SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2001
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:(443) 263-2900
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 21,569,431 Common Shares outstanding as of August 10, 2001.
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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
June 30, December 31,
2001 2000
--------------- ----------------
ASSETS
Cash and cash equivalents ........................................................ $ 28,820 $ 27,504
Interest receivable .............................................................. 10,000 9,978
Investment in mortgage revenue bonds, net(Note 2)................................. 519,910 500,190
Investment in other bond related investments(Notes 3 and 4)....................... 14,708 13,457
Loans receivable(Note 6).......................................................... 362,209 349,291
Restricted assets ................................................................ 30,911 25,212
Other assets ..................................................................... 42,162 27,694
Mortgage servicing rights, net ................................................... 7,416 6,876
Property and equipment ........................................................... 1,801 1,012
Goodwill and other intangible assets ............................................. 25,825 26,668
--------------- ----------------
Total assets ..................................................................... $ 1,043,762 $ 987,882
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable(Note 7)............................................................. $ 301,686 $ 329,159
Accounts payable, accrued expenses and other liabilities ......................... 23,840 23,497
Investment in derivative financial instruments(Note 5)............................ 15,871 -
Investment in other bond related investments(Notes 3 and 4)....................... 7,063 17,984
Distributions payable ............................................................ 2,606 2,606
Short-term debt .................................................................. 29,595 41,290
Long-term debt ................................................................... 81,396 70,899
--------------- ----------------
Total liabilities ................................................................ 462,057 485,435
--------------- ----------------
Commitments and contingencies .................................................... - -
Preferred shareholders' equity in a subsidiary company(Note 8).................... 137,655 137,664
Shareholders' equity:
Preferred shares:
Series I (10,995 and 14,933 shares issued and outstanding, respectively) ..... 6,795 9,594
Series II (3,176 and 7,226 shares issued and outstanding, respectively) ...... 2,384 4,868
Preferred capital distribution shares:
Series I (5,742 and 7,798 shares issued and outstanding, respectively) ....... 2,464 3,489
Series II (1,391 and 3,164 shares issued and outstanding, respectively) ...... 419 1,268
Term growth shares (2,000 shares issued and outstanding) ......................... 216 197
Common shares (21,623,761 shares, including 21,607,930 issued, and 15,831
deferred shares at June 30, 2001 and 17,716,576 shares, including
17,700,745 issued, and 15,831 deferred shares at December 31, 2001) .......... 398,670 328,990
Less common shares held in treasury at cost (59,330 shares and
60,839 shares, respectively) ................................................. (912) (944)
Less unearned compensation - deferred shares .................................... (4,804) (4,144)
Accumulated other comprehensive income ........................................... 38,818 21,465
--------------- ----------------
Total shareholders' equity ....................................................... 444,050 364,783
--------------- ----------------
Total liabilities and shareholders' equity ....................................... $ 1,043,762 $ 987,882
=============== ================
The accompanying notes are an integral part of these financial statements.
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,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- -------------- -------------- -------------
INCOME:
Interest on mortgage revenue bonds and other bond related
investments ...................................................... $ 12,209 $ 9,798 $ 23,979 $ 19,725
Interest on loans ................................................. 8,768 7,552 16,949 14,385
Loan origination and brokerage fees ............................... 4,453 1,380 6,517 1,996
Loan servicing fees ............................................... 1,729 1,351 3,361 2,838
Interest on short-term investments ................................ 693 898 1,695 1,970
Other income ...................................................... 1,643 961 6,456 2,271
Net gain on sales ................................................. 879 19 1,045 19
------------- -------------- -------------- -------------
Total income ...................................................... 30,374 21,959 60,002 43,204
------------- -------------- -------------- -------------
EXPENSES:
Salaries and benefits ............................................. 5,030 3,652 9,475 6,984
Professional fees ................................................. 913 597 1,604 1,279
Operating expenses ................................................ 2,150 1,133 3,681 2,227
Goodwill and other intangibles amortization ....................... 628 358 1,321 716
Interest expense .................................................. 7,769 7,173 15,595 13,900
Other-than-temporary impairments related to investments in
mortgage revenue bonds and other bond related investments - - 3,256 -
------------- -------------- -------------- -------------
Total expenses .................................................... 16,490 12,913 34,932 25,106
Net holding gains (losses) on trading securities .................. 1,272 - (3,593) -
------------- -------------- -------------- -------------
Net income before income allocated to preferred shareholders
in a subsidiary company, income taxes and cumulative
effect of accounting change ................................. 15,156 9,046 21,477 18,098
Income allocable to preferred shareholders in a subsidiary
company .......................................................... 2,606 1,818 5,212 3,262
------------- -------------- -------------- -------------
Net income before income taxes and cumulative effect
of accounting change ........................................ 12,550 7,228 16,265 14,836
Income tax expense ................................................ 224 193 227 184
------------- -------------- -------------- -------------
Net income before cumulative effect of accounting change .......... 12,326 7,035 16,038 14,652
Cumulative effect on prior years of change in
accounting for derivative financial instruments ............. - - (12,277) -
------------- -------------- -------------- -------------
Net income ........................................................ $ 12,326 $ 7,035 $ 3,761 $ 14,652
============= ============== ============== =============
Net income allocated to:
Preferred shares:
Series I ................................................. $ 180 $ 204 $ 344 $ 427
============= ============== ============== =============
Series II ................................................ 49 84 94 176
============= ============== ============== =============
Preferred capital distribution shares:
Series I ................................................. $ 66 $ 82 $ 137 $ 172
============= ============== ============== =============
Series II ................................................ 2 21 13 47
============= ============== ============== =============
Term growth shares .......................................... $ 216 $ 165 $ 424 $ 332
============= ============== ============== =============
Common shares ............................................... $ 11,813 $ 6,479 $ 2,749 $ 13,498
============= ============== ============== =============
Page 2
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,
----------------------------- -----------------------------
2001 2000 2001 2000
----------------------------- -----------------------------
Basic net income per share:
Preferred shares:
Series I .............................................. $ 13.21 $ 13.65 $ 24.11 $ 28.59
============= ============== ============== =============
Weighted average shares outstanding ................ 13,635 14,933 14,280 14,933
Series II ............................................. 8.34 11.61 14.42 24.41
============= ============== ============== =============
Weighted average shares outstanding ................ 5,891 7,226 6,555 7,226
Preferred capital distribution shares:
Series I .............................................. $ 9.27 $ 10.50 $ 18.37 $ 22.04
============= ============== ============== =============
Weighted average shares outstanding ................ 7,120 7,798 7,457 7,798
Series II ............................................. 0.82 6.67 4.59 14.98
============= ============== ============== =============
Weighted average shares outstanding ................ 2,579 3,164 2,870 3,164
Common shares:
Income before cumulative effect of accounting change ..... $ 0.55 $ 0.37 $ 0.72 $ 0.77
Cumulative effect on prior years of change in
accounting for derivative financial instruments ....... - - (0.59) -
------------- -------------- -------------- -------------
Basic net income per common share ........................ $ 0.55 $ 0.37 $ 0.13 $ 0.77
============= ============== ============== =============
Weighted average common shares outstanding ............... 21,524,016 17,435,385 20,747,361 17,430,954
Diluted net income per share:
Common shares:
Income before cumulative effect of accounting change ..... $ 0.54 $ 0.36 $ 0.71 $ 0.76
Cumulative effect on prior years of change in
accounting for derivative financial instruments ....... - - (0.58) -
------------- -------------- -------------- -------------
Diluted net income per common share ..................... $ 0.54 $ 0.36 $ 0.13 $ 0.76
============= ============== ============== =============
Weighted average common shares outstanding ............... 22,014,990 17,822,075 21,222,890 17,791,655
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) (unaudited)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net income $ 12,326 $ 7,035 $ 3,761 $ 14,652
------------- ------------- ------------- -------------
Other comprehensive income:
Unrealized gains on investments:
Unrealized holding gains arising during the period 1,364 5,286 5,126 2,899
Reclassification adjustment for losses
included in net income - - 12,227 -
------------- ------------- ------------- -------------
Other comprehensive income: 1,364 5,286 17,353 2,899
------------- ------------- ------------- -------------
Comprehensive income $ 13,690 $ 12,321 $ 21,114 $ 17,551
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the six months ended
June 30,
---------------------------------
2001 2000
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $ 3,761 $ 14,652
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to preferred shareholders in a subsidiary company ........ 5,212 3,262
Cumulative effect of accounting change ................................... 12,277 -
Net holding losses on trading securities .................................. 3,593 -
Other-than-temporary impairments related to investments in
mortgage revenue bonds .................................................. 3,256 -
Decrease in valuation allowance on parity working capital loans ........... (21) -
Net gain on sales ......................................................... (1,045) (19)
Net amortization of premiums, discounts and fees on investments ........... 155 154
Depreciation and amortization ............................................. 1,442 806
Deferred share compensation expense ....................................... 738 501
Deferred shares issued under the Non-Employee Directors' Share Plans ...... - 67
Director fees paid and share awards made by reissuance of treasury shares.. - 9
Increase in interest receivable ........................................... (22) (506)
(Increase) decrease in other assets ....................................... 726 (90)
Increase in accounts payable, accrued expenses and other liabilities ...... 312 109
--------------- ----------------
Net cash provided by operating activities ..................................... 30,384 18,945
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage revenue bonds, other bond related investments,
loan originations and other investments ................................... (243,359) (200,202)
Principal payments received ................................................... 192,369 84,542
Net proceeds from sales of investments ........................................ 5,000 12,538
Purchases of property and equipment ........................................... (911) (112)
Net reduction (investment) in restricted assets ............................... (5,699) 6,307
--------------- ----------------
Net cash used in investing activities ......................................... (52,600) (96,927)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities ............................................. 284,125 200,516
Repayment of credit facilities ................................................ (311,598) (132,053)
Repayment of short-term debt .................................................. (11,695) -
Proceeds from long-term debt .................................................. 10,703 -
Repayment of long-term debt ................................................... (206) -
Issuance of common shares ..................................................... 82,645 -
Issuance of preferred shares in a subsidiary company .......................... - 57,616
Redemption of preferred shares ................................................ (7,168) -
Proceeds from stock options exercised ......................................... 905 -
Distributions ................................................................. (18,967) (17,638)
Distributions to preferred shares in a subsidiary company ..................... (5,212) (2,987)
--------------- ----------------
Net cash provided by financing activities ..................................... 23,532 105,454
--------------- ----------------
Net increase in cash and cash equivalents ..................................... 1,316 27,472
Cash and cash equivalents at beginning of period .............................. 27,504 54,417
--------------- ----------------
Cash and cash equivalents at end of period .................................... $ 28,820 $ 81,889
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................................. $ 17,740 $ 13,232
=============== ================
Income taxes paid ............................................................. $ 316 $ 316
=============== ================
DISCLOSURE OF NON-CASH ACTIVITIES:
Investment in a partnership under a note payable obligation ................... $ - $ 500
=============== ================
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data) (unaudited)
Preferred Capital Accumulate
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
--------- --------- --------- --------- --------- ---------- -------- ------------ ------------ ----------
Balance,
January 1, 2001 ..... $ 9,594 $ 4,868 $ 3,489 $ 1,268 $ 197 $ 328,990 $ (944) $ (4,144) $ 21,465 $ 364,783
Net income 344 94 137 13 424 2,749 - - - 3,761
Unrealized gains on
investments, net of
reclassifications .. - - - - - - - - 17,353 17,353
Distributions ....... (345) (1,028) (138) (429) (405) (16,622) - - - (18,967)
Redemption of
preferred
shares(Note 9) ..... (2,798) (1,550) (1,024) (433) - (1,363) - - - (7,168)
Reissuance of
treasury shares .... - - - - - (32) 32 - - -
Options exercised ... - - - - - 905 - - - 905
Issuance of common
shares ............. - - - - - 82,645 - - - 82,645
Deferred share
grants ............. - - - - - 1,398 - (1,398) - -
Amortization
of deferred
compensation ....... - - - - - - - 738 - 738
--------- --------- --------- --------- --------- ---------- -------- ------------ ------------ ----------
Balance,
June 30, 2001 ....... $ 6,795 $ 2,384 $ 2,464 $ 419 $ 216 $ 398,670 $ (912) $ (4,804) $ 38,818 $ 444,050
========= ========= ========= ========= ========= ========== ======== ============ ============ ==========
Preferred Capital
Preferred Shares Distribution Shares Term
------------------- ------------------- Growth Common Treasury
SHARE ACTIVITY: Series I Series II Series I Series II Shares Shares Shares
--------- --------- --------- --------- --------- ------------ --------
Balance,
January 1, 2001 ..... 14,933 7,226 7,798 3,164 2,000 17,655,737 60,839
Redemption of
preferred
shares(Note 9) ..... (3,938) (4,050) (2,056) (1,773) - - -
Reissuance of
treasury shares .... - - - - - 1,509 (1,509)
Options exercised ... - - - - - 53,000 -
Issuance of common
shares ............. - - - - - 3,800,000 -
Issuance of common
shares under
employee share
incentive plans .... - - - - - 54,185 -
--------- --------- --------- --------- --------- ------------ --------
Balance,
June 30, 2001 ....... 10,995 3,176 5,742 1,391 2,000 21,564,431 59,330
========= ========= ========= ========= ========= ============ ========
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage & Equity, LLC ("MuniMae") and its subsidiaries (together
with MuniMae, the ("Company") are principally engaged in originating, investing
in and servicing investments related to multifamily housing financings. A
significant portion of the Company's investments are mortgage revenue bonds, or
interests in mortgage revenue bonds, issued by state and local governments or
their agencies or authorities to finance multifamily housing developments. As a
result, interest income from these investments is exempt for federal income tax
purposes. Multifamily housing developments, as well as the rents paid by the
tenants, secure these investments. The Company also originates, invests in and
services investments related to multifamily housing financings that are not
mortgage revenue bonds. These investments generate taxable rather than
tax-exempt income.
The assets of MuniMae TE Bond Subsidiary, LLC and its subsidiaries
(collectively, "TE Bond Sub"), a majority owned subsidiary of MuniMae, are
solely those of TE Bond Sub and are not available to creditors of MuniMae. The
equity interest in TE Bond Sub held by MuniMae is subject to the claims of
creditors of the Company and in certain circumstances could be foreclosed upon.
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
1 to the Company's Annual Report on Form 10-K for the year ended December 31,
2000 (the "Company's 2000 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 2000 Form 10-K.
Certain 2000 amounts have been reclassified to conform to the 2001 presentation.
New Accounting Pronouncements
During July 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB Statement No. 133." In addition, during 2000, the Financial Accounting
Standards Board issued FASB Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." These statements
(collectively, "FAS 133") establish accounting and reporting standards for
derivative financial instruments, including certain derivative financial
instruments embedded in other contracts, and for hedging activity. FAS 133
requires the Company to recognize all derivatives as either assets or
liabilities in its financial statements and record these instruments at their
fair values. In order to achieve hedge accounting treatment, hedging activities
must be appropriately designated, documented and proven to be effective as a
hedge of a balance sheet item pursuant to the provisions of FAS 133. The Company
has elected, as permitted by FAS 133, not to prove the hedging effectiveness of
its interest rate swap investments due to the cost and administrative burden of
complying with FAS 133. As a result, changes in fair value of derivatives are
recorded through current income rather than through other comprehensive income.
The Company adopted FAS 133 on January 1, 2001.
The Company has several types of financial instruments that meet the
definition of a derivative financial instrument under FAS 133, including
interest rate swaps, put option contracts and total return swaps. Under FAS 133,
the Company's investment in total return swaps and put option contracts is
recorded on the balance sheet with changes in fair value of these instruments,
as well as changes in fair value of other instruments which are deemed to be
derivative financial instruments, recorded in current earnings. The Company also
has investments in interest rate swaps, which are held to offset the floating
interest rate exposure in certain investments.
The adoption of FAS 133 does not affect cash available for distribution,
the Company's ability to pay distributions, the characterization of the
tax-exempt income or the financial obligations under the bonds. Upon adoption,
the Company's interest rate swaps and total return swaps were reclassified to
trading securities; those with a negative balance were reflected as liabilities
on the balance sheet. As of January 1, 2001, the Company's put option contracts
were recorded on the balance sheet with a fair value of zero. The cumulative
effect of adopting FAS 133 was a decrease to net income of approximately $12.3
million as of January 1, 2001, and is reflected in the income statement as a
cumulative effect of a change in accounting principle. The Company recognized an
increase (decrease) in net income of $1.3 million and ($3.6) million for the
three and six months ended June 30, 2001, respectively, due to the change in
fair value of its derivative instruments. This change is reflected in net
holding gains (losses) on trading securities in the statement of income.
During September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. FAS 140 is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
March 31, 2001. The disclosure requirements related to securitization
transactions and collateral are required for all fiscal years ending after
December 15, 2000. Accordingly, the Company has incorporated the appropriate
disclosure requirements in its notes to the consolidated financial statements
for the three months ended June 30, 2001. The Company believes the provisions
pertaining to the transfer and servicing of financial assets and extinguishment
of liabilities occurring after March 31, 2001 may over time have a significant
impact on the total assets and total liabilities of the Company. In particular,
new securitization transactions that would have been accounted for as a sale
under Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("FAS 125") may be accounted for as a borrowing under FAS 140. Therefore, the
senior interest in future securitizations may be recorded as debt and the bonds
associated with the transaction may continue to be included in investments in
mortgage revenue bonds rather than being excluded upon completion of the
securitization transaction.
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141")
and No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") which are
effective July 1, 2001 and January 1, 2002, respectively, for the Company. FAS
141 requires that the purchase method of accounting be used for all business
combinations consummated after June 30, 2001. Under FAS 142, amortization of
goodwill, including goodwill recorded in past business combinations, will
discontinue upon adoption of this standard. In addition, goodwill recorded as a
result of business combinations completed during the six-month period ending
December 31, 2001 will not be amortized. All goodwill and intangible assets will
be tested for impairment in accordance with the provisions of the Statement. The
Company is currently reviewing the provisions of FAS 141 and FAS 142 and
assessing the impact of adoption.
NOTE 2 - INVESTMENTS IN MORTGAGE REVENUE BONDS
The Company holds a portfolio of tax-exempt mortgage revenue bonds and
certificates of participation in grantor trusts holding tax-exempt mortgage
revenue bonds ("COPs"). The tax-exempt mortgage revenue bonds are issued by
state and local government authorities to finance multifamily housing
developments secured by nonrecourse mortgage loans on the underlying properties.
The COPs represent a pro rata interest in a trust that holds a tax-exempt
mortgage revenue bond. 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. See further discussion of the general mortgage loan terms in Note 5
to the Company's 2000 Form 10-K.
The table on pages 11 and 12 provides certain information with respect to
the bonds held by the Company at June 30, 2001 and December 31, 2000.
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, the Company pledged investments as collateral for the term debt
financing completed in March 1999. At June 30, 2001 the total carrying amount of
the mortgage revenue bonds pledged as collateral was $371.8 million. The Company
also purchased other investments, which it has pledged as additional collateral
for the senior interests in certain P-FLOATs(sm) trusts. These assets, totaling
$8.0 million at June 30, 2001, are included in restricted assets on the balance
sheet.
June 30, 2001
------------------------------------------------------
Base Face Amortized Unrealized Fair
Investment in Mortgage Year Interest Maturity Amount Cost Gain (Loss) Value
Revenue Bonds Acquired Rate (12) Date (000s) (000s) (000s) (000s)
- ----------------------------- ---------- ---------- --------- ------------ -------------- -------------- ----------
Participating Bonds (1):
Alban Place (2),(4),(5) 1986 7.875 Oct. 2008 $ 10,065 $ 10,065 $ 944 $ 11,009
Arlington (10) 2000 8.100 Jan. 2031 12,625 12,562 189 12,751
Cobblestone (4),(10) 1999 7.125 Aug. 2039 6,800 6,732 (272) 6,460
Cool Springs (10) 2000 7.750 Aug. 2030 14,472 14,313 304 14,617
Creekside Village (2),(4),(5),(6) 1987 7.500 Nov. 2009 11,760 7,396 638 8,034
Crossings (4),(8) 1997 8.000 Jul. 2007 6,801 6,709 476 7,185
Emerald Hills (2),(4),(5) 1988 7.750 Apr. 2008 6,725 6,725 1,823 8,548
Jefferson Commons (4),(10) 2000 8.200 Jan. 2031 19,873 19,574 1,044 20,618
Lakeview Garden (2),(4),(5),(6) 1987 7.750 Aug. 2007 9,003 4,918 964 5,882
Newport On Seven (2),(4),(5),(6) 1986 8.125 Aug. 2008 10,125 7,898 2,947 10,845
North Pointe (2),(4),(6) 1986 7.875 Aug. 2006 25,185 12,739 9,750 22,489
Northridge Park (2),(4),(5) 1987 7.500 Jun. 2012 8,815 8,815 804 9,619
Stone Mountain (4),(8),(10) 1997 7.875 Oct. 2027 - - - -
Timber Ridge (4),(10) 2000 7.950 Jan. 2036 5,215 5,119 44 5,163
Villas at LaRiveria (4),(10) 1999 7.125 Jun. 2034 8,850 8,744 150 8,894
------------ -------------- ----------- ------------
Subtotal participating bonds 156,314 132,309 19,805 152,114
------------ -------------- ----------- ------------
Non-Participating Bonds:
Baytown (10) 2000 7.750 Jun. 2030 5,000 4,950 (200) 4,750
Bedford Park (9) 2000 8.000 Nov. 2032 9,325 9,232 188 9,420
Buchanan Bay (4) 2001 5.830 Dec. 2031 10,725 9,098 876 9,974
Charter House 1996 7.450 Jul. 2026 25 25 (3) 22
Cielo Vista (4),(10) 1999 7.125 Sep. 2034 9,480 9,408 (686) 8,722
Country Club (10) 1999 7.250 Aug. 2029 2,478 2,448 (118) 2,330
Delta Village (4),(10) 1999 7.125 Jun. 2035 2,011 1,976 (85) 1,891
Elmbrook-Golden (10) 2000 7.800 May. 2035 2,799 2,745 (2) 2,743
Gannon - Cedar Run (4),(10) 1998 7.125 Dec. 2025 13,200 13,238 94 13,332
Gannon - Dade (9) 1998 7.125 Dec. 2029 54,948 55,226 219 55,445
Gannon -
Whispering Palms (9) 1998 7.125 Dec. 2029 12,603 12,663 (134) 12,529
Gannon Bond (4),(10) 1998 7.125 Dec. 2029 3,500 3,500 35 3,535
Hidden Valley (4),(10) 1996 8.250 Jan. 2026 1,630 1,630 16 1,646
Hunter's Glen (4) 2001 6.350 Dec. 2029 10,740 9,111 1,629 10,740
Honey Creek (9) 2000 7.625 Jul. 2035 20,485 20,277 (1,021) 19,256
Lake Piedmont (4),(6),(10) 1998 7.725 Apr. 2034 19,118 18,016 (4,633) 13,383
Mountain View
(Willowgreen) (2),(4),(6) 2000 8.000 Dec. 2010 9,275 6,769 2,726 9,495
Oakbrook (4),(10) 1996 8.200 Jul. 2026 3,085 3,114 (29) 3,085
Oakmont/Towne Oaks (4),(10) 1998 7.200 Jan. 2034 11,229 11,207 (764) 10,443
Orangevale (4),(10) 1998 7.000 Oct. 2013 2,271 2,271 (57) 2,214
Paola (10) 1999 7.250 Aug. 2029 1,045 1,032 (71) 961
Parkwood (4),(10) 1999 7.125 Jun. 2035 3,910 3,841 836 4,677
Riverset Phase II 1996 9.500 Oct. 2019 110 105 8 113
Sahuarita (4),(10) 1999 7.125 Jun. 2029 2,115 2,104 (158) 1,946
Santa Fe Springs (4) 2000 (14) Jun. 2025 11,700 11,455 (925) 10,530
Shadowbrook (4),(10) 1999 6.850 Jun. 2029 5,780 5,767 (334) 5,433
Southwinds (4),(10) 2000 8.000 Sept 2030 4,350 4,263 44 4,307
Stone Mountain (4),(8),(10) 1997 7.875 Oct. 2027 33,900 34,071 (1) 34,070
Torries Chase (4),(10) 1996 8.150 Jan. 2026 2,000 2,000 60 2,060
University Courtyard (4),(10) 2000 7.250 Mar. 2040 9,850 9,749 (194) 9,555
Villa Hialeah -
refunded (4), (5) 1999 6.000 Aug. 2019 10,250 8,005 1,323 9,328
Western Hills (4),(10) 1998 7.000 Dec. 2029 3,027 3,027 (228) 2,799
Wheeler Creek (4),(10) 1998 (13) Jan. 2003 10,489 10,377 216 10,593
Woodmark (4),(10) 1999 7.125 Jun. 2039 10,200 10,072 128 10,200
------------ -------------- ----------- ------------
Subtotal non-participating bonds 312,653 302,772 (1,245) 301,527
------------ -------------- ----------- ------------
December 31, 2000
-----------------------------------------------------
Base Face Amortized nrealized Fair
Investment in Mortgage Year Interest Maturity Amount Cost Gain (Loss) Value
Revenue Bonds Acquired Rate (12) Date (000s) (000s) (000s) (000s)
- ----------------------------- ---------- ---------- --------- ------------ -------------- -------------- ----------
Participating Bonds (1):
Alban Place (2),(4),(5) 1986 7.875 Oct. 2008 $ 10,065 $ 10,065 $ 68 $ 10,133
Arlington (10) 2000 8.100 Jan. 2031 12,625 12,562 63 12,625
Cobblestone (4),(10) 1999 7.125 Aug. 2039 6,800 6,732 102 6,834
Cool Springs (10) 2000 7.750 Aug. 2030 14,472 14,313 87 14,400
Creekside Village (2),(4),(5),(6) 1987 7.500 Nov. 2009 11,760 7,396 501 7,897
Crossings (4),(8) 1997 8.000 Jul. 2007 6,838 6,746 494 7,240
Emerald Hills (2),(4),(5) 1988 7.750 Apr. 2008 6,725 6,725 2,027 8,752
Jefferson Commons (4),(10) 2000 8.200 Jan. 2031 19,900 19,602 298 19,900
Lakeview Garden (2),(4),(5),(6) 1987 7.750 Aug. 2007 9,003 4,918 1,066 5,984
Newport On Seven (2),(4),(5),(6) 1986 8.125 Aug. 2008 10,125 7,898 2,889 10,787
North Pointe (2),(4),(6) 1986 7.875 Aug. 2006 25,185 12,739 8,918 21,657
Northridge Park (2),(4),(5) 1987 7.500 Jun. 2012 8,815 8,815 1,125 9,940
Stone Mountain (4),(8),(10) 1997 7.875 Oct. 2027 33,900 34,080 (10) 34,070
Timber Ridge (4),(10) 2000 7.950 Jan. 2036 5,215 5,119 96 5,215
Villas at LaRiveria (4),(10) 1999 7.125 Jun. 2034 8,850 8,744 150 8,894
------------ -------------- ----------- --------------
Subtotal participating bonds 190,278 166,454 17,874 184,328
------------ -------------- ----------- --------------
Non-Participating Bonds:
Baytown (10) 2000 7.750 Jun. 2030 5,000 4,950 (100) 4,850
Bedford Park (9) 2000 8.000 Nov. 2032 9,325 9,232 (274) 8,958
Buchanan Bay (4) 2001 5.830 Dec. 2031 - - - -
Charter House 1996 7.450 Jul. 2026 25 25 - 25
Cielo Vista (4),(10) 1999 7.125 Sep. 2034 9,500 9,427 (22) 9,405
Country Club (10) 1999 7.250 Aug. 2029 2,485 2,454 (93) 2,361
Delta Village (4),(10) 1999 7.125 Jun. 2035 2,011 1,976 (85) 1,891
Elmbrook-Golden (10) 2000 7.800 May. 2035 2,800 2,746 (2) 2,744
Gannon - Cedar Run (4),(10) 1998 7.125 Dec. 2025 13,200 13,238 (302) 12,936
Gannon - Dade (9) 1998 7.125 Dec. 2029 54,999 55,277 (1,137) 54,140
Gannon -
Whispering Palms (9) 1998 7.125 Dec. 2029 12,676 12,737 (362) 12,375
Gannon Bond (4),(10) 1998 7.125 Dec. 2029 3,500 3,500 (53) 3,447
Hidden Valley (4),(10) 1996 8.250 Jan. 2026 1,640 1,640 16 1,656
Hunter's Glen (4) 2001 6.350 Dec. 2029 - - - -
Honey Creek (9) 2000 7.625 Jul. 2035 20,485 20,277 (509) 19,768
Lake Piedmont (4),(6),(10) 1998 7.725 Apr. 2034 19,118 18,016 (4,439) 13,577
Mountain View
(Willowgreen) (2),(4),(6) 2000 8.000 Dec. 2010 9,275 6,769 2,598 9,367
Oakbrook (4),(10) 1996 8.200 Jul. 2026 3,105 3,134 95 3,229
Oakmont/Towne Oaks (4),(10) 1998 7.200 Jan. 2034 11,249 11,227 (203) 11,024
Orangevale (4),(10) 1998 7.000 Oct. 2013 2,328 2,328 (58) 2,270
Paola (10) 1999 7.250 Aug. 2029 1,048 1,035 (71) 964
Parkwood (4),(10) 1999 7.125 Jun. 2035 3,910 3,842 604 4,446
Riverset Phase II 1996 9.500 Oct. 2019 110 105 8 113
Sahuarita (4),(10) 1999 7.125 Jun. 2029 2,120 2,108 (200) 1,908
Santa Fe Springs (4) 2000 (14) Jun. 2025 15,100 11,455 (281) 11,174
Shadowbrook (4),(10) 1999 6.850 Jun. 2029 5,780 5,767 13 5,780
Southwinds (4),(10) 2000 8.000 Sept 2030 4,350 4,263 43 4,306
Stone Mountain (4),(8),(10) 1997 7.875 Oct. 2027 - - - -
Torries Chase (4),(10) 1996 8.150 Jan. 2026 2,010 2,010 60 2,070
University Courtyard (4),(10) 2000 7.250 Mar. 2040 9,850 9,749 (47) 9,702
Villa Hialeah -
refunded (4), (5) 1999 6.000 Aug. 2019 10,250 8,005 1,630 9,635
Western Hills (4),(10) 1998 7.000 Dec. 2029 3,033 3,033 (227) 2,806
Wheeler Creek (4),(10) 1998 (13) Jan. 2003 8,633 8,521 (350) 8,171
Woodmark (4),(10) 1999 7.125 Jun. 2039 10,200 10,072 (229) 9,843
------------ -------------- ----------- -------------
Subtotal non-participating bonds 259,115 248,918 (3,977) 244,941
------------ -------------- ----------- -------------
June 30, 2000
--------------------------------------- -------------
Base Face Amortized nrealized Fair
Investment in Mortgage Year Interest Maturity Amount Cost Gain (Loss) Value
Revenue Bonds Acquired Rate (12) Date (000s) (000s) (000s) (000s)
- ----------------------------- ---------- ---------- --------- ------------ -------------- ----------- -------------
Participating Subordinate Bonds (1):
Barkley Place (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,480 2,445 3,438 5,883
Gilman Meadows (3),(4),(6),(10) 1995 3.000 Jan. 2030 2,875 2,530 2,364 4,894
Hamilton Chase (3),(4),(6),(10) 1995 3.000 Jan. 2030 6,250 4,140 (515) 3,625
Mallard Cove I (3),(4),(6),(10) 1995 3.000 Jan. 2030 1,670 798 331 1,129
Mallard Cove II (3),(4),(6),(10) 1995 3.000 Jan. 2030 3,750 2,429 832 3,261
Meadows (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,635 3,716 279 3,995
Montclair (3),(4),(6),(10) 1995 3.000 Jan. 2030 6,840 1,691 1,760 3,451
Newport Village (3),(4),(6),(10) 1995 3.000 Jan. 2030 4,175 2,973 2,174 5,147
Nicollet Ridge (3),(4),(6),(10) 1995 3.000 Jan. 2030 12,415 6,075 3,209 9,284
Riverset Phase II (6) 1996 10.000 Oct. 2019 1,489 - 1,948 1,948
Steeplechase (3),(4),(6),(10) 1995 16.000 Jan. 2030 5,300 4,224 (539) 3,685
Whispering Lake (3),(4),(6),(10) 1995 3.000 Jan. 2030 8,500 4,779 3,929 8,708
------------- -------------- ----------- -------------
Subtotal participating subordinate bonds 60,379 35,800 19,210 55,010
------------- -------------- ----------- -------------
Non-Participating Subordinate Bonds:
CapReit B 2000 11.000 Sept 2005 - - - -
Cinnamon Ridge (6) 1999 5.000 Jan. 2015 1,832 1,218 28 1,246
Farmington Meadows (10) 1999 8.000 Aug. 2039 1,987 1,943 45 1,988
Independence Ridge (10) 1996 12.500 Dec. 2015 1,045 1,045 105 1,150
Locarno (10) 1996 12.500 Dec. 2015 675 675 41 716
Olde English Manor (11) 1998 10.570 Nov. 2033 1,273 1,268 (160) 1,108
Rillito B Series (6),(7) 2000 13.000 Dec. 2033 1,044 1,241 (343) 898
Winter Oaks B bond (6),(10) 1999 7.500 Jul. 2022 2,184 2,133 29 2,162
Winter Oaks C bond (6),(10) 1999 10.000 Jul. 2022 2,141 1,654 337 1,991
------------- -------------- ----------- ------------
Subtotal non-participating subordinate bonds 12,181 11,177 82 11,259
------------- -------------- ----------- ------------
Total investment in mortgage revenue bonds $ 541,527 $ 482,058 $ 37,852 $ 519,910
============= ============== =========== ============
December 31, 2000
--------------------------------------- -------------
Base Face Amortized nrealized Fair
Investment in Mortgage Year Interest Maturity Amount Cost Gain (Loss) Value
Revenue Bonds Acquired Rate (12) Date (000s) (000s) (000s) (000s)
- ----------------------------- ---------- ---------- --------- ------------ -------------- ----------- -------------
Participating Subordinate Bonds (1):
Barkley Place (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,480 2,445 3,407 5,852
Gilman Meadows (3),(4),(6),(10) 1995 3.000 Jan. 2030 2,875 2,530 2,221 4,751
Hamilton Chase (3),(4),(6),(10) 1995 3.000 Jan. 2030 6,250 4,140 (468) 3,672
Mallard Cove I (3),(4),(6),(10) 1995 3.000 Jan. 2030 1,670 798 309 1,107
Mallard Cove II (3),(4),(6),(10) 1995 3.000 Jan. 2030 3,750 2,429 758 3,187
Meadows (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,635 3,716 276 3,992
Montclair (3),(4),(6),(10) 1995 3.000 Jan. 2030 6,840 1,691 1,958 3,649
Newport Village (3),(4),(6),(10) 1995 3.000 Jan. 2030 4,175 2,973 2,016 4,989
Nicollet Ridge (3),(4),(6),(10) 1995 3.000 Jan. 2030 12,415 6,075 3,267 9,342
Riverset Phase II (6) 1996 10.000 Oct. 2019 1,489 - 1,863 1,863
Steeplechase (3),(4),(6),(10) 1995 16.000 Jan. 2030 5,300 4,224 (591) 3,633
Whispering Lake (3),(4),(6),(10) 1995 3.000 Jan. 2030 8,500 4,779 3,839 8,618
------------ -------------- ----------- -------------
Subtotal participating subordinate bonds 60,379 35,800 18,855 54,655
------------ -------------- ----------- -------------
Non-Participating Subordinate Bonds:
CapReit B 2000 11.000 Sept 2005 5,000 4,950 100 5,050
Cinnamon Ridge (6) 1999 5.000 Jan. 2015 1,832 1,218 28 1,246
Farmington Meadows (10) 1999 8.000 Aug. 2039 1,991 1,946 55 2,001
Independence Ridge (10) 1996 12.500 Dec. 2015 1,045 1,045 105 1,150
Locarno (10) 1996 12.500 Dec. 2015 675 675 41 716
Olde English Manor (11) 1998 10.570 Nov. 2033 1,273 1,268 (173) 1,095
Rillito B Series (6),(7) 2000 13.000 Dec. 2033 1,044 1,241 (343) 898
Winter Oaks B bond (6),(10) 1999 7.500 Jul. 2022 2,184 2,133 7 2,140
Winter Oaks C bond (6),(10) 1999 10.000 Jul. 2022 2,141 1,654 316 1,970
------------ -------------- ----------- -------------
Subtotal non-participating subordinate bonds 17,185 16,130 136 16,266
------------ -------------- ----------- -------------
Total investment in mortgage revenue bonds 526,957 $ 467,302 $ 32,888 $ 500,190
-=========== ============== =========== =============
(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, 2001.
(5) TE Bond Sub or its subsidiaries own an 87% interest in these investments.
(6) At June 30, 2001 these bonds were on non-accrual status.
(7) The underlying bonds are held in a trust; TE Bond Sub owns an 18%
subordinate interest in the trust.
(8) The Stone Mountain bond was reissued on April 2001. Prior to the reissuance
the bond was participating. Following the transaction, the new reissued
bond is non-participating.
(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.
(10)Investments held by TE Bond Sub or its subsidiaries.
(11)The underlying bonds are held in a trust; TE Bond Sub owns an 81% senior
interest in the trust.
(12)The base interest rate represents the permanent base interest rate on the
investment as of June 30, 2001.
(13)The permanent interest rate resets monthly based on 90% of the 30 day
treasury bill.
(14)The interest rate on the Santa Fe bond will reset in May 2002. At that time
the bond will be remarketed at par or a rate not exceeding a rate that will
allow the property to perform at a 1.05 debt service coverage on the bond.
NOTE 3 - SECURITIZATION TRANSACTIONS
The Company primarily securitizes mortgage bonds in its portfolio through
the Merrill Lynch P-FLOATs(sm) program. Through this program, the Company sells
bonds to Merrill Lynch or structures a transaction whereby Merrill Lynch buys
bonds from third parties. Merrill Lynch in turn, deposits the bonds into a
trust, which is created to hold these assets. Subsequently, these bonds are
credit enhanced by Merrill Lynch. Two types of securities, P-FLOATs(sm) and
RITES(sm), are created for each asset deposited into the trust. The P-FLOATs(sm)
are short-term floating rate interests in the trust that have priority on the
cash flows of the mortgage bonds and bear interest at rates that are reset
weekly by the remarketing agent, Merrill Lynch. The P-FLOATs(sm) are sold to
qualified third party investors. When the Company sells a bond to Merrill Lynch,
the Company receives the proceeds from the sale of the P-FLOATs(sm), less
certain transaction costs, and retains the residual interests in the trust, the
RITES(sm). When Merrill Lynch buys the bond directly, the Company purchases the
RITES(sm). The RITES(sm) are the subordinate security and receive the residual
interest on the bond after the payment of all fees and the P-FLOATs(sm)
interest.
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 collateralizes the senior interests in the P-FLOATs(sm)
trusts.
For financial reporting purposes, transactions where the Company
securitizes a bond through the P-FLOATs(sm) program and subsequently purchases a
RITES(sm) interest are accounted for in accordance with FAS 140. Under FAS 140,
the accounting for these transactions is partially dependent on certain call
provisions granted to the RITES(sm) holder. If the RITES(sm) holder is granted a
call provision under the terms of the transaction, then effective control over
the transferred assets has not been relinquished and the transaction is
accounted for as a borrowing. When the RITES(sm) holder is not granted a call
provision and effective control has been relinquished, the transaction is
accounted for as a sale and the Company recognizes gains and losses on the sale
of its bonds to Merrill Lynch. The portion of the unrealized gain or loss on a
bond that is recognized as a result of the sale is determined by allocating the
net amortized cost at the time of sale between the corresponding P-FLOATs(sm)
and RITES(sm) based upon their relative fair values, in accordance with FAS 140.
The Company may also structure transactions whereby Merrill Lynch buys bonds
from third parties and the Company subsequently purchases RITES(sm) investments
related to the bonds. In this case, the Company may retain the call provision
associated with its investment in the RITES(sm) position without requiring
borrowing treatment.
The Company did not securitize any bonds in the second quarter of 2001.
NOTE 4 - OTHER BOND RELATED INVESTMENTS
At June 30, 2001, the Company's other bond related investments are
primarily investments in RITES(sm). At December 31, 2000, the Company's other
bond related investments also included investments in interest rate swaps and
total return swaps. In conjunction with the adoption of FAS 133 on January 1,
2001, the Company's investments in interest rate swaps and total return swaps
were reclassified to investments in derivative financial instruments (see
further discussion in Note 5). The table on page 15 provides certain information
with respect to the other bond related investments held by the Company at June
30, 2001 and December 31, 2000.
During the second quarter of 2001, the Company purchased one RITES(sm)
interest with a par value of $5,000 for $31,000.
RITES(sm) Valuation Analysis
The fair value of a RITES(sm) investment is derived from the quote on the
underlying bond reduced by the outstanding corresponding P-FLOATs(sm) face
amount. The Company bases the fair value of the underlying bond, which has a
limited market, on quotes from external sources, such as brokers, for these or
similar bonds. The fair value of the underlying bond includes a prepayment risk
factor. The prepayment risk factor is reflected in the fair value of the bond by
assuming the bond will prepay at the most adverse time to the Company given
current market rates and estimates of future market rates. Based on this, an
adverse change in prepayment risk would not have an effect on the fair value of
the Company's RITES investments. In addition, the RITES(sm) investments are not
subject to prepayment risk as the term of the securitization trusts is only for
a period during which the underlying bond cannot be prepaid. Based on historical
information, credit losses were estimated to be zero.
At June 30, 2001, a 10% and 20% adverse change in the discount rate used to
estimate the fair value of the Company's RITES(sm) would have the following
impact:
(000s) RITES(sm)
Fair value of retained interests $7,645
Residual cash flows discount rate (annual rate) 5.0% - 8.6%
Impact on fair value of 10% adverse change $19,726
Impact on fair value of 20% adverse change $37,618
The sensitivity analysis presented above is hypothetical in nature and
presented for information purposes only. The analysis shows the effect on fair
value of a variation in one assumption and is calculated without considering the
effect of changes in any other assumption. In reality, changes in one assumption
may affect the others, which may magnify or offset the sensitivities.
---------------------------------------------------------------
Face Amortized Unrealized Fair Value
Year Amount Cost Gain (Loss) Assets Liabilities(4)
Other Bond Related Investments: Acquired (000s) (000s) (000s) (000s) (000s)
- ----------------------------------------- ------------ --------- ---------- ------------ ------------ --------------
Investment in RITES:
Barrington (1) 2000 $ 5 $ 5 $ 273 $ 278 $ -
Briarwood (1) 1999 135 104 467 571 -
Charter House (1) 1996 80 221 736 957 -
Cinnamon Ridge (1) 2000 5 329 1,574 1,903 -
Fort Branch (1) 2000 8 8 370 378 -
Indian Lakes (1) 1997 3,195 3,290 772 4,062 -
LaPaloma (1) 1999 8 8 (438) - (430)
LeMirador (Coleman Senior) (1) 1999 165 4 141 145 -
Meridian at Bridgewater (1) 1999 5 40 (35) 5 -
Museum Towers 2001 5 5 105 110 -
Oklahoma City (1) 1998 195 236 (2,771) - (2,535)
Olde English Manor (1) 1999 76 94 (418) - (324)
Palisades Park (1) 1999 90 80 128 208 -
Park at Landmark 2000 5 15 242 257 -
Pavilion (1) 1999 5 5 (255) - (250)
Queen Anne IV (1) 1998 65 65 16 81 -
Rancho Mirage/Castle Hills (1) 2000 5 5 - 5 -
Rillito Village (1) 1999 65 64 (375) - (311)
Riverset Phase I (1) 2000 5 1,072 1,749 2,821 -
Riverset Phase II (1) 1996 75 114 149 263 -
Riverview (1) 2000 5 5 213 218 -
Sienna (Italian Gardens) (1) 1999 160 - 20 20 -
Silver Springs (1) 2000 5 32 384 416 -
Sonterra (1) 1998 5 32 (908) - (876)
Southgate Crossings (1) 1997 77 468 1,392 1,860 -
Southwood (1) 1997 425 315 (2,223) - (1,908)
Village at Sun Valley (1) 2000 5 5 140 145 -
Village Green (1) 2000 5 25 (454) - (429)
Woodglen (1) 1999 5 33 (28) 5 -
--------- ---------- ------------ ------------ --------------
Subtotal investment in RITES 4,889 6,679 966 14,708 (7,063)
--------- ---------- ------------ ------------ --------------
---------- ------------ ------------ --------------
Interest rate agreements (2), (5) Various - - - -
---------- ------------ ------------ --------------
Investment in total return swaps (3), (5):
Club West (3/30/99 - 7/19/02) 1999 - - - -
Willow Key (3/30/99 - 7/19/02) 1999 - - - -
--------- ---------- ------------ ------------ --------------
Total investment in total return swaps - - - - -
--------- ---------- ------------ ------------ --------------
Total other bond related investments $ 6,679 $ 966 $ 14,708 $ (7,063)
========== ============ ============ ==============
December 31, 2000
---------------------------------------------------------------
Face Amortized Unrealized Fair Value
Year Amount Cost Gain (Loss) Assets Liabilities(4)
Other Bond Related Investments: Acquired (000s) (000s) (000s) (000s) (000s)
- ----------------------------------------- ------------ --------- ---------- ------------ ------------ --------------
Investment in RITES:
Barrington (1) 2000 $ 5 $ 4 $ 1 $ 5 $ -
Briarwood (1) 1999 135 104 618 722 -
Charter House (1) 1996 80 242 684 926 -
Cinnamon Ridge (1) 2000 5 330 1,573 1,903 -
Fort Branch (1) 2000 8 8 123 131 -
Indian Lakes (1) 1997 3,250 3,356 864 4,220 -
LaPaloma (1) 1999 8 8 (263) - (255)
LeMirador (Coleman Senior) (1) 1999 165 4 71 75 -
Meridian at Bridgewater (1) 1999 5 44 (181) - (137)
Museum Towers 2001 - - - - -
Oklahoma City (1) 1998 195 239 (2,384) - (2,145)
Olde English Manor (1) 1999 76 95 (201) - (106)
Palisades Park (1) 1999 100 92 (276) - (184)
Park at Landmark 2000 5 20 69 89 -
Pavilion (1) 1999 5 5 (357) - (352)
Queen Anne IV (1) 1998 65 65 (145) - (80)
Rancho Mirage/Castle Hills (1) 2000 5 5 192 197 -
Rillito Village (1) 1999 65 64 (407) - (343)
Riverset Phase I (1) 2000 5 1,076 1,717 2,793 -
Riverset Phase II (1) 1996 75 189 73 262 -
Riverview (1) 2000 5 4 1 5 -
Sienna (Italian Gardens) (1) 1999 160 - 30 30 -
Silver Springs (1) 2000 5 34 (29) 5 -
Sonterra (1) 1998 5 32 (672) - (640)
Southgate Crossings (1) 1997 83 501 1,503 2,004 -
Southwood (1) 1997 430 309 (1,561) - (1,252)
Village at Sun Valley (1) 2000 5 5 70 75 -
Village Green (1) 2000 5 26 (16) 10 -
Woodglen (1) 1999 5 35 (243) - (208)
--------- ---------- ------------ ------------ ----------
Subtotal investment in RITES 4,960 6,896 854 13,452 (5,702)
--------- ---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
Interest rate agreements (2), (5) Various - (10,438) 5 (10,443)
---------- ------------ ------------ ----------
Investment in total return swaps (3), (5):
Club West (3/30/99 - 7/19/02) 1999 7,960 - (680) - (680)
Willow Key (3/30/99 - 7/19/02) 1999 17,440 - (1,159) - (1,159)
--------- ---------- ------------ ------------ ----------
Total investment in total return swaps 25,400 - (1,839) - (1,839)
--------- ---------- ------------ ------------ ----------
Total other bond related investments $ 6,896 $(11,423) $ 13,457 $ (17,984)
========= ===========- ============ ==========
(1) Investment held by TE Bond Sub or its subsidiaries.
(2) The Company enters into interest rate swap contracts to hedge against
interest rate exposure on the Company's investment in RITES. The amounts
disclosed represent the net fair values of all the Company's swaps at the
reporting date.
(3) Face amount represents notional amount of swap agreements and the dates
represent the effective date and the termination date of the swap.
(4) The aggregate negative fair value of the investments is included in
liabilities 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) Upon the adoption of FAS 133 on January 1, 2001, the Company's investment
in interest rate swaps and total return swaps was reclassified to
investment in derivative financial instruments (see Note 5).
NOTE 5 - INVESTMENT IN DERIVATIVE FINANCIAL INSTRUMENTS
Upon adoption of FAS 133 on January 1, 2001, the Company's investment in
interest rate swaps, total return swaps and put option contracts was
reclassified from investment in other bond related investments to investment in
derivative financial instruments (see further discussion in Note 1). The table
on page 18 provides certain information with respect to the derivative financial
instruments held by the Company at June 30, 2001.
Interest rate swaps
Since the bonds securitized generally bear fixed rates of interest, the
floating rate residual interests in the trust created by the securitization may
subject the Company to interest rate risks. To reduce the Company's exposure to
interest rate risks on residual interests retained, the Company may enter into
interest rate swaps. Historically, the Company has attempted to offset
substantially all of its floating interest rate exposure; however, from time to
time, a portion of the Company's floating rate exposure may not have been fully
mitigated by hedging instruments. As a result, changes in interest rates could
result in either an increase or decrease in the Company's interest income and
cash flows associated with these investments.
Under the interest rate swap agreements, the Company is obligated to pay
Merrill Lynch Capital Services, Inc. or other counterparties (the
"Counterparty") a fixed rate. In return, the Counterparty will pay the Company a
floating rate equivalent to the BMA Municipal Swap Index, an index of weekly
tax-exempt variable rate issues. Net swap payments received, if any, will be
taxable income, even though the investments being offset pay tax-exempt
interest. The Company recognizes taxable capital gains or losses upon the
termination of an interest rate swap contract. See further discussion in Note 8
to the Company's 2000 Form 10-K.
Total Return Swaps
To generate short-term financing proceeds, the Company occasionally enters
into total return swaps with Merrill Lynch that replicate the total return on a
bond or loan financed at a then current market interest rate ("financing rate").
During the term of the swaps, the Company receives net taxable income equal to
the excess of the interest rate on the underlying investment over the financing
rate. To the extent that the financing rate exceeds the interest rate on the
underlying investment, the Company is obligated to pay Merrill Lynch the excess
of the financing rate over the interest rate on the underlying investment. In
addition to the net taxable income received, total return swaps include a cash
settlement at termination, whereby the Company will pay to (receive from)
Merrill Lynch an amount equal to the decline (increase) in the market value of
the underlying bond or loan. The Company held two total return swaps at June 30,
2001.
Put Options
The Company has occasionally entered into put option agreements with
Merrill Lynch Capital Services, Inc. whereby Merrill Lynch has the right to sell
to the Company, and the Company has the obligation to buy, an underlying
investment at a specified price. Under the put options, the Company receives an
annual payment for assuming the purchase obligation and providing asset
management services on the underlying investments. The purchase price can be
reduced in the event of a material adverse change (as defined in the put
agreements). At June 30, 2001, the Company had four put options with Merrill
Lynch with a fair value of zero. The Company's aggregate obligation under these
put options is $107.3 million at June 30, 2001.
The Company has occasionally entered into put option agreements with
Merrill Lynch Capital Services, Inc. whereby Merrill Lynch has the right to sell
to the Company, and the Company has the obligation to buy, an underlying
investment at a specified price. Under the put options, the Company receives an
annual payment for assuming the purchase obligation and providing asset
management services on the underlying investments. The purchase price can be
reduced in the event of a material adverse change (as defined in the put
agreements). At June 30, 2001, the Company had four put options with Merrill
Lynch with a fair value of zero. The Company's aggregate obligation under these
put options is $107.3 million at June 30, 2001.
June 30, 2001
--------------------------------------------
Face Fair Value
Year Amount Assets Liabilities (3)
Investment in derivative financial instruments (4): Acquired (000s) (000s) (000s)
------------------------------- ------------- -------------
Interest rate agreements (1) .......................... Various $ - $ (14,365)
------------- -------------
Investment in total return swaps (2):
Club West (3/30/99 - 7/19/02) .......... 1999 $ 7,960 - (601)
Willow Key (3/30/99 - 7/19/02) .......... 1999 17,440 - (905)
------------ ------------- -------------
Total investment in total return swaps ................ $ 25,400 - (1,506)
============ ------------- -------------
Total investment in derivative financial instruments .. $ - $ (15,871)
============= =============
(1) The Company enters into interest rate swap contracts to offset against
interest rate exposure on the Company's investment in RITES. The amounts
disclosed represent the net fair values of all the Company's swaps at the
reporting date.
(2) Face amount represents notional amount of swap agreements and the dates
represent the effective date and the termination date of the swap.
(3) The aggregate negative fair value of the investments is included in
liabilities 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.
(4) Upon the adoption of FAS 133 on January 1, 2001, the Company's investment
in interest rate swaps and total return swaps was reclassified to
investment in derivative financial instruments (see Note 5).
NOTE 6 - LOANS RECEIVABLE
The Company's loans receivable primarily consist of construction loans,
permanent loans, taxable loans and other loans. The general terms of the loans
owned by the Company are discussed in Note 9 to the Company's 2000 Form 10-K.
The following table summarizes loans receivable by loan type at June 30, 2001
and December 31, 2000.
(000s)
Loan Type June 30, December 31,
2001 2000
--------- ----------
Taxable construction loans ............... $ 244,847 $ 270,481
Permanent Loans .......................... 61,652 39,821
Taxable loans ............................ 30,312 18,416
Other loans .............................. 26,228 21,424
363,039 350,142
Allowance for loan losses ................ (830) (851)
---------- ----------
Total .................................... $ 362,209 $ 349,291
NOTE 7 - NOTES PAYABLE
The Company's notes payable consist primarily of notes payable and advances
under line of credit arrangements. The notes payable are borrowings by Midland
Financial Holdings, Inc. ("Midland") used to finance construction lending and
working capital needs. The general terms of the Company's notes payable are
discussed in Note 12 to the Company's 2000 Form 10-K. The following table
summarizes notes payable at June 30, 2001 and December 31, 2000.
(000s) June 30, December 31,
2001 2000
---------- ------------
Notes payable ................................ $191,537 $234,830
Group Trust Warehouse Facility and
Lines of Credit ........................ 51,355 26,225
Residential Funding Warehouse
Facility .............................. 54,481 54,481
Bank Lines of Credit ......................... 4,000 8,539
Other ........................................ 313 5,084
---------- ------------
$301,686 $329,159
========== ============
NOTE 8 - PREFERRED SHAREHOLDERS' EQUITY IN A SUBSIDIARY COMPANY
The Company's preferred shareholders' equity in a subsidiary represents two
classes of preferred shares issued by TE Bond Sub, Series A and Series B
Preferred Shares. The income allocable to the Series A and Series B Preferred
Shares is senior to the Company's ownership interest in TE Bond Sub. Therefore,
only income from TE Bond Sub available after payment of the cumulative
distributions of the Series A and Series B Preferred Shares is allocated to the
Company. The following table provides a summary of
certain terms of the Series A and Series B Preferred Shares.
Series A Series B
Preferred Shares Preferred Shares
Issue date May 27, 1999 June 2, 2000
Number of shares 42 30
Par amount per share $2,000,000 $2,000,000
Dividend rate 6.875% 7.75%
First remarketing date June 30, 2009 November 1, 2010
Mandatory tender date June 30, 2009 November 1, 2010
Redemption date June 30, 2049 June 30, 2050
The following table reflects the composition of the Series A and Series B
Preferred Shareholders' equity in TE Bond Sub.
Series A Series B
Preferred Shares Preferred Shares Total
---------------- ------------------- ---------------
Balance, December 31, 2000 $80,060 $57,604 $137,664
Offering costs adjustment - (9) (9)
Income allocable to preferred shares 2,887 2,325 5,212
Distributions (2,887) (2,325) (5,212)
---------------- ------------------- ---------------
Balance, June 30, 2001 $80,060 $57,595 $137,655
================ =================== ===============
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 2 and in footnotes to the Other Bond Related Investments table in Note 4.
The fair value of such assets aggregated $451.1 million at June 30, 2001.
NOTE 9 - PREFERRED SHARE REDEMPTION
In accordance with the Company's operating agreement, the Preferred Shares
and the Preferred Capital Distribution Shares ("Preferred CD Shares") (see
further discussion in Note 15 to the Company's 2000 Form 10-K) must be partially
redeemed when any bond attributable to the shares is sold, or beginning in the
year 2000, when any bond attributable to the shares reaches par value (which
includes accrued but unpaid base interest under the original bond terms and
accrued but unpaid interest under the then current bond terms) based on receipt
of an appraisal securing the bond. The Company must redeem the Preferred Shares
and Preferred CD Shares within six months of the occurrence of a redemption
event. Four bonds attributable to Series I Preferred Shares and Preferred CD
Shares and four bonds attributable to Series II Preferred Shares and Preferred
CD Shares reached par value in December 2000. As a result, in June of 2001, the
Company redeemed approximately 26% and 56% of the Series I and Series II
Preferred Shares and Preferred CD Shares, respectively.
NOTE 10 - EARNINGS PER SHARE
The table on page 22 reconciles the numerators and denominators in the
basic and diluted EPS calculations for common shares for the three months ended
June 30, 2001 and 2000.
NOTE 11 - DISTRIBUTIONS
On July 19, 2001, the Board of Directors declared distributions for the
three months ended June 30, 2001 for shareholders of record on July 30, 2001.
The payment date was August 10, 2001. The per share distributions are shown on
the table on page 23.
NOTE 12 - BUSINESS SEGMENT REPORTING
In the fourth quarter of 1999, the Company adopted Financial Accounting
Standards Board Statement No. 131, "Disclosures About Segments of an Enterprise
and Related Information," which establishes standards for reporting information
about a company's operating segments. In October 1999, as a result of the
Midland acquisition, the Company restructured its operations into two business
segments: (1) an operating segment consisting of Midland and other subsidiaries
that primarily generate taxable fee income by providing loan servicing, loan
origination and other related services and (2) an investing segment consisting
primarily of subsidiaries holding investments producing tax-exempt interest
income. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. A complete description of the
Company's reporting segments is described in Note 22 to the Company's 2000 Form
10-K.
The table on page 24 reflects the results of the Company's segments for the
three and six months ended June 30, 2001 and 2000.
NOTE 13 - SUBSEQUENT EVENT
In July 2001, the Company refinanced $67 million of its long-term debt
(discussed in Note 4 to the Company's 2000 Form 10-K). As a result of the
refinancing, the Company reduced this portion of its long-term debt from $67
million to $45 million. Substantially all other terms of the debt remained
unchanged as a result of the refinancing.
MUNICIPAL MORTGAGE & EQUITY, LLC
RECONCILIATION OF BASIC AND DILUTED EPS
(In thousands, except share and per share data)
(unaudited)
For the three months ended June 30, 2001 For the three months ended June 30, 2000
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ---------------- ----------- -------------- ---------------- -----------
Basic EPS
Net income allocable to
common shares $ 11,813 21,524,016 $ 0.55 $ 6,479 17,435,385 $ 0.37
=========== ===========
Effect of Dilutive Securities
Options and deferred shares - 490,974 - 386,690
-------------- ---------------- -------------- ----------------
Diluted EPS
Net income allocable to
common shares $ 11,813 22,014,990 $ 0.54 $ 6,479 17,822,075 $ 0.36
============== ================ =========== ============== ================ ===========
For the six months ended June 30, 2001 For the six months ended June 30, 2000
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ---------------- ----------- -------------- ---------------- -----------
Basic EPS
Net income allocable to
common shares $ 2,749 20,747,361 $ 0.13 $ 13,498 17,430,954 $ 0.77
=========== ===========
Effect of Dilutive Securities
Options and deferred shares - 475,529 - 360,701
-------------- ---------------- -------------- ----------------
Diluted EPS
Net income allocable to
common shares $ 2,749 21,222,890 $ 0.13 $ 13,498 17,791,655 $ 0.76
============== ================ =========== ============== ================ ===========
Preferred Capital
Preferred Shares Distribution Shares
Common ------------------------------- -------------------------------
Shares Series I Series II Series I Series II
----------- -------------- --------------- -------------- ---------------
Distributions paid on May 11, 2001
to holders of record on April 30, 2001:
For the three months ended
March 31, 2001 (1) $ 0.4250 $ 10.08 $ 5.00 $ 7.78 $ 1.75
Distributions paid on August 10, 2001
to holders of record on July 30, 2001:
For the three months ended
June 30, 2001 (2) $ 0.4275 $ 11.70 $ 11.40 $ 8.60 $ 3.95
(1) The distributions for the Series I Preferred Shares and Preferred Capital
Distribution Shares include a special distribution of $1.48 which
represents their pro rata portion of the proceeds from the sale of a
taxable loan secured by the property known as Mountain View.
(2) In June 2001, approximately 26% of Series I Preferred Shares and Preferred
Capital Distribution Shares and approximately 56% of Series II Preferred
Shares and Preferred Capital Distribution Shares were redeemed (see further
discussion in Note 9). The effect of this redemption was a decrease in the
number of shares outstanding, which, in turn caused the per share
distribution to increase.
Municipal Mortgage & Equity, LLC
Segment Reporting
(in thousands) (unaudited)
For the three months ended June 30, 2001
------------------------------------------------------------------------
Total
INCOME: Investing Operating Adjustments Consolidated
------------ ------------- ---------------- ---------------
Interest on mortgage revenue bonds and
other bond related investments ......................... $ 11,400 $ 809 $ - $ 12,209
Interest on loans ...................................... 645 8,123 - 8,768
Loan origination and brokerage fees .................... - 4,573 (120) (1) 4,453
Loan servicing fees .................................... - 1,729 - 1,729
Interest on short-term investments ..................... 513 180 - 693
Other income ........................................... - 1,643 - 1,643
Net gain on sales ...................................... - 879 - 879
------------ ------------- ---------------- ---------------
Total income ....................................... 12,558 17,936 (120) 30,374
------------ ------------- ---------------- ---------------
EXPENSES:
Salaries and benefits .................................. 419 4,611 - 5,030
Professional Fees ...................................... 281 632 - 913
Operating expenses ..................................... 256 1,894 - 2,150
Goodwill and other intangibles amortization ............ - 628 - 628
Interest expense ....................................... 1,463 6,306 - 7,769
Other-than-temporary impairments related to
investments in mortgage revenue bond and
other bond related investments ....................... - - -
------------ ------------- ---------------- ---------------
Total expenses ..................................... 2,419 14,071 - 16,490
Net holding gains(losses) on trading securities ........ 1,272 - - 1,272
------------ ------------- ---------------- ---------------
Net income before income allocated to
preferred shareholders in a subsidiary
company, income taxes and cumulative effect
of accounting change ................................. 11,411 3,865 (120) 15,156
Income allocable to preferred shareholders
in a subsidiary company .............................. 2,606 - - 2,606
------------ ------------- ---------------- ---------------
Net income before income taxes and cumulative
effect of accounting change .......................... 8,805 3,865 (120) 12,550
Income taxes ........................................... - 224 - 224
------------ ------------- ---------------- ---------------
Net income before cumulative effect of
accounting change .................................... 8,805 3,641 (120) 12,326
Cumulative effect on prior years of change
in accounting for derivative financial instruments ... - - - -
------------ ------------- ---------------- ---------------
Net income (loss) ...................................... $ 8,805 $ 3,641 $ (120) $ 12,326
============ ============= ================ ===============
Municipal Mortgage & Equity, LLC
Segment Reporting
(in thousands)(unaudited)
For the six months ended June 30, 2001
-----------------------------------------------------------------------
Total
INCOME: Investing Operating Adjustments Consolidated
------------- ------------- ---------------- --------------
Interest on mortgage revenue bonds and
other bond related investments ......................... $ 22,742 $ 1,237 $ - $ 23,979
Interest on loans ...................................... 1,126 15,823 - 16,949
Loan origination and brokerage fees .................... - 6,937 (420) (1) 6,517
Loan servicing fees .................................... - 3,361 - 3,361
Interest on short-term investments ..................... 1,254 441 - 1,695
Other income ........................................... - 6,456 - 6,456
Net gain on sales ...................................... - 1,045 - 1,045
------------- ------------- ---------------- --------------
Total income ....................................... 25,122 35,300 (420) 60,002
------------- ------------- ---------------- --------------
EXPENSES:
Salaries and benefits .................................. 762 8,713 - 9,475
Professional Fees ...................................... 498 1,106 - 1,604
Operating expenses ..................................... 462 3,219 - 3,681
Goodwill and other intangibles amortization ............ 1,321 - 1,321
Interest expense ....................................... 3,087 12,508 - 15,595
Other-than-temporary impairments related to
investments in mortgage revenue bond and
other bond related investments ....................... 3,256 - 3,256
------------- ------------- ---------------- --------------
Total expenses ..................................... 4,809 30,123 - 34,932
Net holding gains(losses) on trading securities ........ (3,593) - - (3,593)
------------- ------------- ---------------- --------------
Net income before income allocated to
preferred shareholders in a subsidiary
company, income taxes and cumulative effect
of accounting change ................................. 16,720 5,177 (420) 21,477
Income allocable to preferred shareholders
in a subsidiary company .............................. 5,212 - - 5,212
------------- ------------- ---------------- --------------
Net income before income taxes and cumulative
effect of accounting change .......................... 11,508 5,177 (420) 16,265
Income taxes ........................................... - 227 - 227
------------- ------------- ---------------- --------------
Net income before cumulative effect of
accounting change .................................... 11,508 4,950 (420) 16,038
Cumulative effect on prior years of change
in accounting for derivative financial instruments ... (12,277) - - (12,277)
------------ ------------- ---------------- --------------
Net income (loss) ...................................... $ (769) $ 4,950 $ (420) $ 3,761
============= ============= ================ ==============
Notes:
(1) Adjustments represent origination fees on purchased investments which are
deferred and amortized into income over the life of the investment.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Business
Municipal Mortgage & Equity, LLC ("MuniMae") and its subsidiaries (together
with MuniMae, the "Company") are principally engaged in originating, investing
in and servicing investments related to multifamily housing financings.
Results of Operations
Quarterly Results Analysis
Total income for the three months ended June 30, 2001 increased by
approximately $8.4 million over the same period last year due primarily to (i)
an increase in collections of interest totaling $3.6 million on bonds, other
bond related investments and loans, (ii) an increase in loan servicing fees,
loan origination and brokerage fees and other income of $4.1 million due
primarily to an increase in syndication fees and commissions, and (iii) an
increase in gain on sale of taxable loans of $0.9 million as a result of the
sale of loans on which the Company retained the servicing rights.
Salary and benefits, professional fees and operating expenses for the three
months ended June 30, 2001 increased by approximately $2.7 million over the same
period last year due primarily to (i) a $1.4 million increase in salary and
benefits expense associated with an increase in the number of employees and an
increase in bonus compensation accruals as a result of the increase in equity
syndication production, (ii) a $1.0 million increase in operating expenses due
to commissions paid on equity syndication production, and (iii) a $0.3 million
increase in professional fees associated with legal and consulting fees on
information systems initiatives.
The Company incurred interest expense of $7.8 million for the three months
ended June 30, 2001 as a result of interest expense from short-term borrowings
associated with taxable construction lending activity of $6.3 million and $1.5
million in interest expense related to securitization transactions accounted for
as borrowings.
The Company recorded income allocable to preferred shareholders of TE Bond
Sub of $2.6 million for the three months ended June 30, 2001 as a result of the
June 2000 and May 1999 Preferred Equity Offerings (see Note 8 to the
consolidated financial statements).
Year to Date Results Analysis
Total income for the six months ended June 30, 2001 increased by
approximately $16.8 million over the same period last year due primarily to (i)
an increase in collections of interest totaling $6.8 million on bonds, other
bond related investments and loans, (ii) an increase in loan servicing fees,
loan origination and brokerage fees and other income of $9.2 million due
primarily to an increase in syndication fees and commissions and income earned
on the assumption of a bond purchase obligation, and (iii) an increase in gain
on sale of taxable loans of $1.0 million as a result of the sale of loans on
which the Company retained the servicing rights.
Salary and benefits, professional fees and operating expenses for the six
months ended June 30, 2001 increased by approximately $4.3 million over the same
period last year due primarily to (i) a $2.5 million increase in salary and
benefits expense associated with an increase in the number of employees and an
increase in bonus compensation accruals as a result of the increase in equity
syndication production, (ii) a $1.5 million increase in operating expenses due
to commissions paid on equity syndication production, and (iii) a $0.3 million
increase in professional fees associated with legal and consulting fees on
information system initiatives.
The Company recorded other-than-temporary impairments aggregating $3.3
million on two investments for the six months ended June 30, 2001.
The Company incurred interest expense of $15.6 million for the six months
ended June 30, 2001 as a result of interest expense from short-term borrowings
associated with taxable construction lending activity of $12.5 million and $3.1
million in interest expense related to securitization transactions accounted for
as borrowings.
The Company recorded income allocable to preferred shareholders of TE Bond
Sub of $5.2 million for the six months ended June 30, 2001 as a result of the
June 2000 and May 1999 Preferred Equity Offerings (see Note 8 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" as amended by Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB Statement No. 133." In addition, during 2000, the Financial Accounting
Standards Board issued FASB Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." These statements
(collectively, "FAS 133") establish accounting and reporting standards for
derivative financial instruments, including certain derivative financial
instruments embedded in other contracts, and for hedging activity. FAS 133
requires the Company to recognize all derivatives as either assets or
liabilities in its financial statements and record these instruments at their
fair values. In order to achieve hedge accounting treatment, hedging activities
must be appropriately designated, documented and proven to be effective as a
hedge of a balance sheet item pursuant to the provisions of FAS 133. The Company
has elected, as permitted by FAS 133, not to prove the hedging effectiveness of
its interest rate swap investments due to the cost and administrative burden of
complying with FAS 133. As a result, changes in fair value of derivatives are
recorded through current income rather than through other comprehensive income.
The Company adopted FAS 133 on January 1, 2001.
The Company has several types of financial instruments that meet the
definition of a derivative financial instrument under FAS 133, including
interest rate swaps, put option contracts and total return swaps. Under FAS 133,
the Company's investment in total return swaps and put option contracts is
recorded on the balance sheet with changes in fair value of these instruments,
as well as changes in fair value of other instruments which are deemed to be
derivative financial instruments, recorded in current earnings. The Company also
has investments in interest rate swaps, which are held to offset the floating
interest rate exposure in certain investments.
The adoption of FAS 133 does not affect cash available for distribution,
the Company's ability to pay distributions, the characterization of the
tax-exempt income or the financial obligations under the bonds. Upon adoption,
the Company's interest rate swaps and total return swaps were reclassified to
trading securities; those with a negative balance were reflected as liabilities
on the balance sheet. As of January 1, 2001, the Company's put option contracts
were recorded on the balance sheet with a fair value of zero. The cumulative
effect of adopting FAS 133 was a decrease to net income of approximately $12.3
million as of January 1, 2001, and is reflected in the income statement as a
cumulative effect of a change in accounting principle. The Company recognized an
increase (decrease) in net income of $1.3 million and ($3.6) million for the
three and six months ended June 30, 2001, respectively, due to the change in
fair value of its derivative instruments. This change is reflected in net
holding gains (losses) on trading securities in the statement of income.
During September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. FAS 140 is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
March 31, 2001. The disclosure requirements related to securitization
transactions and collateral are required for all fiscal years ending after
December 15, 2000. Accordingly, the Company has incorporated the appropriate
disclosure requirements in its notes to the consolidated financial statements
for the three months ended June 30, 2001. The Company believes the provisions
pertaining to the transfer and servicing of financial assets and extinguishment
of liabilities occurring after March 31, 2001 may over time have a significant
impact on the total assets and total liabilities of the Company. In particular,
new securitization transactions that would have been accounted for as a sale
under Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("FAS 125") may be accounted for as a borrowing under FAS 140. Therefore, the
senior interest in future securitizations may be recorded as debt and the bonds
associated with the transaction may continue to be included in investments in
mortgage revenue bonds rather than being excluded upon completion of the
securitization transaction.
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141")
and No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") which are
effective July 1, 2001 and January 1, 2002, respectively, for the Company. FAS
141 requires that the purchase method of accounting be used for all business
combinations consummated after June 30, 2001. Under FAS 142, amortization of
goodwill, including goodwill recorded in past business combinations, will
discontinue upon adoption of this standard. In addition, goodwill recorded as a
result of business combinations completed during the six-month period ending
December 31, 2001 will not be amortized. All goodwill and intangible assets will
be tested for impairment in accordance with the provisions of the Statement. The
Company is currently reviewing the provisions of FAS 141 and FAS 142 and
assessing the impact of adoption.
Liquidity and Capital Resources
The Company's primary objective is to maximize shareholder value through
increases in Cash Available for Distribution ("CAD") per common share and
appreciation in the value of its common shares. The Company seeks to achieve its
growth objectives by growing its investing and operating business segments. The
Company grows its investment segment by acquiring, servicing and managing
diversified portfolios of mortgage bonds and other bond related investments.
Growth in the operating segment is derived from increasing levels of fees
generated by affordable housing equity syndications, loan servicing and
origination and brokerage services. The Company's business plan included
structuring $300 to $375 million in bond related investment transactions in
2001. 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 equity offerings, to finance its acquisitions. Through the
Company's management of capital for others, including Fannie Mae and several
pension funds, the Company has expanded its access to capital.
For the six months ended June 30, 2001, the Company structured $55.5
million in tax-exempt bond transactions. Of this amount, $5,000 represented
investments retained by the Company. In addition, MuniMae originated $50.0
million of construction loans, $18.2 million of taxable permanent loans and
equity investments totaling $3.1 million.
Securitizations
The Company uses securitizations to enhance its overall return on its
investments and to generate proceeds that, along with equity offering proceeds,
facilitate the acquisition of additional investments. Through the use of
securitizations, the Company expects to employ leverage and maintain overall
leverage ratios in the 50% to 60% 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
debt of the investing segment plus the total amount of senior interests in its
investments, which it considers the equivalent of off-balance sheet financing,
by the sum of total assets owned by the Company plus senior interests owned by
others adjusted for reserves equal to the net assets of the operating segment.
Under this method, the Company's leverage ratio at June 30, 2001 was
approximately 50.9%.
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 June 30, 2001 the Company had cash and cash equivalents of approximately
$28.8 million.
Cash flow from operating activities was $30.4 million and $18.9 million for
the three months ended June 30, 2001 and 2000, respectively. The increase in
cash flow for 2001 versus 2000 is due primarily to an increase in income from
new investments and an increase in other income attributable to Midland.
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 several 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 other significant differences are non-cash gains and
losses associated with bond valuations and sales, non-cash gains and losses
associated with changes in market value of derivative financial instruments,
amortization of goodwill and intangibles and capitalization of mortgage
servicing rights, net of deferred taxes for GAAP purposes, which are not
included in the calculation of CAD.
The Company is required to distribute to the holders of its 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 CAD to common shares. For the three
months ended June 30, 2001 and 2000, CAD to common shares was $10.3 million and
$7.7 million, respectively. The Company's distribution per common share for the
three months ended June 30, 2001 of $0.4275 represents a pay out ratio of 89.7%.
The Company's distribution per common share for the three months ended June 30,
2000 of $0.4175 represents a pay out ratio of 94.9%.
Regular cash distribution to shareholders, for the three months ended June
30, 2001 and 2000, were $9.6 million and $7.8 million, respectively.
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, equity
proceeds and securitization proceeds.
Income Tax Considerations
MuniMae is organized as a limited liability company. This structure allows
MuniMae to combine the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. MuniMae does not pay tax at the corporate level. Instead, the
distributive share of MuniMae's income, deductions and credits is included in
each shareholder's income tax return. In addition, the tax-exempt income derived
from certain investments remains tax-exempt when it is passed through to the
shareholders. The Company records cash dividends received from subsidiaries
organized as corporations as dividend income for tax purposes.
As a result of the Midland acquisition, in October 1999, the Company
restructured its operations into two segments, an operating segment and an
investing segment (see Note 12 to the consolidated financial statements). The
operating segment, which is directly or indirectly wholly owned by MuniMae,
consists primarily of entities subject to income taxes. The Company provides for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). FAS 109 requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the financial statement carrying amounts and
the tax basis of assets and liabilities.
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 significantly 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 that 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Since December 31, 2000 there has been no material change to the
information included in Item 7A of the Company's 2000 Form 10-K, except as
described below.
Interest Rate Risk
In anticipation of converting a substantial portion of the Company's
short-term floating rate debt (see discussion of P-FLOATS in Note 3 to the
consolidated financial statements) into longer term, fixed rate facilities, the
Company revised its interest rate management strategy in the second quarter of
2001. To accomplish this, the Company entered into a series of new interest rate
swaps, some of which offset certain of the Company's existing swaps. The net
effect of the swap portfolio reduced the average life of the Company's interest
rate swaps from eight years to three years. This new program also reduced the
Company's exposure to swap-related margin call risk and decreased the annual
cost of the Company's interest rate management strategy. However, the new
strategy increases the Company's exposure to rollover risk, particularly in the
event that the Company is unable to convert short-term floating rate debt into a
longer-term fixed rate facility and interest rate swaps expire during a rising
interest rate environment.
This section should be read in conjunction with the Quantitative and
Qualitative Disclosures about Market Risk section included in the Company's 2000
Form 10-K. The above discussion does not represent a full disclosure of the
Company's risk with respect to interest rates.
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
At the annual meeting of the Company's shareholders held on June 14, 2001,
the shareholders voted on two proposals in addition to the election of the
Company's directors. The election of the board of directors was passed, but the
proposal to approve a 2001 Employee Share Incentive Plan and a 2001 Non-Employee
Directors' Plan were tabled. The shareholders elected the following directors:
William L. Jews (19,793,211 in favor and 463,027 abstaining), Douglas A.
McGregor (19,803,937 in favor and 452,301 abstaining) and Carl W. Stearn
(19,939,590 in favor and 316,648 abstaining). Subsequent to the meeting, the
2001 Employee Share Incentive Plan was revised so as not to exceed 5% of all
outstanding shares. The annual meeting reconvened on July 19, 2001. At this
meeting, the shareholders voted to adopt a new 2001 Share Incentive Plan
providing for the issuance of up to 900,000 common shares to executive officers,
other key employees and key independent contractors. The votes cast on this
proposal were as follows: 8,473,855 in favor; 1,299,757 opposed; 453,204
abstaining; and 29,421 broker non-votes. The shareholders also voted to adopt a
new 2001 Non-Employee Directors' Plan providing for the issuance of up to
150,000 common shares to non-employee directors. The votes cast on this proposal
were as follows: 18,403,868 in favor; 1,335,231 opposed; 487,716 abstaining; and
29,422 broker non-votes.
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 Amended and Restated Certificate of Formation and Operating Agreement
of the Company (filed as Exhibit 3.1 to the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1997, filed with
the Commission on May 29, 1998 and incorporated by reference herein).
3.3 By-laws of the Company (filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K, filed with the Commission on May 29, 1998 and
incorporated by reference herein).
10.1 First Amendment to Employment Agreement between the Registrant and
Robert J. Banks, dated June 20, 2001
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the quarter ended
June 30, 2001.
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)
/s/ Mark K. Joseph
By: _____________________________________________
Mark K. Joseph
Chairman of the Board, Chief Executive Officer
(Principal Executive Officer), and
Director
/s/ William S. Harrison
By: ____________________________________________
William S. Harrison
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
DATED: August 14, 2001
INDEX TO EXHIBITS
Exhibit
Number Document
10.1 First Amendment to Employment Agreement between the
Registrant and Robert J. Banks, dated June 20, 2001
Exhibit 10.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "First Amendment") is
made this 20th day of June, 2001, by and between Municipal Mortgage & Equity,
LLC, a Delaware limited liability company ("Employer") and Robert J. Banks
("Employee")
WHEREAS, Employer and Employee are parties to that certain Employment
Agreement dated October 20, 1999 (the "Employment Agreement");
WHEREAS, Employer and Employee are also parties to that certain Stock
Purchase and Contribution Agreement dated as of September 30, 1999 (the
"Purchase Agreement");
WHEREAS, Employer and Employee wish to make certain adjustments to the
Employment Agreement and the Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Employer and Employee
hereby agree as follows:
1. Deferred Purchase Price.
(a) Employer and Employee agree that the installments of the Deferred
Purchase Price described in Sections 2.04(a)(B) and (C) of the Purchase
Agreement shall be fully earned and payable on the dates and in the amounts set
forth therein without any adjustment under Section 2.04 (b) of the Purchase
Agreement; provided, however, that no installment of Deferred Purchase Price
shall be due and payable to Employee if on the date such payment would be due,
(i) Employee is in violation of the covenant not to compete set forth in Section
8 of the Employment Agreement, (ii) Employee has resigned his employment with
the Company for any reason other than one of those permitted by Section 7(b)(ii)
of the Employment Agreement, or (iii) Employee is in violation of Section 5.10
of the Purchase Agreement (as modified by Section 2 below). Employee hereby
certifies that his share of each installment of the Deferred Purchase Price is
60%, that Mr. Gloeckl's is 20%, that Mr. Mathis has assigned his share in its
entirety to Midland Senior Management Associates, LLC, a Florida limited
liability company ("MSM"), and that MSM's share of each installment is 20%; and
Employee agrees to hold Employer harmless from any claim to the contrary by any
person.
(b) In consideration of the elimination of any adjustment to the amount of
the Deferred Purchase Price under Section 2.04 (b) of the Purchase Agreement,
Employee hereby waives (i) any and all provisions of the Purchase Agreement
pertaining to how Employer must operate the Company and its Subsidiaries (each
as defined therein), including without limitation Section 6.05 thereof, and (ii)
Section 7 (b)(ii)(H) of the Employment Agreement.
2. Transfer Restrictions. Employer and Employee agree that transfers of
Purchaser Closing Shares (as defined in the Purchase Agreement) by Employee to
trusts of which Employee is a Trustee and all of the beneficiaries of which are
related to Employee by blood or marriage shall be deemed to comply with the
requirements of Section 5.10 of the Purchase Agreement that Employee retain
ownership of his Purchaser Closing Shares for certain periods of time and in
certain amounts; provided, however, that any transfer permitted by this sentence
shall be explicitly subject to the requirement that the transferee trust be
bound by the ownership restrictions of Section 5.10. All Purchaser Closing
Shares subject to Section 5.10 shall continue to bear restrictive legends for as
long as Section 5.10 applies by its terms to those shares. Upon Employee's
request, Employer shall remove such restrictive legend from those Purchaser
Closing Shares which are no longer subject to Section 5.10. This Section shall
not affect any restrictive legends required to be placed upon Employee's shares
under applicable federal or state securities laws or in conformity with
Employer's policies applicable to all shares in Employer which are owned by its
senior management.
3. Incentive Compensation. Section 2(b) of the Employment Agreement is
hereby amended to delete the clause which reads "provided, however, that no
Incentive Compensation shall be payable for any year in which Midland does not
achieve the Earn-out target for such year as set forth, subject to adjustment as
provided in Sections 2.04(a) and 2.04(b) of the Purchase Agreement (as
hereinafter defined)."
4. Termination_Date. The Initial Term of the Employment Agreement is
hereby revised to end on February 5, 2003.
5. No_Other_Amendments. Subject to the modifications as set forth herein,
the Employment Agreement remains in full force and effect in accordance with its
terms. Subject to the modifications set forth herein, those provisions of the
Purchase Agreement which survived the closing thereunder remain in full force
and effect in accordance with their terms.
IN WITNESS WHEREOF and intending to be legally bound, the parties have
executed this First Amendment as of the date and year first above written.
WITNESS: EMPLOYER:
Municipal Mortgage & Equity, LLC
/s/ William S. Harrison /s/ Michael L. Falcone
________________________ By: _____________________________
Michael L. Falcone
President
EMPLOYEE:
/s/ Myra S. Peppi /s/ Robert J. Banks
________________________
Robert J. Banks