of preferred
shares (657) (124) (527) (371) - - -
Deferred shares issued
under the Non-Employee
Directors' Share Plans - - - - - 2,333 -
--------- ------------ -------- -------- --------- --------- --------
Balance, September 30, 1999 14,933 7,226 7,798 3,164 2,000 16,806,755 140,460
========= ============ ======== ======== ======== ========== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MUNICIPAL MORTGAGE & EQUITY, LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage & Equity, LLC (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 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").
In February 1999, MuniMae TEI Holdings, LLC ("TEI Holdings") was
organized as a wholly owned subsidiary of the Company to invest in and otherwise
deal in tax-exempt bonds and related tax-exempt investments. MuniMae TE Bond
Subsidiary, LLC ("TE Bond Sub"), a limited liability company wholly owned by TEI
Holdings, was organized in February 1999 for the same purposes. Also in February
1999, MMA Credit Enhancement I, LLC ("MMACE I, LLC") was organized as a wholly
owned subsidiary of TE Bond Sub to provide credit enhancement for and on behalf
of securitizations by TE Bond Sub and to pledge all or any portion of its assets
in connection with providing credit enhancement for such securitizations. The
consolidated financial statements of the Company include the Company, the
entities above, The SCA Tax Exempt Trust, MuniMae Servicing, MuniMae
Investments, MMA Servicing and the MuniMae Compensation Trust. See Note 1 to the
financial statements appearing in the Company's 1998 Annual Report on Form 10-K
(the "Company's 1998 Form 10-K").
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 Company's 1998 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 1998 Form 10-K.
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
NOTE 2 - PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY
<PAGE>
On May 27, 1999, TE Bond Sub sold to institutional investors 42 shares
of $2,000,000 par-value 6 7/8 % Series A Cumulative Preferred Shares (the
"Series A Preferred Shares" or the "Preferred Share Offering"). The Series A
Preferred Shares bear interest at 6.875% per annum or, if lower, the aggregate
net income of the issuing company, TE Bond Sub. The Series A Preferred Shares
have a senior claim to the income derived from the investments owned by TE Bond
Sub. Any income from TE Bond Sub available after payment of the cumulative
distributions of the Series A Preferred Shares is allocated to the Company. Cash
distributions on the Series A Preferred Shares will be paid quarterly on each
January 31, April 30, July 31 and October 31. The Series A Preferred Shares are
subject to remarketing on June 30, 2009. On the remarketing date, the
remarketing agent will seek to remarket the shares at the lowest distribution
rate that would result in a resale of the Series A Preferred Shares at a price
equal to par plus all accrued but unpaid distributions. The Series A Preferred
Shares will be subject to mandatory tender on June 30, 2009 and on all
subsequent remarketing dates at a price equal to par plus all accrued but unpaid
distributions. The Series A Preferred Shares must be redeemed no later than June
30, 2049.
In connection with this transaction, the Company contributed certain of
its assets to TEI Holdings, which in turn contributed certain of its assets to
TE Bond Sub and its subsidiaries. The assets of TE Bond Sub and its
subsidiaries, while indirectly controlled by MuniMae and thus included in the
consolidated financial statements of the Company, are legally owned by TE Bond
Sub and are not available to the creditors of the Company. The assets owned by
TE Bond Sub and its subsidiaries are identified in footnotes to the Investment
in Mortgage Revenue Bonds table in Note 4 and in footnotes to the Other Bond
Related Investments table in Note 5. The fair value of such assets aggregated
$375.3 million at September 30, 1999.
NOTE 3 - TERM SECURITIZATION FACILITY
In March 1999, the Company consummated a transaction with an affiliate
of Merrill Lynch, Pierce, Fenner, & Smith Incorporated ("Merrill Lynch") that
converted a portion of its investment in the P-FLOATs(sm) program into a longer
term securitization facility. As a result, this facility enabled the Company to
reduce its exposure to credit and annual renewal risks associated with the
liquidity and credit enhancement features of the P-FLOATs(sm) trusts (defined in
Note 5) and the swap agreements. In order to facilitate this transaction, the
Company sold to Merrill Lynch its $0.7 million par-value RITES(sm) (defined in
Note 5) investments in two P- FLOATs(sm) trusts containing the Gannon-Dade bond
($55.1 million) and the Whispering Palms bond ($12.7 million) for $1.0 million.
Merrill Lynch then collapsed the Gannon-Dade and Whispering Palms P-FLOATs(sm)
trusts and deposited the bonds ($67.8 million) into a new securitization trust
(the "Term Securitization Facility").
Two classes of certificates were sold out of the Term Securitization
Facility: Class A and Class B trust certificates. The $67.0 million par-value
Class A certificates, which are senior to the Class B certificates, were sold to
qualified third party investors and bear interest at a fixed rate of 4.95% per
annum through the remarketing date, August 15, 2005. The interest rate will be
<PAGE>
reset on the remarketing date to the lowest rate that would result in the sale
of the Class A certificates at par plus any appreciation in the value of the
underlying bonds attributable to the Class A certificates. The $0.8 million
par-value Class B certificates were purchased by TE Bond Sub. The Class B
certificates receive the residual interest from the Term Securitization Facility
after payment of (1) trustee fees and expenses, (2) all interest and any
principal due on the Class A certificates in accordance with the terms of the
documents and (3) servicing fees. The Term Securitization Facility is subject to
optional liquidation in whole, but not in part, on each February 15, May 15,
August 15 or November 15, commencing February 15, 2000, at the direction of a
majority of the Class B certificate holders. The Class A certificates are
subject to mandatory tender on the remarketing date. The Term Securitization
Facility terminates on August 1, 2008. The Company receives a fee of 0.15% of
the weighted average balance of the trust certificates outstanding per annum for
acting as the servicer of the Term Securitization Facility.
In conjunction with this transaction, the Company purchased the
outstanding P-FLOATs(sm) in the Cedar Run P-FLOATs(sm) trust. The Company then
collapsed the Cedar Run P-FLOATs(sm) trust and became the holder of the Cedar
Run bond. The Company contributed the Cedar Run bond, along with three other
investments to MuniMae Investments. MuniMae Investments, in turn, contributed
these assets to TEI Holdings. TEI Holdings then contributed these assets to TE
Bond Sub, who in turn contributed these four investments having a total
principal amount of $59.6 million (the "Credit Enhancement Assets") to MMACE I,
LLC. MMACE I, LLC provides credit enhancement for the bonds and liquidity
support for the Class A certificates in the Term Securitization Facility. In
fulfillment of this obligation, MMACE I, LLC pledged the Credit Enhancement
Assets to the Term Securitization Facility.
This transaction was accounted for using the concepts outlined in
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". As a
result of certain call provisions available to the B certificate holders, the
Company has accounted for this transaction as a borrowing. Accordingly, the
Class A certificates were recorded as long-term debt and the Gannon-Dade and
Whispering Palm bonds are included in investments in mortgage revenue bonds. In
conjunction with the recording of the $67.0 million in long-term debt, the
Company capitalized $500,000 in debt issue costs. These debt issue costs are
being amortized over the life of the Term Securitization Facility, based on the
amount of outstanding debt, using the effective interest method.
NOTE 4 - INVESTMENTS IN MORTGAGE REVENUE BONDS AND MORTGAGE
REVENUE BONDS PLEDGED
The Company invests in various mortgage revenue bonds, 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 3
to the Company's 1998 Form 10-K.
<PAGE>
The following table provides certain information with respect to the
bonds held by the Company at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------
Base Face Amortized Unrealized Fair
Investment in Mortgage Year Interest Maturity Amount Cost Gain (Loss) Value
Revenue Bonds Acquired Rate Date (000s) (000s) (000s) (000s)
- --------------------------------- ---------- --------- ----------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Participating Bonds (1):
Alban Place (2), (4),(12) 1986 7.875 Oct. 2008 $ 10,065 $ 10,065 $ 260 $ 10,325
Creekside Village (2),(12) 1987 7.500 Nov. 2009 11,760 7,396 289 7,685
Emerald Hills (2),(12) 1988 7.750 Apr. 2008 6,725 6,725 1,848 8,573
Lakeview Garden (2),(12) 1987 7.750 Aug. 2007 9,003 4,919 189 5,108
Newport-on-Seven (2),(12) 1986 8.125 Aug. 2008 10,125 7,898 2,327 10,225
North Pointe (2),(4),(12) 1986 7.875 Aug. 2006 25,185 12,738 5,605 18,343
Northridge Park (2),(12) 1987 7.500 June 2012 8,815 8,815 34 8,849
Riverset (2),(4),(12) 1988 7.875 Nov. 1999 19,000 19,000 (40) 18,960
Southfork Village (2),(8) 1988 7.875 Jan. 2009 10,375 10,375 2,761 13,136
Stone Mountain (7),(11) 1997 7.875 Oct. 2027 33,900 35,243 (1,004) 34,239
Villa Hialeah (2),(14) 1987 7.875 Oct. 2009 - - - -
Mountain View (Willowgreen) (2), 12) 1986 8.000 Dec. 2010 9,275 6,770 961 7,731
The Crossings (11) 1997 8.000 July 2007 6,927 6,834 564 7,398
Palisades Park 1998 7.125 Aug. 2028 - - - -
The Villas (11) 1999 7.125 Jun. 2034 8,850 8,743 106 8,849
Cobblestone (11) 1999 7.125 Sep. 2039 6,800 6,732 68 6,800
---------- ------------ ---------
Subtotal participating bonds 152,253 13,968 166,221
---------- ------------ ---------
Non-Participating Bonds:
Riverset Phase II 1996 9.500 Oct. 2019 110 105 8 113
Charter House 1996 7.450 July 2026 30 30 - 30
Hidden Valley (11) 1996 8.250 Jan. 2026 1,660 1,660 141 1,801
Oakbrook (11) 1996 8.200 July 2026 3,135 3,164 206 3,370
Torries Chase (11) 1996 8.150 Jan. 2026 2,030 2,030 136 2,166
Gannon A Bond (4),(11) 1998 7.125 Dec. 2029 3,500 3,500 (35) 3,465
Italian Gardens (11) 1998 7.250 May 2030 8,000 7,985 15 8,000
Coleman Senior (11) 1998 7.250 May 2030 8,050 8,035 15 8,050
Lake Piedmont (Nantucket) (4),(11) 1998 7.725 Apr. 2034 19,140 19,046 (1,820) 17,226
Orangevale (11) 1998 7.000 Oct. 2013 2,460 2,460 (12) 2,448
Western Hills (5),(11) 1998 7.750 Dec. 2029 3,040 3,040 (121) 2,919
Oakmont/Towne Oaks (11) 1998 7.200 Jan. 2034 11,278 11,256 22 11,278
Briarwood 1998 6.950 Apr. 2023 13,221 13,221 (71) 13,150
Gannon - Dade (9),(11) 1998 7.125 Dec. 2029 55,050 55,325 (826) 54,499
Gannon - Whispering (9),(11) 1998 7.125 Dec. 2029 12,750 12,814 (191) 12,623
Gannon - Cedar Run (4),(11) 1998 7.125 Dec. 2025 13,200 13,239 (170) 13,069
Wheeler Creek (6) 1999 6.000 Jan. 2002 51 51 - 51
La Paloma (10) 1999 7.500 May. 2030 4,378 4,312 (223) 4,089
Pavillion (10) 1999 7.500 May. 2030 5,100 5,024 (260) 4,764
Parkwood (11) 1999 7.125 Jun. 2035 3,910 3,842 (66) 3,776
Delta Village (11) 1999 7.125 Jun. 2035 2,011 1,976 (21) 1,955
Sahuarita (10),(11) 1999 8.000 Jun. 2029 51 39 7 46
Shadowbrook (10),(11) 1999 7.750 Jun. 2029 5,780 5,768 128 5,896
Woodmark (10),(11) 1999 8.000 Jun. 2039 10,200 10,073 128 10,201
Country Club (10),(11) 1999 7.750 Jul. 2029 2,490 2,459 (43) 2,416
Paola (10),(11) 1999 7.750 Jul. 2029 1,050 1,037 (18) 1,019
Cielo Vista (11) 1999 7.125 Aug. 2034 9,550 9,477 73 9,550
Villa Hialeah - refunded (14) 1987 7.875 Oct. 2009 10,250 8,004 1,055 9,059
---------- ------------ ---------
Subtotal non-participating bonds 208,972 (1,943) 207,029
---------- ------------ ---------
Participating Subordinate Bonds (1):
Barkley Place (3),(13) 1995 16.000 Jan. 2030 3,480 2,445 2,682 5,127
Gilman Meadows (3),(13) 1995 3.000 Jan. 2030 2,875 2,530 1,864 4,394
Hamilton Chase (3),(13) 1995 3.000 Jan. 2030 6,250 4,140 160 4,300
Mallard Cove I (3),(13) 1995 3.000 Jan. 2030 1,670 798 582 1,380
Mallard Cove II (3),(13) 1995 3.000 Jan. 2030 3,750 2,429 1,210 3,639
Meadows (3),(13) 1995 16.000 Jan. 2030 3,635 3,716 415 4,131
Montclair (3),(4),(13) 1995 3.000 Jan. 2030 6,840 1,691 3,082 4,773
Newport Village (3),(13) 1995 3.000 Jan. 2030 4,175 2,973 1,340 4,313
Nicollet Ridge (3),(4),(13) 1995 3.000 Jan. 2030 12,415 6,075 1,088 7,163
Steeplechase (3),(13) 1995 16.000 Jan. 2030 5,300 4,224 29 4,253
Whispering Lake (3),(4),(13) 1995 3.000 Jan. 2030 8,500 4,779 4,672 9,451
Riverset Phase II 1996 10.000 Oct. 2019 1,489 - 1,249 1,249
---------- ------------ ---------
Subtotal participating subordinate bonds 35,800 18,373 54,173
---------- ------------ ---------
Non-Participating Subordinate Bonds:
Independence Ridge (11) 1996 12.500 Dec. 2015 1,045 1,045 73 1,118
Locarno (11) 1996 12.500 Dec. 2015 675 675 101 776
Cinnamon Ridge 1999 5.000 Jan. 2015 1,899 1,285 6 1,291
Olde English (11) 1998 10.000 Nov. 2033 1,030 1,025 (98) 927
Rillito B Bond 1999 10.000 Dec. 2033 860 856 (82) 774
Farmington Meadows (11) 1999 8.000 Jun. 2039 2,000 1,955 91 2,046
---------- ------------ ---------
Subtotal non-participating subordinate bonds 6,841 91 6,932
---------- ------------ ---------
Total investment in mortgage revenue bonds $ 403,866 $ 30,489 $434,355
========== ============ =========
December 31, 1998
------------------------------------------
Base Face Amortized Unrealized
Investment in Mortgage Year Interest Maturity Amount Cost Gain (Loss) Fair Value
Revenue Bonds Acquired Rate Date (000s) (000s) (000s) (000s)
- --------------------------------- ---------- --------------------- -------------------- ----------- ---------
Participating Bonds (1):
Alban Place (2), (4),(12) 1986 7.875 Oct. 2008 $ 10,065 $ 10,065 $ (1,067) $ 8,998
Creekside Village (2),(12) 1987 7.500 Nov. 2009 11,760 7,396 - 7,396
Emerald Hills (2),(12) 1988 7.750 Apr. 2008 6,725 6,725 1,875 8,600
Lakeview Garden (2),(12) 1987 7.750 Aug. 2007 9,003 4,919 - 4,919
Newport-on-Seven (2),(12) 1986 8.125 Aug. 2008 10,125 7,898 2,227 10,125
North Pointe (2),(4),(12) 1986 7.875 Aug. 2006 25,185 12,738 3,811 16,549
Northridge Park (2),(12) 1987 7.500 June 2012 8,815 8,815 (943) 7,872
Riverset (2),(4),(12) 1988 7.875 Nov. 1999 19,000 19,000 (70) 18,930
Southfork Village (2),(8) 1988 7.875 Jan. 2009 10,375 10,375 2,451 12,826
Stone Mountain (7),(11) 1997 7.875 Oct. 2027 33,900 35,284 184 35,468
Villa Hialeah (2),(14) 1987 7.875 Oct. 2009 10,250 8,004 - 8,004
Mountain View (Willowgreen) (2), 12) 1986 8.000 Dec. 2010 9,275 6,770 756 7,526
The Crossings (11) 1997 8.000 July 2007 6,975 6,883 518 7,401
Palisades Park 1998 7.125 Aug. 2028 9,728 9,541 187 9,728
The Villas (11) 1999 7.125 Jun. 2034 - - - -
Cobblestone (11) 1999 7.125 Sep. 2039 - - - -
---------- ----------- ----------
Subtotal participating bonds 154,413 9,929 164,342
---------- ----------- ----------
Non-Participating Bonds:
Riverset Phase II 1996 9.500 Oct. 2019 110 105 11 116
Charter House 1996 7.450 July 2026 30 30 1 31
Hidden Valley (11) 1996 8.250 Jan. 2026 1,680 1,680 176 1,856
Oakbrook (11) 1996 8.200 July 2026 3,165 3,195 113 3,308
Torries Chase (11) 1996 8.150 Jan. 2026 2,050 2,050 84 2,134
Gannon A Bond (4),(11) 1998 7.125 Dec. 2029 3,500 3,500 70 3,570
Italian Gardens (5),(11) 1998 7.800 May 2030 8,000 7,985 95 8,080
Coleman Senior (5),(11) 1998 8.000 May 2030 8,050 8,035 116 8,151
Lake Piedmont (Nantucket) (4),(11) 1998 7.725 Apr. 2034 19,150 19,056 285 19,341
Orangevale (11) 1998 7.000 Oct. 2013 2,543 2,543 (76) 2,467
Western Hills (5),(11) 1998 7.750 Dec. 2029 3,040 3,040 - 3,040
Oakmont/Towne Oaks (11) 1998 7.200 Jan. 2034 11,287 11,265 - 11,265
Briarwood 1998 6.950 Apr. 2023 13,221 13,221 - 13,221
Gannon - Dade (9),(11) 1998 7.125 Dec. 2029 - - - -
Gannon - Whispering (9),(11) 1998 7.125 Dec. 2029 - - - -
Gannon - Cedar Run (4),(11) 1998 7.125 Dec. 2025 - - - -
Wheeler Creek (6) 1999 6.000 Jan. 2002 - - - -
La Paloma (10) 1999 7.500 May. 2030 - - - -
Pavillion (10) 1999 7.500 May. 2030 - - - -
Parkwood (11) 1999 7.125 Jun. 2035 - - - -
Delta Village (11) 1999 7.125 Jun. 2035 - - - -
Sahuarita (10),(11) 1999 8.000 Jun. 2029 - - - -
Shadowbrook (10),(11) 1999 7.750 Jun. 2029 - - - -
Woodmark (10),(11) 1999 8.000 Jun. 2039 - - - -
Country Club (10),(11) 1999 7.750 Jul. 2029 - - - -
Paola (10),(11) 1999 7.750 Jul. 2029 - - - -
Cielo Vista (11) 1999 7.125 Aug. 2034 - - - -
Villa Hialeah - refunded (14) 1987 7.875 Oct. 2009 - - - -
---------- ----------- ---------
Subtotal non-participating bonds 75,705 875 76,580
---------- ----------- ---------
Participating Subordinate Bonds (1):
Barkley Place (3),(13) 1995 16.000 Jan. 2030 3,480 2,445 3,055 5,500
Gilman Meadows (3),(13) 1995 3.000 Jan. 2030 2,875 2,530 2,233 4,763
Hamilton Chase (3),(13) 1995 3.000 Jan. 2030 6,250 4,140 91 4,231
Mallard Cove I (3),(13) 1995 3.000 Jan. 2030 1,670 798 707 1,505
Mallard Cove II (3),(13) 1995 3.000 Jan. 2030 3,750 2,429 1,446 3,875
Meadows (3),(13) 1995 16.000 Jan. 2030 3,635 3,716 90 3,806
Montclair (3),(4),(13) 1995 3.000 Jan. 2030 6,840 1,691 2,028 3,719
Newport Village (3),(13) 1995 3.000 Jan. 2030 4,175 2,973 2,171 5,144
Nicollet Ridge (3),(4),(13) 1995 3.000 Jan. 2030 12,415 6,075 973 7,048
Steeplechase (3),(13) 1995 16.000 Jan. 2030 5,300 4,224 - 4,224
Whispering Lake (3),(4),(13) 1995 3.000 Jan. 2030 8,500 4,779 4,376 9,155
Riverset Phase II 1996 10.000 Oct. 2019 1,489 - 1,449 1,449
---------- ----------- ---------
Subtotal participating subordinate bonds 35,800 18,619 54,419
---------- ----------- ---------
Non-Participating Subordinate Bonds:
Independence Ridge (11) 1996 12.500 Dec. 2015 1,045 1,045 230 1,275
Locarno (11) 1996 12.500 Dec. 2015 675 675 108 783
Cinnamon Ridge 1999 5.000 Jan. 2015 - - - -
Olde English (11) 1998 10.000 Nov. 2033 1,030 1,025 - 1,025
Rillito B Bond 1999 10.000 Dec. 2033 - - - -
Farmington Meadows (11) 1999 8.000 Jun. 2039 - - - -
---------- ----------- ---------
Subtotal non-participating subordinate bonds 2,745 338 3,083
---------- ----------- ---------
Total investment in mortgage revenue bonds $ 268,663 $ 29,761 298,424
========== =========== =========
(1) These bonds also contain additional interest features contingent on available cash flow.
(2) One of the original 22 bonds.
(3) Series B Bonds derived from original 22 bonds.
(4) These assets were pledged as collateral as of September 30, 1999.
(5) The interest rate represents the rate during the construction or rehabilitation period which is anticipated to be one year for
Western Hills. The permanent interest rate will be 7.25%
for Italian Gardens and Coleman Senior and 7.0% for Western Hills.
(6) The interest rate for the first 24 months of construction is 6% and thereafter the rate resets monthly based on 90% of the 30
day treasury bill.
(7) The underlying bond is held in a trust; MMACE I, LLC pledged the Principal and Interest custodial receipt related to the
underlying bond as collateral as of September 30, 1999. The Company and TE Bond Sub own all of the custodial receipts related to
the underlying bond.
(8) The original bond was traunched into two smaller bonds with 87% ownership to TE Bond Sub and 13% ownership to TEI Holdings.
The bond owned by TE Bond Sub was pledged as collateral as of September 30, 1999.
(9) The underlying bonds are held in a trust; TE Bond Sub owns a certificate in the trust which represents the residual cash flows
generated on the underlying bonds. (See Note 3 to the consolidated financial statements.)
(10) The interest rate represents the rate during construction or rehabilitation period through completion and project
stabilization. The permanent interest rate will be 6.71% for La Paloma and Pavillion, 7.125% for Sahuarita, 6.85% for Shadowbrook,
7.125% for Woodmark, 7.25% for Country Club and Paola.
(11) Investments held by TE Bond Sub or its subsidiaries. (See Note 2 to the consolidated financial statements.)
(12) The underlying bonds are held in a trust; TE Bond Sub owns an 87% interest in the trust and TEI Holdings owns a 13% interest
in the trust.
(13) The underlying bonds are held in a trust; TE Bond Sub owns a 60.61% interest in the trust and TEI Holdings owns a 39.39%
interest in the trust.
(14) The Villa Hialeah bond was refunded in July 1999. Prior to this refunding, the bond was participating. Following the
transaction, the new refunded bond is non-participating. As a result of the refunding, the original bond was reissued as two bonds
with 87% ownership to TE Bond Sub and 13% ownership to TEI Holdings.
</TABLE>
<PAGE>
In the third quarter, the Company originated $21.9 million in
tax-exempt mortgage revenue bonds collateralized by five multifamily apartment
communities with 780 units. The weighted average permanent interest rate on
these investments is 7.2% and the maturity dates range from August 2034 to
September 2039. The Company received $0.3 million in construction administration
and origination fees related to these transactions. These fees are recognized
into income over the life of the investment.
Also in the third quarter, the $10.3 million participating mortgage
revenue bond collateralized by the Villa Hialeah apartment community was
exchanged for a new refunded bond with like principal amount. The bond was
refunded in response to a decline in property performance that would have led to
the property being unable to meet the contractual terms of the bond. The new
refunded bond bears interest at 6.0% per annum and matures in August 2019. The
new refunded bond does not contain additional interest features contingent on
available cash flow. The Company received a $50,000 fee related to this
transaction. These fees are recognized into income over the life of the
investment.
In order to facilitate the securitization of certain assets at higher
leverage ratios than otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional bonds to a pool that
acts as collateral for the senior interests in certain P-FLOATs(sm) trusts.
Additionally, investments owned by MMACE I, LLC have been pledged as collateral
for the Term Securitization Facility discussed in Note 3. At September 30, 1999
the total carrying amount of the mortgage revenue bonds pledged as collateral
was $148.4 million.
NOTE 5 - OTHER BOND RELATED INVESTMENTS AND FINANCIAL RISK
MANAGEMENT
The Company's other bond related investments are primarily investments
in Residual Interest Tax-Exempt Securities Receipts ("RITES(sm)"), a security
offered by Merrill Lynch through its RITES(sm)/Puttable Floating Option
Tax-Exempt Receipts ("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). In order to facilitate the securitization
of certain assets at higher leverage ratios than otherwise available, the
Company has pledged additional bonds to a pool that acts as collateral for the
senior interests in certain P-FLOATs(sm) trusts. The following table provides
certain information with respect to the other bond related investments held by
the Company at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------
Face Amortized Unrealized Fair Value
Year Amount Cost Gain (Loss)Assests Liabilities (4)
Other Bond Related Investments: Acquired (000s) (000s) (000s) (000s) (000s)
- --------------------------------------------- --------- --------- ---------- --------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
RITES -Indian Lakes (5) 1997 $ 3,270 $ 3,404 $ 14 $ 3,418 $ -
Interest rate swap (6/30/97 - 1/03/06) (1) 1997 6,500 - - - -
RITES -Charter House (5) 1996 80 294 (121) 173 -
P-FLOATs -Charter House 1996 - - - - -
RITES -Southgate (5) 1997 97 586 141 727 -
RITES -Southwood (5) 1997 440 293 185 478 -
RITES -Riverset Phase II (5) 1996 75 367 (105) 262 -
Interest rate swap (11/24/97 - 11/23/07) (1), (3) 1997 58,000 - - - -
Cinnamon Ridge Total Return Swap (12/11/97-
12/31/99) (1) 1997 10,133 - 355 355 -
Cinnamon Ridge Interest Rate Swap (12/10/99-
12/10/09) (1) 1997 7,000 - 57 57 -
RITES -Gannon (2) 1998 - - - - -
Interest rate swap (2/2/98 - 2/1/08) (1) 1998 73,000 - 1,791 1,791 -
Interest rate swap (5/1/98 - 4/30/99) (1) 1998 9,675 - 160 160 -
Interest rate swap (5/1/99 - 4/30/09) (1) 1998 9,675 - 251 251 -
Interest rate swap (8/20/98 - 8/20/08) (1) 1998 6,185 - - 180 -
Interest rate swap (8/28/98 - 8/5/99) (1) 1998 7,500 - 180 - -
RITES -Villas at Sonterra (5) 1998 5 34 (335) - (301)
RITES -Queen Anne IV (5) 1998 65 65 (218) - (153)
RITES -Oklahoma City pool (5) 1998 195 245 (1,977) - (1,732)
RITES -Olde English (5) 1999 76 97 (57) 40 -
Club West Total Return Swap (3/29/99 - 9/28/00) (1) 1999 7,960 - (546) - (546)
Willow Key Total Return Swap (3/29/99 - 8/19/01) (1) 1999 17,440 - (708) - (708)
RITES -Palisades Park (5) 1999 100 97 (158) - (61)
RITES -Rillito (5) 1999 65 64 (321) - (257)
Interest rate swap (4/16/99 - 9/1/06) (1) 1999 9,600 - (113) - (113)
Interest rate swap (9/24/99 - 9/24/06) (1) 1999 13,200 - - - -
Interest rate swap (9/24/99 - 4/1/09) (1) 1999 9,600 - - - -
---------- --------- ----------------------
Total other bond related investments $ 5,546 $ (1,525) $ 7,892 $ (3,871)
========== ========= ======================
December 31, 1998
-----------------------------------------------------
Face Amortized Unrealized Fair Value
Year Amount Cost Gain (Loss) Assets Liabilities (4)
Other Bond Related Investments: Acquired (000s) (000s) (000s) (000s) (000s)
- --------------------------------------------- --------- ---------- --------- ---------- ---------------------
RITES -Indian Lakes (5) 1997 $ 3,320 $ 3,470 $ 336 $ 3,806 $ -
Interest rate swap (6/30/97 - 1/03/06) (1) 1997 6,500 - (320) - (320)
RITES -Charter House (5) 1996 80 323 66 389 -
P-FLOATs -Charter House 1996 7,440 7,440 - 7,440 -
RITES -Southgate (5) 1997 105 633 272 905 -
RITES -Southwood (5) 1997 440 279 548 827 -
RITES -Riverset Phase II (5) 1996 75 466 21 487 -
Interest rate swap (11/24/97 - 11/23/07) (1), (3) 1997 58,000 - (2,170) - (2,170)
Cinnamon Ridge Total Return Swap (12/11/97-
12/31/99) (1) 1997 10,570 - 729 729 -
Cinnamon Ridge Interest Rate Swap (12/10/99-
12/10/09) (1) 1997 7,000 - (275) - (275)
RITES -Gannon (2) 1998 814 1,048 374 1,422 -
Interest rate swap (2/2/98 - 2/1/08) (1) 1998 73,000 - (1,470) - (1,470)
Interest rate swap (5/1/98 - 4/30/99) (1) 1998 9,675 - (25) - (25)
Interest rate swap (5/1/99 - 4/30/09) (1) 1998 9,675 - (325) - (325)
Interest rate swap (8/20/98 - 8/20/08) (1) 1998 7,500 - (165) - (165)
Interest rate swap (8/28/98 - 8/5/99) (1) 1998 6,185 - 15 15 -
RITES -Villas at Sonterra (5) 1998 5 35 72 107 -
RITES -Queen Anne IV (5) 1998 65 65 32 97 -
RITES -Oklahoma City pool (5) 1998 195 250 (55) 195 -
RITES -Olde English (5) 1999 - - - - -
Club West Total Return Swap (3/29/99 - 9/28/00) (1) 1999 - - - - -
Willow Key Total Return Swap (3/29/99 - 8/19/01) (1) 1999 - - - - -
RITES -Palisades Park (5) 1999 - - - - -
RITES -Rillito (5) 1999 - - - - -
Interest rate swap (4/16/99 - 9/1/06) (1) 1999 - - - - -
Interest rate swap (9/24/99 - 9/24/06) (1) 1999 - - - - -
Interest rate swap (9/24/99 - 4/1/09) (1) 1999 - - - - -
--------- ---------- ---------------------
Total other bond related investments $ 14,009 $ (2,340)$ 16,419 $ (4,750)
========= ========== =====================
(1) Face amount represents notional amount of swap agreements and the (dates) represent the effective date and the termination
date of the swap.
(2) These assets were sold in March 1999. (See Note 3 to the consolidated financial statements.)
(3) This swap agreement was terminated in February 1999.
(4) The aggregate negative fair value of the investments is included in guaranty liability for financial reporting purposes.
The negative fair value of these investments is considered temporary and is not indicative of the future earnings on these
investments.
(5) Investment held by MuniMae Investments, a wholly owned subsidiary of TE Bond Sub.
</TABLE>
<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. During the three months ended September 30, 1999, the
Company purchased and/or sold interests in one bond that it previously
securitized.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In September 1999, the Company entered into a put option with Merrill
Lynch whereby Merrill Lynch has the right to sell to the Company, and the
Company has the obligation to buy, a $15 million taxable floating rate note. The
floating rate note is collateralized by a pool of multi-family apartment
communities ("the CapReit portfolio"). The floating rate note is subordinate to
$98.2 million of senior tax-exempt mortgage revenue bonds. The note bears
interest at a rate based on one month LIBOR (the London Interbank Offered Rate)
plus 8.0% per annum and matures in September 2004. Under this put option, the
Company receives an annual payment equal to 6.25% of the average aggregate
principal amount of the note, for assuming the purchase obligation. In addition,
the put option includes a cash settlement or physical settlement at termination.
Under the cash settlement the Company will pay to Merrill Lynch an amount equal
to the decline in market value of the underlying note. Under the physical
settlement, the Company will pay Merrill Lynch $15 million for the note and in
turn Merrill Lynch will deliver the loan to the Company. The put option expires
at the earlier of (1) September 1, 2004, maturity of the note, (2) the
redemption of the note, or (3) optional termination by Merrill Lynch. The
Company received a $228,000 fee for this transaction.
In conjunction with this transaction, the Company committed to purchase
a $13.0 million subordinate trust certificate collateralized by the CapReit
portfolio discussed above. The $13.0 million subordinate trust certificate is
subordinate to $85.2 million in senior trust certificates and bears interest at
9.0% per annum. The trust terminates in January 2005. The Company anticipates
closing this transaction in the fourth quarter of 1999. The Company earned a
$130,000 origination fee on this transaction. These fees are recognized into
income over the life of the investment.
NOTE 7 - EARNINGS PER SHARE
The following table reconciles the numerators and denominators in the
basic and diluted EPS calculations for Common Shares for the three and nine
months ended September 30, 1999 and 1998:
<PAGE>
<TABLE>
<CAPTION>
Municipal Mortgage & Equity, LLC
Reconciliation of Basic and Diluted EPS
For the three months ended September 30, 1999 For the three months ended September 30, 1998
(in thousands, except share and per share data)(in thousands, 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 common shares $ 6,709 16,805,960 $ 0.40 $ 6,692 16,307,957 $ 0.41
============= =============
Effect of Dilutive Securities
Options and deferred shares - 268,577 - 179,093
Convertible preferred shares
to the extent dilutive 163 433,737 - -
------------- -------------- ------------- -------------
Diluted EPS
Income allocable to common shares
plus assumed conversions $ 6,872 17,508,274 $ 0.39 $ 6,692 16,487,050 $ 0.41
============= ============== ============= ============= ============= =============
For the nine months ended September 30, 1999 For the nine months ended September 30, 1998
(in thousands, except share and per share data)(in thousands, except share and per share data)
------------------------------------------- -------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- -------------- ------------- ------------- ------------- -------------
Basic EPS
Income allocable to common shares $ 21,182 16,806,229 $ 1.26 $ 17,990 14,680,503 $ 1.23
============= =============
Effect of Dilutive Securities
Options and deferred shares - 245,195 - 208,899
Convertible preferred shares
to the extent dilutive 294 286,937 582 498,935
------------- -------------- ------------- -------------
Diluted EPS
Income allocable to common shares
plus assumed conversions $ 21,476 17,338,361 $ 1.24 $ 18,572 15,388,337 $ 1.21
============= ============== ============= ============= ============= =============
</TABLE>
<PAGE>
NOTE 8 - DISTRIBUTIONS
On October 7, 1999, the Board of Directors declared distributions for
the three months ended September 30, 1999 for shareholders of record on October
18, 1999 and the Company paid the distributions on November 1, 1999. The per
share distributions are shown in the following table:
<TABLE>
<CAPTION>
Preferred Capital
Common Preferred Shares Distribution Shares
------------------------ -------------------------
Shares Series I Series II Series I Series II
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Distributions paid on May 3, 1999
to holders of record on April 19, 1999:
For the three months ended
March 31, 1999 (1) $ 0.395 $ 29.98 $ 42.19 $ 30.51 $ 54.49
Distributions paid on August 2, 1999
to holders of record on July 19, 1999:
For the three months ended
June 30, 1999 0.400 13.74 15.00 10.55 10.00
Distributions paid on November 1, 1999
to holders of record on October 18, 1999:
For the three months ended
September 30, 1999 0.405 13.74 15.00 10.55 10.00
------------ ----------- ------------ ------------ ------------
Year-to-date 1999 Distributions $ 1.200 $ 57.46 $ 72.19 $ 51.61 $ 74.49
============ =========== ============ ============ ============
(1) The distributions for the Series I and Series II Preferred and Preferred Capital Distribution Shares
include a special distribution as follows: Preferred Series I, $16.24; Preferred Series II, $25.59;
Preferred Capital Distribution Series I, $19.96 and Preferred Capital Distribution Series II, $41.89.
The special distribution for Series I and Series II represents their proportionate share of the Company's net proceeds
from the sale of eight Consolidated Demand Notes in March 1999.
</TABLE>
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS
Sale of Assets
In October 1999, the Company sold the $13.2 million mortgage revenue
bond collateralized by the Briarwood apartment community through the Merrill
Lynch P-FLOATs(sm) program. The Company then purchased the $135,000 (par value)
Briarwood RITES(sm) for $103,000. The Company recognized a loss of $71,000 on
this transaction. Also in October 1999, the Company sold the $19.9 million
taxable note collateralized by the Honey Creek Apartments to Merrill Lynch.
Midland Acquisition
On October 20, 1999, the Company acquired 100% of the capital stock of
Midland Financial Holdings, Inc. ("Midland"), a Florida corporation, for
approximately $45 million, subject to certain post-closing adjustments. Of this
amount, approximately $23 million in cash and approximately $12 million in
common shares was paid at the closing of the transaction, respectively, and
$3.33 million in MuniMae common shares is payable annually over a three year
period if Midland meets certain performance targets, including an annual
contribution to Cash Available for Distribution of at least $6.0 million in year
one, $6.25 million in year two and $6.5 million in year three. Midland is a
fully integrated real estate investment firm specializing in providing debt and
equity capital to the multifamily housing industry, particularly in the area of
affordable housing.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Business
Municipal Mortgage & Equity, LLC (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 cash flow is available for distribution
to the Common Shares and the Company's current policy is to distribute to Common
Shareholders at least 80% of the annual cash available for distributions ("CAD")
to Common Shares. This payout ratio approximated 95.3% and 94.9% of CAD for the
three months ended September 30, 1999 and 1998, respectively.
Certain of the bonds held by the Company are participating bonds that
provide for payment of contingent interest in addition to base interest at a
fixed rate. Additionally, the mortgage loans underlying all of the bonds and
certain bond related investments held by the Company are nonrecourse. As a
result of these two factors, 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.
Acquisition of Midland Financial Holdings, Inc.
On October 20, 1999, the Company acquired 100% of the capital stock of
Midland Financial Holdings, Inc. ("Midland"), a Florida corporation for
approximately $45 million, subject to certain post-closing adjustments. Of this
amount, approximately $23 million in cash and approximately $12 million in
common shares was paid at the closing of the transaction, respectively, and
$3.33 million in MuniMae common shares is payable annually over a three year
period if Midland meets certain performance targets, including an annual
contribution to CAD of at least $6.0 million in year one, $6.25 million in year
two and $6.5 million in year three.
Midland is headquartered in Clearwater, Florida with offices in Dallas,
Texas; Detroit, Michigan; Portland, Oregon; and San Francisco, California, and
will continue to operate under the Midland name. Midland is a fully integrated
real estate investment firm specializing in providing debt and equity capital to
the multifamily housing industry, particularly in the area of affordable
<PAGE>
housing. Midland is a FannieMae delegated underwriter and servicer ("DUS"), that
manages construction and permanent loans as well as equity investments on
behalf of pension fund investors, and also raises equity from corporations
for investments in the federal affordable housing tax credit program.
The acquisition of Midland expands the Company's reach in the
multi-family marketplace. As one of only three FannieMae DUS lenders in the
country that provides equity financing in addition to FannieMae debt financing,
Midland brings the Company access to additional capital resources.
Results of Operations
Quarterly Results Analysis
Total income for the three months ended September 30, 1999 increased by
approximately $3.3 million over the same period last year due primarily to an
increase in interest income on investments of approximately $3.3 million.
Operating expenses for the three months ended September 30, 1999
increased by approximately $0.9 million from the same period last year due
primarily to an increase in salary and benefits expense as a result of an
increase in the number of employees and accruing a portion of the 1999 year-end
bonuses. During 1998, all bonuses were accrued in the fourth quarter.
The Company incurred interest expense of $0.8 million for the three
months ended September 30, 1999 as a result of the Term Securitization Facility
in March 1999 (see Note 3 to the consolidated financial statements).
The Company recorded income allocable to preferred shareholders of a
subsidiary company of $1.4 million for the three months ended September 30, 1999
as a result of the May 1999 Preferred Equity Offering (see Note 2 to the
consolidated financial statements).
Year-to-Date Results Analysis
Total income for the nine months ended September 30, 1999 increased by
approximately $8.5 million over the same period last year due primarily to an
increase in interest income on investments of approximately $7.1 million and an
increase in gain on sale of investments of $1.0 million.
Operating expenses for the nine months ended September 30, 1999
increased by approximately $1.2 million from the same period last year due
primarily to an increase in salary and benefits expense as a result of an
increase in the number of employees and accruing a portion of the 1999 year-end
bonuses, offset by recovery of valuation allowances of $0.6 million. During
1998, all bonuses were accrued in the fourth quarter.
<PAGE>
The Company incurred interest expense of $1.7 million for the nine
months ended September 30, 1999 as a result of the Term Securitization Facility
in March 1999 (see Note 3 to the consolidated financial statements).
The Company recorded income allocable to preferred shareholders of a
subsidiary company of $2.0 million for the nine months ended September 30, 1999
as a result of the May 1999 Preferred Equity Offering (see Note 2 to the
consolidated financial statements).
Liquidity and Capital Resources
The Company's primary objective is to maximize shareholder value
through increases in CAD 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 or Preferred Share equity offerings, to finance its acquisitions.
In March 1999, the Company converted a portion of its investment in the
Merrill Lynch P-FLOATs(sm) program into a longer term securitization facility
(see Note 3 to the consolidated financial statements). Going forward, the
Company intends to use a combination of this longer term securitization facility
and the Merrill Lynch P-FLOATs(sm) securitization program. The P- FLOATs(sm)
program allows the Company to securitize bonds relatively quickly and allows the
Company to purchase interests in bonds it has previously securitized. A longer
term securitization facility allows the Company to reduce its exposure to credit
and annual renewal risks associated with the liquidity and credit enhancement
features of the P-FLOATs(sm) trusts and allows the Company to reduce its
reliance on interest rate swaps. The combination of these two vehicles allows
the Company the flexibility it needs to finance acquisitions.
In the third quarter, the Company participated in $22.3 million of
investment transactions. All of these transactions were bond or loan
transactions retained by the Company.
From time to time, depending on the Company's capital position and
needs, the Company may purchase or sell on the open market interests in bonds
that it has securitized or bonds that the Company did not originally own, but in
which it now holds a residual interest. During the third quarter of 1999, the
Company purchased and/or sold interests in one bond which it previously
securitized.
<PAGE>
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, approximately 99%, while not
leveraging other assets at all. The Company calculates leverage by dividing the
total amount of on-balance sheet financing classified as long term debt and
senior interests to its investments, which it considers to be off-balance sheet
financing, by the sum of total assets owned by the Company plus senior interests
to its investments. Under this method, the Company's leverage ratio at September
30, 1999 was approximately 41%.
In order to facilitate the securitization of certain assets at higher
leverage ratios, the Company has pledged additional bonds to the pool that acts
as collateral for the senior interests in the trust.
Cash Flow
At September 30, 1999, the Company had cash and cash equivalents of
approximately $31.5 million.
Cash flow from operating activities was $23.1 million and $20.0 million
for the nine months ended September 30, 1999 and 1998, respectively. The
increase in cash flow for 1999 versus 1998 is due primarily to an increase in
income from new investments.
The Company uses 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 as income when received but for GAAP purposes are amortized into
income over the life of the associated investment. 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 September 30, 1999 and 1998, cash available
for distribution to Common Shares was $7.2 million and $6.8 million,
respectively. Regular cash distributions to common shareholders attributable to
the three months ended September 30, 1999 and 1998 were $6.8 million and $6.5
million, respectively. The Company's Common Share dividend for the three months
ended September 30, 1999 of $0.405 represents a payout ratio of 95.3% of CAD.
The Company's Common Share dividend for the three months ended September 30,
1998 of $0.385 represents a payout ratio of 94.9% of CAD.
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 proceeds and the Preferred Share equity offering proceeds raised
in May 1999. The Company's business plan includes making additional investments
during the remainder of 1999 which will be funded through securitizations and
the May 1999 Preferred Share Offering. Cash not used as set forth above may be
used to reduce the total amount of senior interests in the Company's securitized
facilities.
Income Tax Considerations
The Company has elected under Section 754 of the Internal Revenue Code
to adjust the basis of the Company's property on the transfer of shares to
reflect the price each shareholder paid for their shares. While the bulk of the
Company's recurring income is tax-exempt, from time to time, the Company may
sell or securitize various assets which may result in capital gains and losses
for tax purposes. Since the Company is taxed as a partnership, these capital
gains and losses are passed through to shareholders and are reported on each
shareholder's Schedule K-1. The capital gain and loss allocated from the Company
may be different to each shareholder due to the Company's 754 election and is a
function of, among other things, the timing of the shareholder's purchase of
shares and the timing of transactions which generate gains or losses for the
Company. This means that for assets purchased by the Company prior to a
shareholder's purchase of shares, the shareholder's basis in the assets may be
significantly different than the Company's basis in those same assets. Although
the procedure for allocating the basis adjustment is complex, the result of the
election is that each share is homogeneous, while each shareholder's basis in
the assets of the Company may be different. Consequently, the capital gains and
losses allocated to shareholders may be significant and different than the
capital gains and losses recorded by the Company.
A portion of the Company's interest income is derived from private
activity bonds which for income tax purposes, are considered tax preference
items for purposes of alternative minimum tax ("AMT"). AMT is a mechanism within
the Internal Revenue Code to ensure that all taxpayers pay at least a minimum
amount of taxes. All taxpayers are subject to the AMT calculation requirements
although the vast majority of taxpayers will not actually pay AMT. As a result
of AMT, the percentage of the Company's income that is exempt from federal
income tax may be different for each shareholder depending on that shareholder's
individual tax situation.
Year 2000 Compliance
The Company is continuing to evaluate Year 2000 compliance issues,
including exposure related to vendors, borrowers, software and other systems to
determine whether internal and external concerns have been addressed. The
Company has established a Year 2000 Project Committee to oversee this evaluation
and implementation. The Company's internal goal was to be 100% compliant by
September 30, 1999. As of the date of this writing, all testing to determine
Year 2000 compliance was completed by June 30, 1999. Anything identified as not
being Year 2000 compliant was upgraded or replaced prior to September 30, 1999.
As disclosed in Note 10 - Related Party Transactions, to the Company's
1998 Form 10-K, the Company directly reimburses an affiliate for certain
administrative services which include shared information systems. The file
server hardware and software used by the affiliate and the Company have already
been upgraded to Year 2000 compliant systems. All desktop hardware and operating
systems owned by the Company have been inventoried and evaluated; the Company
has upgraded or replaced any non-compliant equipment. The accounting software
shared by the Company and the affiliate already contains four-digit year data
fields and should present no Year 2000 problems. Also, the payroll hardware
and software shared by the Company and the affiliate has been converted to
Year 2000 compliant systems.
The Company is currently evaluating all external business relationships
that could negatively impact its business if they failed to become Year 2000
compliant. Key business relationships have been identified and questionnaires
have been forwarded to those businesses to request a written update of their
progress towards becoming Year 2000 compliant.
The Company believes that sufficient resources are being devoted to the
Year 2000 compliance issues through the formation of the Year 2000 Project
Committee. At this time, there are no plans to include the use of outside
consultants, or to have the Company's plan reviewed by its outside auditors.
Preliminary Year 2000 compliance issues have been discussed with the Company's
attorneys. At this time, the Company is unaware of any potential legal issues
that would adversely affect its business. Based on information currently
available, the Company does not expect to incur significant operating expenses
or material costs to become Year 2000 compliant.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Since December 31, 1998 there has been no material change to the
information included in Item 7A of the Company's Form 10-K.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amendment No. 1 to the Amended and Restated
Certificate of Formation and Operating Agreement of
the Company (filed as Item 6 (a) Exhibit 3.1 to the
Company's report on Form 10-Q, filed with the
Commission on May 14, 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 October 8, 1999, the Company filed a Form on 8-K to report
the Company agreed to acquire 100% of the capital stock of Midland
Financial Holdings, Inc., a Florida corporation, from Messrs. Robert
Banks, Keith Gloeckl, and Ray Mathis, for up to $45 million.
On November 2, 1999, the Company filed a Form on 8-K to report
the Company acquired 100% of the capital stock of Midland Financial
Holdings, Inc., a Florida corporation, from Messrs. Robert Banks,
Keith Gloeckl, and Ray Mathis, for up to $45 million, subject to
certain post-closing adjustments.
<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 & EQUITY, LLC
(Registrant)
By: /s/ Mark K. Joseph
Mark K. Joseph
Chairman of the Board, Chief Executive Officer (Principal Executive
Officer), and and Director
By: /s/ Gary Mentesana
Gary Mentesana
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
DATED: November 10, 1999
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document
27 Financial Data Schedule
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 31,450
<SECURITIES> 0
<RECEIVABLES> 3,862
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,312
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 514,640
<CURRENT-LIABILITIES> 3,924
<BONDS> 0
81,597
21,394
<COMMON> 311,036
<OTHER-SE> 24,162
<TOTAL-LIABILITY-AND-EQUITY> 514,640
<SALES> 0
<TOTAL-REVENUES> 31,813
<CGS> 0
<TOTAL-COSTS> 4,749
<OTHER-EXPENSES> 1,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,746
<INCOME-PRETAX> 23,329
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,329
<EPS-BASIC> 1.26<F1>
<EPS-DILUTED> 1.24<F1>
<FN>
<F1> The earnings per share reflects the earning per share of the
Common Shares.
November 10, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: Municipal Mortgage & Equity, LLC
File No. 001-11981
Dear Sir or Madam:
On behalf of the above referenced company, enclosed pursuant to Rule 13a-13
under Securities and Exchange Act of 1934 is the Company's Report on Form 10-Q
for the three months ended September 30, 1999.
Sincerely,
/s/ Gary A. Mentesana
Gary A. Mentesana
Chief Financial Officer
</FN>
</TABLE>
