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: June 30, 1999 Commission file number: 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 16,806,094 Common Shares outstanding as of August 9, 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 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
Part I. FINANCIAL STATEMENTS
Item 1. Financial Statements
<PAGE>
<TABLE>
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited)
June 30, December 31,
1999 1998
----------------- -----------------
<S> <C>
ASSETS
Cash and cash equivalents $ 46,329 $ 23,164
Interest receivable 4,743 2,859
Investment in mortgage revenue bonds, net (Note 4) 266,528 201,858
Investment in mortgage revenue bonds pledged, net (Note 4) 148,336 96,566
Investment in other bond related investments, net (Note 5) 13,696 11,669
Investment in parity working capital loans, demand
notes and other loans, net (Note 6) 27,279 17,246
Other assets 1,102 682
Restricted assets 6,220 5,367
----------------- -----------------
Total assets $ 514,233 $ 359,411
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,185 $ 2,484
Unearned revenue 912 721
Guaranty liability 3,619 754
Long-term debt (Note 3) 67,000 -
----------------- -----------------
Total liabilities 74,716 3,959
----------------- -----------------
Commitments and contingencies - -
Preferred shareholders' equity in a subsidiary company (Note 2) 80,845 -
Shareholders' equity:
Preferred shares:
Series I ( 14,933 and 15,590 shares issued and outstanding, respectively) 10,078 10,985
Series II ( 7,226 and 7,350 shares issued and outstanding, respectively) 5,725 5,970
Preferred capital distribution shares:
Series I (7,798 and 8,325 shares issued and outstanding, respectively) 3,740 4,351
Series II (3,164 and 3,535 shares issued and outstanding, respectively) 1,631 1,958
Term growth shares (2,000 shares issued and outstanding) 154 105
Common shares (16,946,494 shares, including 16,938,446 issued, and 8,048
deferred shares at June 30, 1999 and 16,944,882 shares, including
16,938,446 issued, and 6,436 deferred shares at December 31, 1998) 311,041 310,109
Less common shares held in treasury at cost (141,054 shares
and 153,832, respectively) (2,366) (2,555)
Less unearned compensation - deferred shares (2,586) (2,892)
Accumulated other comprehensive income 31,255 27,421
----------------- -----------------
Total shareholders' equity 358,672 355,452
----------------- -----------------
Total liabilities and shareholders' equity $ 514,233 $ 359,411
================= =================
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 six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C>
INCOME:
Interest on mortgage revenue bonds and other bond related investments $ 8,793 $ 5,829 $ 16,107 $ 11,121
Interest on parity working capital loans, demand notes and other loans 423 1,135 1,071 2,215
Interest on short-term investments 441 168 684 540
Net gain on sales 15 203 1,478 524
Other income 422 346 838 614
------------ ------------ ------------- ------------
Total income 10,094 7,681 20,178 15,014
------------ ------------ ------------- ------------
EXPENSES:
Operating expenses 1,668 1,328 2,760 2,488
Interest expense 854 - 900 -
------------ ------------ ------------- ------------
Total expenses 2,522 1,328 3,660 2,488
------------ ------------ -------------- ------------
Net income before distributions to preferred shareholders in a
subsidiary company 7,572 6,353 16,518 12,526
Income allocable to preferred shareholders in a subsidiary company 545 - 545 -
------------ ------------ -------------- ------------
Net income $ 7,027 $ 6,353 $ 15,973 $ 12,526
============ ============ ============== ============
Net income allocated to:
Preferred shares:
Series I $ 229 $ 212 $ 584 $ 430
============ ============ ============== ============
Series II $ 101 $ 111 $ 285 $ 257
============ ============ ============== ============
Preferred capital distribution shares:
Series I $ 96 $ 96 $ 256 $ 192
============ ============ ============== ============
Series II $ 30 $ 40 $ 93 $ 98
============ ============ ============== ============
Term growth shares $ 154 $ 126 $ 282 $ 251
============ ============ ============== ============
Common shares $ 6,417 $ 5,768 $ 14,473 $ 11,298
============ ============ ============== ============
Basic net income per share:
Preferred shares:
Series I $ 15.32 $ 13.63 $ 39.10 $ 27.59
============ ============ ============== ============
Series II $ 13.93 $ 15.18 $ 39.44 $ 34.96
============ ============ ============== ============
Preferred capital distribution shares:
Series I $ 12.24 $ 11.50 $ 32.78 $ 23.05
============ ============ ============== ============
Series II $ 9.62 $ 11.33 $ 29.36 $ 27.79
============ ============ ============== ============
Net income per common share:
Basic $ 0.38 $ 0.40 $ 0.86 $ 0.82
============ ============ ============== ============
Diluted $ 0.37 $ 0.39 $ 0.85 $ 0.80
============ ============ ============== ============
Weighted average common shares outstanding:
Basic 16,803,650 14,363,999 16,806,381 13,853,289
============ ============ ============== ============
Diluted 17,475,546 15,547,150 17,253,422 14,825,493
============ ============ ============== ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
1999 1998 1999 1998
------------ ------------ ------------- ---------
<S> <C> <C> <C>
Net income $ 7,027 $ 6,353 $ 15,973 $ 12,526
----------- ----------- ------------ ----------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains arising during the period 4,523 102 3,047 706
Reclassification adjustment for (gains) losses included in net income - (203) 787 (471)
----------- ----------- ------------ ---------
Other comprehensive income (loss) 4,253 (101) 3,834 235
----------- ----------- ------------ ---------
Comprehensive income $ 11,550 $ 6,252 $ 19,807 $ 12,761
=========== =========== ============ =========
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 six months ended
June 30,
1999 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,973 $ 12,526
Adjustments to reconcile net income and comprehensive income to net cash
provided by operating activities:
Decrease in valuation allowance on loans (531) -
Net gain on sales (1,478) (524)
Income allocable to preferred shareholders of a subsidiary company 545 -
Net amortization of premiums and discounts on investments 147 53
Depreciation 29 9
Deferred share compensation expense 306 132
Deferred shares issued under the Non-Employee Directors' Share Plans 31 30
Director fees paid by reissuance of treasury shares 9 10
Increase in interest receivable (1,884) (584)
(Increase) decrease in other assets (393) 162
Increase in accounts payable and accrued expenses 701 302
Increase in unearned revenue, net 191 196
---------------- ----------------
Net cash provided by operating activities 13,646 12,312
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage revenue bonds and other bond related investments
and origination of other loans (104,348) (97,005)
Purchases of furniture and equipment (56) (25)
Net reduction (investment) in restricted assets (853) (981)
Net proceeds from sale of investments 51,177 33,988
Principal payments received 232 113
---------------- ----------------
Net cash used in investing activities (53,848) (63,910)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares - 62,714
Issuance of preferred shares in a subsidiary company 80,300 -
Retirement of preferred shares (927) (1,044)
Proceeds from stock options exercised - 288
Purchase of treasury shares (289) -
Distributions (15,717) (10,713)
---------------- ----------------
Net cash provided by financing activities 63,367 51,245
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 23,165 (353)
Cash and cash equivalents at beginning of period 23,164 7,370
---------------- ----------------
Cash and cash equivalents at end of period $ 46,329 $ 7,017
================ ================
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 JUNE 30, 1999
(In thousands, except share data)
(unaudited)
Preferred Capital Accumulated
Preferred Shares Distribution Shares Term Other
------------------ ------------------ 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>
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 584 285 256 93 282 14,473 - - - 15,973
Unrealized gains on investments,
net of reclassifications - - - - - - - - 3,834 3,834
Distributions (1,028) (429) (592) (215) (233) (13,220) - - - (15,717)
Purchase of treasury shares - - - - - - (289) - - (289)
Reissuance of treasury shares - - - - - (469) 478 - - 9
Deferred shares issued under
the Non-Employee Directors'
Share Plans - - - - - 31 - - - 31
Retirement of preferred shares (463) (101) (275) (205) - 117 - - - (927)
Amortization of deferred
compensation - - - - - - - 306 - 306
------- --------- -------- --------- ------- --------- -------- ---------- -------- ----------
Balance, June 30, 1999 $ 10,078 $ 5,725 $ 3,740 $ 1,631 $ 154 $ 311,041 $(2,366) $ (2,586) $ 31,255 $ 358,672
======== ========= ======== ========= ======= ========= ======== ========== ======== ==========
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 - - - - - 27,778 (27,778)
Retirement of preferred shares (657) (124) (527) (371) - - -
Deferred shares issued under the
Non-Employee Directors' Share
Plans - - - - - 1,612 -
------- --------- -------- --------- ------- --------- --------
Balance, June 30, 1999 14,933 7,226 7,798 3,164 2,000 16,805,440 141,054
======= ========= ======== ========= ======= ========= ========
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 purpose. 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.
<PAGE>
NOTE 2 - PREFERRED SHAREHOLDERS' EQUITY IN SUBSIDIARY
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 after payment of the cumulative distributions
of the Series A Preferred Shares is allocated to the Common Shares and Term
Growth Shares of 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, who in turn, contributed certain of its assets to TE
Bond Sub and its subsidiaries. The assets of TE Bond Sub and its subsidiaries,
while 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 $362.5
million at June 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") which
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").
<PAGE>
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
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" ("SFAS No.
125"). 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 June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------------ ----------------------------------
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),(12) 1986 7.875 Oct. 2008 $10,065 $10,065 $ 290 $10,355 10,065 $10,065 ($1,067) $8,998
Creekside Village (2),(12) 1987 7.500 Nov. 2009 11,760 7,396 61 7,457 11,760 7,396 - 7,396
Emerald Hills (2),(12) 1988 7.750 Apr. 2008 6,725 6,725 2,068 8,793 6,725 6,725 1,875 8,600
Lakeview Garden (2),(12) 1987 7.750 Aug. 2007 9,003 4,919 34 4,953 9,003 4,919 - 4,919
Newport-on-Seven (2),(12) 1986 8.125 Aug. 2008 10,125 7,898 2,448 10,346 10,125 7,898 2,227 10,125
North Pointe (2),(4),(12) 1986 7.875 Aug. 2006 25,185 12,738 4,011 16,749 25,185 12,738 3,811 16,549
Northridge Park (2),(12) 1987 7.500 June 2012 8,815 8,815 44 8,859 8,815 8,815 (943) 7,872
Riverset (2),(4),(12) 1988 7.875 Nov. 1999 19,000 19,000 300 19,300 19,000 19,000 (70) 18,930
Southfork Vllg(2),(8),(12) 1988 7.875 Jan. 2009 10,375 10,375 2,696 13,071 10,375 10,375 2,451 12,826
Stone Mountain (7),(11) 1997 7.875 Oct. 2027 33,900 35,257 (510) 34,747 33,900 35,284 184 35,468
Villa Hialeah (2),(12) 1987 7.875 Oct. 2009 10,250 8,004 1,220 9,224 10,250 8,004 - 8,004
Mountain View
(Willowgreen) (2),(12) 1986 8.000 Dec. 2010 9,275 6,770 864 7,634 9,275 6,770 756 7,526
The Crossings (11) 1997 8.000 July 2007 6,943 6,851 574 7,425 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 8,825 8,719 - 8,719 - - - -
--------- --------- ------ ---------- ------- --------
Subtotal participating bonds 153,532 14,100 167,632 154,413 9,929 164,342
--------- --------- ------ ---------- ------- --------
Non-Participating Bonds:
Riverset Phase II 1996 9.500 Oct. 2019 110 105 9 114 110 105 11 116
Charter House 1996 7.450 July 2026 30 30 1 31 30 30 1 31
Hidden Valley (11) 1996 8.250 Jan. 2026 1,670 1,670 163 1,833 1,680 1,680 176 1,856
Oakbrook (11) 1996 8.200 July 2026 3,150 3,180 238 3,418 3,165 3,195 113 3,308
Torries Chase (11) 1996 8.150 Jan. 2026 2,040 2,040 76 2,116 2,050 2,050 84 2,134
Gannon Portfolio (4),(11) 1998 7.125 Dec. 2029 3,500 3,500 (9) 3,491 3,500 3,500 70 3,570
Italian Gardens (5),(11) 1998 7.800 May 2030 8,000 7,985 55 8,040 8,000 7,985 95 8,080
Coleman Senior (5),(11) 1998 8.000 May 2030 8,050 8,035 55 8,090 8,050 8,035 116 8,151
Lake Piedmont (4),(11) 1998 7.725 Apr. 2034 19,146 19,052 (768) 18,284 19,150 19,056 285 19,341
Orangevale (11) 1998 7.000 Oct. 2013 2,485 2,486 - 2,486 2,543 2,543 (76) 2,467
Western Hills (5),(11) 1998 7.750 Dec. 2029 3,040 3,040 (45) 2,995 3,040 3,040 - 3,040
Oakmont/Towne Oaks (11) 1998 7.200 Jan. 2034 11,281 11,260 - 11,260 11,287 11,265 - 11,265
Briarwood 1998 6.950 Apr. 2023 13,221 13,221 (66) 13,155 13,221 13,221 - 13,221
Gannon - Dade (9),(11) 1998 7.125 Dec. 2029 55,050 55,325 (137) 55,188 - - - -
Gannon - Whispering(9),(11) 1998 7.125 Dec. 2029 12,750 12,814 (255) 12,559 - - - -
Gannon - Cedar Run (4),(11) 1998 7.125 Dec. 2025 13,200 13,239 (38) 13,201 - - - -
Wheeler Creek (6) 1999 6.000 Jan. 2002 51 51 - 51 - - - -
La Paloma (10) 1999 7.500 May 2030 4,378 4,312 - 4,312 - - - -
Pavillion (10) 1999 7.500 May 2030 5,100 5,024 - 5,024 - - - -
Parkwood (11) 1999 7.125 Jun. 2035 3,910 3,842 - 3,842 - - - -
Delta Village (11) 1999 7.125 Jun. 2035 2,011 1,976 - 1,976 - - - -
Sahuarita (10),(11) 1999 8.000 Jun. 2029 51 39 - 39 - - - -
Shadowbrook (10),(11) 1999 7.750 Jun. 2029 5,780 5,768 - 5,768 - - - -
Woodmark (10),(11) 1999 8.000 Jun. 2039 10,200 10,073 - 10,073 - - - -
--------- -------- ------- -------- ------- --------
Subtotal non-participating bonds 188,067 (721) 187,346 75,705 875 76,580
--------- -------- -------- ---------- ------- --------
Participating Subordinate Bonds (1):
Barkley Place (3),(13) 1995 16.000 Jan. 2030 3,480 2,445 2,486 4,931 3,480 2,445 3,055 5,500
Gilman Meadows (3),(13) 1995 3.000 Jan. 2030 2,875 2,530 2,002 4,532 2,875 2,530 2,233 4,763
Hamilton Chase (3),(13) 1995 3.000 Jan. 2030 6,250 4,140 291 4,431 6,250 4,140 91 4,231
Mallard Cove I (3),(13) 1995 3.000 Jan. 2030 1,670 798 549 1,347 1,670 798 707 1,505
Mallard Cove II (3),(13) 1995 3.000 Jan. 2030 3,750 2,429 1,173 3,602 3,750 2,429 1,446 3,875
Meadows (3),(13) 1995 16.000 Jan. 2030 3,635 3,716 424 4,140 3,635 3,716 90 3,806
Montclair (3),(4),(13) 1995 3.000 Jan. 2030 6,840 1,691 2,783 4,474 6,840 1,691 2,028 3,719
Newport Village (3),(13) 1995 3.000 Jan. 2030 4,175 2,973 1,122 4,095 4,175 2,973 2,171 5,144
Nicollet Ridge (3),(4),(13) 1995 3.000 Jan. 2030 12,415 6,075 990 7,065 12,415 6,075 973 7,048
Steeplechase (3),(13) 1995 16.000 Jan. 2030 5,300 4,224 224 4,448 5,300 4,224 - 4,224
Whispering Lake (3),(4),(13) 1995 3.000 Jan. 2030 8,500 4,779 4,517 9,296 8,500 4,779 4,376 9,155
Riverset Phase II 1996 10.000 Oct. 2019 - - 1,558 1,558 1,489 - 1,449 1,449
--------- ------- ------ ---------- ------- --------
Subtotal participating subordinate bonds 35,800 18,119 53,919 35,800 18,619 54,419
--------- ------- ------ ---------- ------- --------
Non-Participating Subordinate Bonds:
Independence Ridge (11) 1996 12.500 Dec. 2015 1,045 1,045 78 1,123 1,045 1,045 230 1,275
Locarno (11) 1996 12.500 Dec. 2015 675 675 233 908 675 675 108 783
Cinnamon Ridge 1999 5.00 Jan. 2015 1,899 1,285 780 2,065 - - - -
Olde English (11) 1998 10.000 Nov. 2033 1,030 1,025 (10) 1,015 1,030 1,025 - 1,025
Rillito B Bond 1999 860 856 - 856 - - - -
--------- ------- ------- ---------- ------- --------
Subtotal non-participating subordinate bonds 4,886 1,081 5,967 2,745 338 3,083
--------- ------- ------ ---------- ------- --------
Total investment in mortgage revenue bonds $382,285 $32,579 $414,864 $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 June 30, 1999.
(5) The interest rate represents the rate during the construction or
rehabilitation period which is anticipated to be sixteen months for Italian
Gardens and Coleman Senior and 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 Principle
and Interest custodial receipt related to the underlying bond as collateral
as of June 30, 1999. The Company and TE Bond Sub own
all of the custodial receipts related to the underlying bond.
(8) The bond was traunched and 87% of the principal and base interest of the
bond was pledged as collateral as of June 30, 1999. The Company and TE Bond Sub
own all of the custodial receipts related to the underlying bond.
(9) The underlying bonds are held in the 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 Sahurarita, 6.85% for
Shadowbrook and 7.125% for Woodmark.
(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.
</TABLE>
<PAGE>
In April 1999, the $3.5 million 12% Gannon Series B bond was converted
into a Series A bond of like principal amount bearing interest at 7.125%. The
conversion was made at the option of the borrower as a result of the underlying
properties achieving certain performance goals as defined in the bond documents.
In May 1999, the Company sold the $11.3 mortgage revenue bond
collateralized by the Oakmont and Towne Oaks apartment communities located in
Monroe, Louisiana to Merrill Lynch. This bond was sold to generate investment
proceeds for new investments. In June 1999, the Company used proceeds from the
Preferred Equity Offering (discussed in Note 2) to repurchase this bond from
Merrill Lynch.
In the second quarter, the Company originated $40.3 million in
tax-exempt mortgage revenue bonds collateralized by eight multifamily apartment
communities with 1,128 units. Two of the eight communities are to-be-built
communities while the remaining six are existing communities that are undergoing
rehabilitation. The weighted average permanent interest rate on these
investments is 7.0% and the maturity dates range from June 2029 to June 2039.
One of the eight bonds has contingent interest features which allow the Company
to participate in the growth of the underlying property collateral. The Company
received $0.8 million in construction administration and origination fees
related to these transactions. These fees are recognized into income over the
life of the construction period or the life of the investment.
Also in the second quarter, the Company purchased a $0.9 million
interest in a trust holding a $1.0 million non-participating Series B bond
collateralized by a 272-unit multifamily apartment community known as Rillito
Village located in Tucson, Arizona. The Company's investment bears interest at
10.0% per annum. This investment was made as part of the MuniMae/Montford Group
joint program (see Note 9 to the Company's 1998 Form 10-K).
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 June 30, 1999 the
total carrying amount of the mortgage revenue bonds pledged as collateral was
$148.3 million.
<PAGE>
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 June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------------------------- ----------------------------------
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> <C>
RITES -Indian Lakes (5) 1997 $ $3,300 $ 3,439 $ 282 $ 3,721 $3,320 $3,470 $ 336 $ 3,806
Interest rate swap (6/30/97 - 1/03/06) (1) 1997 6,500 - (110) (110) 6,500 - (320) (320)
RITES -Charter House (5) 1996 80 303 57 360 80 323 66 389
P-FLOATs -Charter House 1996 - - - - 7,440 7,440 - 7,440
RITES -Southgate (5) 1997 100 602 70 672 105 633 272 905
RITES -Southwood (4),(5) 1997 440 288 (288) - 440 279 548 827
RITES -Riverset Phase II (5) 1996 75 400 (44) 356 75 466 21 487
Interest rate swap (11/24/97 - 11/23/07) (1),(3) 1997 58,000 - - - 58,000 - (2,170) (2,170)
Cinnamon Ridge Total Return Swap
(12/11/97 - 12/31/99) (1) 1997 10,195 - 357 357 10,570 - 729 729
Cinnamon Ridge Interest Rate Swap
(12/10/99 - 12/10/09) (1) 1997 7,000 - 15 15 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 - 1,345 1,345 73,000 - (1,470) (1,470)
Interest rate swap (5/1/98 - 4/30/99) (1) 1998 9,675 - - - 9,675 - (25) (25)
Interest rate swap (5/1/99 - 4/30/09) (1) 1998 9,675 - 74 74 9,675 - (325) (325)
Interest rate swap (8/20/98 - 8/20/08) (1) 1998 7,500 - 141 141 7,500 - (165) (165)
Interest rate swap (8/28/98 - 8/5/99) (1) 1998 6,185 - 3 3 6,185 - 15 15
RITES -Villas at Sonterra (4),(5) 1998 5 34 (34) - 5 35 72 107
RITES -Queen Anne IV (4),(5) 1998 65 65 (65) - 65 65 32 97
RITES -Oklahoma City pool (4),(5) 1998 195 247 (247) - 195 250 (55) 195
RITES -Olde English (4),(5) 1999 76 97 (97) - - - - -
Club West Total Return Swap
(3/29/99 - 9/28/00) (1) 1999 7,960 - (159) (159) - - - -
Willow Key Total Return Swap
(3/29/99 - 8/19/01) (1) 1999 17,440 - (697) (697) - - - -
P-FLOATS -Riverset (5) 1999 7,420 7,420 - 7,420 - - - -
RITES -Palisades Park (4),(5) 1999 100 97 (97) - - - - -
RITES -Rillito (4),(5) 1999 65 65 (65) - - - - -
Palisades Park Interest rate swap
(4/16/99 - 9/1/06) (1) 1999 9,600 - 198 198 - - - -
-------- ----------- -------- -------- -------- ---------
Total other bond related investments $ 13,057 $ 639 $13,696 $ 14,009 $ (2,340)$ 11,669
======== =========== ======== ======== ======== =========
(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 fair value of these investments is negative at June 30, 1999. The aggregate negative fair value of the investments of
($1,963) was 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 June 30, 1999, the Company
purchased and/or sold interests in one bond which it previously securitized.
In March 1999, the Company sold the $9.7 mortgage revenue bond
collateralized by the Palisades Park apartment community located in Universal
City, Texas through the Merrill Lynch P-FLOATs(sm) program. In April 1999, the
Company purchased the $100,000 (par-value) Palisades Park RITES(sm) for
$129,100. The Company recognized a gain of $0.2 million on this transaction.
In conjunction with the sale of the $6.9 million Rillito Village
taxable loan in March 1999, the Company entered into a total return swap with
Merrill Lynch which replicated the total return on the Rillito Village taxable
loan financed at a rate based on one month LIBOR (the London Interbank Offered
Rate) rate plus 1.0%. The total return swap was terminated on April 30, 1999
upon the issuance of two tax-exempt mortgage revenue bonds, a $6.3 million
Series A bond and a $1.0 million Series B bond. Upon issuance of the Rillito
$6.3 million Series A mortgage revenue bond, Merrill Lynch placed the bond into
a trust and P-FLOATs(sm) and RITES(sm) were sold from the trust. In May 1999,
the Company purchased the $65,000 (par-value) Rillito RITES(sm) for $83,825. The
Company also purchased an interest in the Rillito Series B bond discussed
further in Note 4.
<PAGE>
NOTE 6 - INVESTMENT IN PARITY WORKING CAPITAL LOANS, DEMAND
NOTES AND OTHER LOANS
In April 1999, the Company originated a $19.9 million taxable mortgage
loan collateralized by a 656-unit multifamily apartment community known as Honey
Creek located in Dallas, Texas. This short term financing was made pending the
issuance of a tax-exempt mortgage revenue bond. The loan has an interest rate of
8.0%.
In conjunction with the bond investments discussed in Note 4, the
Company made four taxable second loans in the second quarter totaling $2.4
million. The interest rate on these taxable second loans is 8.0% and the
maturity dates range from June 2012 to June 2015.
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 six
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Municipal Mortgage & Equity, LLC
Reconciliation of Basic and Diluted EPS
For the three months ended June 30, 1999 For the three months ended June 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 comon shares $ 6,417 16,803,650 $ 0.38 $ 5,768 14,363,999 $ 0.40
============= =============
Effect of Dilutive Securities
Options and deferred shares - 244,822 - 229,051
Convertible preferred shares
to the extent dilutive 131 427,074 363 954,100
------------- ------------- ------------- -------------
Diluted EPS
Income allocable to common shares
plus assumed conversions $ 6,548 17,475,546 $ 0.37 $ 6,131 15,547,150 $ 0.39
============= ============= ============= ============= ============= =============
For the six months ended June 30, 1999 For the six months ended June 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 comon shares $ 14,473 16,806,381 $ 0.86 $ 11,298 13,853,289 $ 0.82
============= =============
Effect of Dilutive Securities
Options and deferred shares - 233,504 - 223,802
Convertible preferred shares
to the extent dilutive 131 213,537 582 748,402
------------- ------------- ------------- -------------
Diluted EPS
Income allocable to common shares
plus assumed conversions $ 14,604 17,253,422 $ 0.85 $ 11,880 14,825,493 $ 0.80
============= ============= ============= ============= ============= =============
</TABLE>
<PAGE>
NOTE 8 - DISTRIBUTIONS
On July 7, 1999, distributions for the three months ended June 30, 1999
were declared for shareholders of record on July 19, 1999 and paid on August 2,
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) $ 0.3950 $ 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 $ 0.4000 $ 13.74 $ 15.00 $ 10.55 $ 10.00
(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>
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 95.7% of CAD for the
three months ended June 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.
Results of Operations
Quarterly Results Analysis
Total income for the three months ended June 30, 1999 increased by
approximately $2.4 million over the same period last year due primarily to an
increase in interest income on investments of approximately $2.3 million.
Operating expenses for the three months ended June 30, 1999 increased
by approximately $0.3 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.
The Company incurred interest expense of $0.9 million for the three
months ended June 30, 1999 as a result of the Term Securitization Facility in
March 1999 (see Note 3 to the consolidated financial statements).
<PAGE>
The Company recorded income allocable to preferred shareholders of a
subsidiary company of $0.5 million for the three months ended June 30, 1999 (see
Note 2 to the consolidated financial statements). Quarterly income allocable to
the preferred shareholders of the subsidiary company are expected to be $1.4
million per quarter subsequent to June 30, 1999.
Year-to-Date Results Analysis
Total income for the six months ended June 30, 1999 increased by
approximately $5.2 million over the same period last year due primarily to an
increase in interest income on investments of approximately $3.8 million and an
increase in gain on sale of investments of $1.0 million.
Operating expenses for the six months ended June 30, 1999 increased by
approximately $0.3 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 offset by recovery of valuation allowances of $0.5 million.
The Company incurred interest expense of $0.9 million for the six
months ended June 30, 1999 as a result of the Term Securitization Facility in
March 1999 (see Note 3).
The Company recorded income allocable to preferred shareholders of a
subsidiary company of $0.5 million for the six months ended June 30, 1999 (see
Note 2 to the consolidated financial statements).
New Accounting Pronouncement
During July 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). This standard requires the
Company to recognize all derivatives as either assets or liabilities in its
financial statements and measure such instruments at their fair values. Hedging
activities must be redesignated and documented pursuant to the provisions of the
statement. This statement becomes effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. At this time, the Company is still
assessing the impact of SFAS No. 133 on its financial condition and results of
operations.
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
<PAGE>
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.
As discussed below, 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. 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 securtized. 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 exposure to interest
rate swaps. The combination of these two vehicles allows the Company the
flexibility it needs to finance acquisitions.
In the second quarter, the Company participated in $65.6 million of
investment transactions.
Preferred Share Equity Offering
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 after payment of the cumulative distributions
of the Series A Preferred Shares is allocated to the Common Shares and Term
Growth Shares of 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, who in turn, contributed certain of its assets to TE
Bond Sub and its subsidiaries. The assets of TE Bond Sub and its subsidiaries,
while 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
<PAGE>
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 $362.5
million at June 30, 1999.
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
has to date been Merrill Lynch, which, in turn, deposits the bonds into a trust.
Short term floating rate interests in the trust (the "senior interests" or the
"P-FLOATS(sm)"), 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 (or the "RITES(sm)") in the trust and receives the proceeds
from the sale of the senior interests less certain transaction costs. The
Company may also purchase, for investment purposes, RITES(sm) in bonds that it
did not own, in which case no proceeds are received. The RITES(sm) are the
subordinate security and receive the residual income after the payment of all
fees and the floating rate obligation on the P-FLOATS(sm). The Company
recognizes taxable capital gains (or losses) upon the sale of its bonds.
Merrill Lynch provides liquidity to the trust and credit enhancement to
the bonds which enables the senior interests to be sold to certain accredited
third party investors seeking investments rated "AA" or better. The liquidity
and credit enhancement facilities are generally for one year terms and are
renewable annually by Merrill Lynch. To the extent that Merrill Lynch is
downgraded below "AA", either an alternative credit enhancement provider would
be substituted to reinstate the desired investment rating or the senior
interests would be marketed to other accredited investors. In either case, it is
anticipated that the return on the RITES(sm) would decrease, which would
negatively impact CAD. If the credit enhancer did not renew the liquidity or
credit enhancement facilities, the Company would be forced to find alternative
liquidity or credit enhancement facilities, repurchase the underlying bonds or
liquidate the underlying bond and its investment in the RITES(sm). If the
Company is forced to liquidate its investment in the RITES(sm) and potentially,
the related swaps, the Company would recognize gains or losses on the
liquidation for net income, tax reporting and CAD, which may be significant
depending on market conditions. As of June 30, 1999, $108.9 million of the
senior interests were subject to annual "rollover" renewal for liquidity and
credit enhancement. The Company has already extended, in advance, the liquidity
and credit enhancement of the $108.9 million of senior interests through June
15, 2000 and September 15, 2000, respectively. In addition, the Company entered
an agreement whereby the liquidity and credit enhancement facilities will be
automatically extended for sixth months increments subsequent to June 15, 2000
and September 15, 2000 and each six month anniversary thereafter unless notified
by Merrill Lynch six months in advance of their termination of the facilities.
The Company continues to review alternatives which would reduce and diversify
credit risks.
<PAGE>
Since the bonds securitized generally bear fixed rates of interest, the
RITES(sm) in the trust created by the securitization may create interest rate
risks. To reduce the Company's exposure to interest rate risks on RITES(sm)
retained, the Company enters into interest rate swaps, which are contracts
exchanging an obligation to receive a floating rate approximating the rate on
the senior interests for an obligation to pay a fixed rate. Net swap payments
received, if any, will be taxable income, even though the RITES(sm) investment
being hedged pays tax-exempt interest. The Company recognizes taxable capital
gains (or losses) upon the termination of an interest rate swap contract. The
interest rate swaps are for limited time periods which generally approximate the
term of the securitization trusts and are for notional amounts that generally
approximate the outstanding senior interests in the trusts. Also, the interest
rate swap agreements are subject to risk of early termination on the annual
optional termination date by the counterparty, possibly at times unfavorable to
the Company. 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 or are terminated, in which case the Company would be fully
exposed to interest rate risk to the extent the swaps are terminated by the
counterparty while the securitization trusts remain in existence. In addition,
there is no guarantee that the securitization trusts will be in existence for
the duration of the swaps, as these securitization trusts are collapsed if the
credit enhancement or liquidity facilities are not renewed, as discussed above.
If the securitization trusts are no longer in existence, the Company would
recognize gains and losses from changes in market values of the swap instruments
or from the termination of the swap agreements. Depending on market conditions,
these gains and losses on the interest rate swaps could be significant.
The term of the securitization trusts is based on the anticipated
prepayment of the underlying bond in the trust. If the bond prepayment occurs as
anticipated, the Company will receive its pro rata share of proceeds from the
prepayment. However, there is no certainty that bond prepayment will occur at
the end of the term of the securitization trust. If the bond does not prepay
before the securitization trust terminates, the Company would be forced to
liquidate its subordinate investment or, if the Company would wish to retain
this investment, it would be forced to purchase the remaining interests in the
bond.
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 second quarter of 1999, the
Company purchased and/or sold interests in one bond which it previously
securitized.
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 June 30, 1999
was approximately 39%.
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.
Term Securitization Facility
In March 1999, the Company consummated a transaction with Merrill
Lynch which converted a portion of its investment in the P-FLOATs(sm) program
into a longer term securitization facility. As a result, this transaction
enabled the Company to (a) reduce its exposure to credit and annual renewal
risks associated with the liquidity and credit enhancement features of the
P-FLOATs(sm) trusts and the swap agreements, (b) reduce the annual financing
costs and (c) eliminate the risk of receiving taxable net swap payments which
serve to hedge tax-exempt investments.
In order to facilitate this transaction, two bonds ($67.8 million
par-value) were deposited into a new securitization trust (the "Term
Securitization Facility") (see discussion in Note 3 to the consolidated
financial statements). 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 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.
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.
Prior to this transaction, these assets and liabilities had received sale
treatment and therefore were off-balance sheet financing.
<PAGE>
Cash Flow
At June 30, 1999, the Company had cash and cash equivalents of
approximately $46.3 million.
Cash flow from operating activities was $13.6 million and $12.3 million
for the six months ended June 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 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 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 June 30, 1999 and 1998, cash available for
distribution to Common Shares was $7.1 million and $5.7 million, respectively.
Regular cash distributions to common shareholders attributable to the three
months ended June 30, 1999 and 1998 were $6.8 million and $5.5 million,
respectively. The Company's Common Share dividend for the three months ended
June 30, 1999 of $0.40 represents a payout ratio of 95.3% of CAD. The Company's
Common Share dividend for the three months ended June 30, 1998 of $0.38
represents a payout ratio of 95.7% 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 discussed above. 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
<PAGE>
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 evaluating 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 is 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 should be 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
will upgrade or replace any non-compliant equipment by September 30, 1999. 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
will be forwarded to those businesses to request a written update of their
progress towards becoming Year 2000 compliant.
<PAGE>
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.
PART II. OTHER INFORMATION
Item 5. Other Information
Securities Sale
On May 27, 1999, TE Bond Sub sold 42 shares of $2,000,000 par-value 6
7/8 % Series A Cumulative Preferred Shares (the "Series A Preferred Shares").
The Series A Preferred Shares were offered and sold to "qualified institutional
buyers" through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated and Legg Mason Wood Walker, Incorporated, without being registered
under the Securities Act pursuant to the exemption afforded by Rule 144A under
the Securities Act.
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:
No reports on Form 8-K were filed during the three months
ended June 30, 1999.
<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 Director
By: /s/ Gary Mentesana
Gary Mentesana
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
DATED: August 12, 1999
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document
- ------ -------
27 Financial Data Schedule
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 46,329
<SECURITIES> 0
<RECEIVABLES> 4,743
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,072
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 514,233
<CURRENT-LIABILITIES> 4,097
<BONDS> 0
0
102,020
<COMMON> 311,041
<OTHER-SE> 36,207
<TOTAL-LIABILITY-AND-EQUITY> 514,233
<SALES> 0
<TOTAL-REVENUES> 20,178
<CGS> 0
<TOTAL-COSTS> 2,760
<OTHER-EXPENSES> 545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 900
<INCOME-PRETAX> 15,973
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,973
<EPS-BASIC> .86<F1>
<EPS-DILUTED> .85<F1>
<FN>
<F1> The earnings per share reflects the earning per share of the
Common Shares.
August 12, 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 June 30, 1999.
Sincerely,
/s/ Gary A. Mentesana
Gary A. Mentesana
Chief Financial Officer
</FN>
</TABLE>
