UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
Securities Exchange Act of 1934
For the period ended: September 30, 1997 Commission file
number: 001-11981
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 52-1449733
(State of organization) (I.R.S. Employer Identification No.)
218 North Charles Street, Suite 500, Baltimore, Maryland 21201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(410)962-8044
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The Company had 11,093,041 Growth Shares outstanding as of October
21, 1997, the latest practicable date.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
INDEX TO FORM 10-Q
Part I- FINANCIAL INFORMATION
Item
1. Financial Statements
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II- OTHER INFORMATION
Item
5. Other Information
6. Exhibits and Reports on Form 8-K
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited)
September 30, December 31,
1997 1996
------------ ------------
ASSETS
Cash and cash equivalents $8,221 $34,817
Interest receivable 1,412 1,352
Investment in mortgage revenue bonds and other bond
related investments, net (Note 2) 210,659 183,632
Investment in parity working capital loans, demand
notes and other loans, net (Note 3) 11,341 10,158
Other assets 540 318
Restricted assets (Note 4) 1,359 -
------------ ------------
TOTAL ASSETS $233,532 $230,277
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $945 $870
Distributions payable - 8,095
Unearned revenue (Note 5) 982 329
------------ ------------
TOTAL LIABILITIES 1,927 9,294
------------ ------------
Commitments and contingencies (Notes 4, 5 and 8) - -
Shareholders' equity:
Unrealized gain on mortgage revenue bonds and other
bond related investments available for sale, net (Note 2) 17,959 12,423
Preferred shares:
Series I (16,329 shares issued and outstanding) 11,511 11,254
Series II (7,637 shares issued and outstanding) 6,218 6,086
Preferred capital distribution shares:
Series I (8,909 shares issued and outstanding) 4,670 4,559
Series II (3,809 shares issued and outstanding) 2,124 2,080
Term growth shares (2,000 shares issued and outstanding) 99 -
Growth shares (11,158,181 shares outstanding, including
11,153,168 issued, 3,018 deferred, and 1,995 restricted shares
at September 30, 1997 and 11,153,168 shares issued
and outstanding at December 31, 1996) 190,095 185,514
Less growth shares held in treasury at cost (60,127 shares at
September 30, 1997 and 60,798 at December 31, 1996) (923) (933)
Less unearned compensation - restricted shares (Note 6) (148) -
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 231,605 220,983
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $233,532 $230,277
============ ============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share, per share and per BAC data)
(unaudited)
For the three months For the nine months
ended September 30, ended September 30,
-------------------------- -------------------------
1997 1996 1997 1996
------------ ------------ ------------ ----------
INCOME
Interest on mortgage revenue bonds and other bond
related investments $4,295 $3,895 $12,438 $10,422
Interest on parity working capital loans, demand notes
and other loans 1,013 496 2,569 602
Interest on short-term investments 80 368 550 522
Equity in MLP II - 333 - 2,141
Other income 291 87 792 87
------------ ------------ ------------ ----------
TOTAL INCOME 5,679 5,179 16,349 13,774
------------ ------------ ------------ ----------
EXPENSES
Operating expenses 890 1,189 2,441 2,982
Minority interest - 3 - 13
Other-than-temporary impairments related to investments in mortgage
revenue bonds (Note 2) - - - 3,990
------------ ------------ ------------ ----------
TOTAL EXPENSES 890 1,192 2,441 6,985
------------ ------------ ------------ ----------
NET INCOME $4,789 $3,987 $13,908 $6,789
============ ============ ============ ==========
NET INCOME PRIOR TO AUGUST 1, 1996 ALLOCATED TO:
General Partners $ - $8 $ - $36
============ ============ ============ ==========
Limited Partners:
Series I $ - $493 $ - $1,065
============ ============ ============ ==========
Series II $ - $306 $ - $2,508
============ ============ ============ ==========
NET INCOME PER BAC PRIOR TO AUGUST 1, 1996:
Series I $ - $2.47 $ - $ 5.33
============ ============ ============ ==========
Series II $ - $3.18 $ - $26.06
============ ============ ============ ==========
NET INCOME SUBSEQUENT TO JULY 31, 1996 ALLOCATED TO:
Preferred shares:
Series I $236 $166 $686 $166
============ ============ ============ ==========
Series II $122 $85 $366 $85
============ ============ ============ ==========
Preferred capital distribution shares:
Series I $104 $78 $303 $78
============ ============ ============ ==========
Series II $47 $34 $139 $34
============ ============ ============ ==========
Term growth shares $99 $64 $284 $64
============ ============ ============ ==========
Growth shares $4,181 $2,753 $12,130 $2,753
============ ============ ============ ==========
NET INCOME PER SHARE SUBSEQUENT TO JULY 31, 1996:
Preferred shares:
Series I $14.44 $10.19 $41.99 $10.19
============ ============ ============= =========
Series II $16.01 $11.14 $47.96 $11.14
============ ============ ============= =========
Preferred capital distribution shares:
Series I $11.63 $8.70 $33.99 $8.70
============ ============ ============= =========
Series II $12.34 $8.92 $36.56 $8.92
============ ============ ============= =========
Growth shares $0.37 $0.25 $1.09 $0.25
============ ============ ============= =========
Weighted average shares outstanding 11,145,541 11,144,380 11,124,513 11,144,380
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (unaudited)
For the nine months ended
September 30,
--------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,908 $6,789
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in MLP II net income - (2,141)
Income allocated to minority interest - 13
Other-than-temporary impairments related to investments in
mortgage revenue bonds - 3,990
Increase (decrease) in valuation allowance on parity working
capital loans (60) 29
Depreciation and amortization 61 -
Restricted share compensation expense 34 -
Deferred shares issued under the Non-Employee Directors' Share Plan 51 -
Director fees paid by reissuance of treasury shares 12 -
(Increase) in interest receivable (59) (15)
(Increase) decrease in other assets (153) 61
Increase in accounts payable and accrued expenses 75 318
(Decrease) in due to affiliates - (5)
Increase in unearned fees collected, net 294 -
------------ ------------
Net cash provided by operating activities 14,163 9,039
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage revenue bonds and other bond related
investments (21,672) (1,720)
Net decrease in short-term investments - 4,705
Origination of other loans (1,124) -
Purchases of furniture and equipment (80) -
Investment in MMACap, LLC (Note 4) (1,000) -
Principal payments received 131 77
Distributions from MLP II - 2,992
------------ ------------
Net cash provided by (used in) investing activities (23,745) 6,054
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Treasury Stock - (538)
Distributions (17,014) (18,589)
------------ ------------
Net cash provided by (used in) financing activities (17,014) (19,127)
------------ ------------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (26,596) (4,034)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 34,817 9,810
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,221 $5,776
============ ============
Disclosure of Non-Cash Activities:
Restricted assets acquired with investment in MMACap, LLC $ 359 $ -
============ ============
Net assets received upon dissolution of the MLP II structure $ - $64,448
============ ============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1997 THROUGH SEPTEMBER 30, 1997
(In thousands, except share data) (unaudited)
Preferred
Preferred Shares Capital Distribution
Series I Series II Series I Series II
------------- ------------- ------------- ----------------
Balance, January 1, 1997 $11,254 $6,086 $4,559 $2,080
Net income 686 366 303 139
Distributions (429) (234) (192) (95)
Reissuance of treasury stock - - - -
Deferred shares issued under the
Non-Employee Directors' Share Plan - - - -
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - - - -
Restricted share grants - - - -
Amortization of deferred compensation - - - -
------------- ------------- ------------- ----------------
Balance, September 30, 1997 $11,511 $6,218 $4,670 $2,124
============= ============= ============= ================
SHARE ACTIVITY:
Balance, January 1, 1997 16,329 7,637 8,909 3,809
Reissuance of treasury stock - - - -
Deferred shares issued under the
Non-Employee Directors' Share Plan - - - -
Vesting of restricted shares - - - -
------------- ------------- ------------- ----------------
Balance, September 30, 1997 16,329 7,637 8,909 3,809
============= ============= ============= ================
The accompanying notes are an integral part of these financial statements.
Unrealized Gain
on mortgage revenue
bonds and other
bond related
Term Growth Growth Treasury Unearned investments, available
Shares Shares Shares Compensation for sale, net Total
------------- ------------- ------------- ---------------- --------------
Balance, January 1, 1997 $- $185,514 ($933) $- $12,423 $220,983
Net income 284 12,130 - - - 13,908
Distributions (185) (7,784) - - - (8,919)
Reissuance of treasury stock - 2 10 - - 12
Deferred shares issued under the
Non-Employee Directors' Share Plan - 51 - - - 51
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - - - - 5,536 5,536
Restricted share grants - 182 - (182) - -
Amortization of deferred compensation - - - 34 - 34
------------- ------------- ------------- ---------------- -------------- ----------------
Balance, September 30, 1997 $99 $190,095 ($923) ($148) $17,959 $231,605
============= ============= ============= ================ ============== ================
SHARE ACTIVITY:
Balance, January 1, 1997 2,000 11,092,370 60,798
Reissuance of treasury stock - 671 (671)
Deferred shares issued under the
Non-Employee Directors' Share Plan - 3,018 -
Vesting of restricted shares - 1,995 -
------------- ------------- -------------
Balance, September 30, 1997 2,000 11,098,054 60,127
============= ============= =============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage
revenue bonds issued by state and local government authorities to finance
multifamily housing developments and secured by nonrecourse mortgage
loans on the underlying properties. The Company, organized in July 1995
as a limited liability company under Delaware law, is the successor to the
business of the SCA Tax Exempt Fund Limited Partnership (the
"Partnership"), which was merged into the Company effective August 1,
1996 (the "Merger"). Accordingly, the accompanying financial statements
represent the financial position of the Company at September 30, 1997
and December 31, 1996; results of operations include those of the
Partnership for the seven months ended July 31, 1996 and those of the
Company for the two months ended September 30, 1996 and the nine
months ended September 30, 1997. Certain 1996 amounts have been
reclassified to conform to the 1997 presentation.
On June 30, 1997, the Company acquired a 99.9% member interest
in MMACap, LLC for $1.0 million (see further discussion in Note 4). The
other 0.1% member interest in MMACap, LLC was purchased by MME
I Corporation, an affiliate of the Company. As a result of this acquisition,
the consolidated financial statements of the Company include MMACap,
LLC.
The accompanying unaudited financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and in the opinion of management contain all
adjustments (consisting of only normal recurring accruals) necessary to
present a fair statement of the results for the periods presented. These
results have been determined on the basis of accounting principles and
policies discussed in Note 2 to the Financial Statements appearing in the
Company's 1996 Annual Report on Form 10-K (the "Company's 1996
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 1996 Form
10-K.
NOTE 2 - INVESTMENT IN MORTGAGE REVENUE BONDS AND OTHER BOND
RELATED INVESTMENTS
The Company invests in various mortgage revenue bonds and other
bond related investments, the proceeds of which are used to make
nonrecourse mortgage loans on multifamily housing developments. The
Company's rights and the specific terms of the bonds are defined by the
various loan documents which were negotiated at the time of settlement.
The basic terms and structure of each bond are described in Note 5 to the
Company's 1996 Form 10-K. On February 14, 1995, the Partnership
refunded 11 of the original mortgage revenue bonds into 11 Series A Bonds
and 11 Series B Bonds. As part of the financing consummated on February
14, 1995 (the "Financing"), custody receipts in the Series A Bonds were
sold to third party investors. A complete description of the Financing and
the bond terms is set forth in Notes 4 and 5 to the Company's 1996 Form
10-K.
As of September 30, 1997, the Company held 32 bonds (12
participating bonds, six non-participating bonds, 12 participating
subordinate bonds and two non-participating subordinate bonds) and two
bond related investments. The bonds and bond related investments are
collateralized by 32 individual properties. The following table provides
certain information with respect to each of the bonds and other bond related
investments.
September 30, 1997 December 31, 1996
----------------------------- --------------------------
Base Face Amortized Unrealized Fair Amortized Unrealized Fair
Investment in Mortgage Interest Maturity Amount Cost Gain (Loss) Value Cost Gain (Loss) Value
Revenue Bonds (Note 2) Rate Date (000s) (000s) (000s) (000s) (000s) (000s) (000s)
- ---------------------------- ---------------------------------------------------------- ---------------------------
Participating Bonds (1):
Alban Place (2) 7.875 Oct. 2008 $10,065 $10,065 ($667) $9,398 $10,065 ($773) $9,292
Creekside Village (2) 7.500 Nov. 2009 11,760 7,396 162 7,558 7,396 120 7,516
Emerald Hills (2) 7.750 Apr. 2008 6,725 6,725 487 7,212 6,725 455 7,180
Lakeview Garden (2) 7.750 Aug. 2007 9,003 5,674 125 5,799 5,674 98 5,772
Newport-on-Seven (2) 8.125 Aug. 2008 10,125 7,898 675 8,573 7,898 618 8,516
North Pointe (2) 7.875 Aug. 2006 25,185 12,738 3,225 15,963 12,738 1,536 14,274
Northridge Park (2) 7.500 June 2012 8,815 8,815 (2,006) 6,809 8,815 (2,959) 5,856
Riverset (2) 7.875 Nov. 1999 19,000 19,000 529 19,529 19,000 560 19,560
Southfork Village (2) 7.875 Jan. 2009 10,375 10,375 1,155 11,530 10,375 1,337 11,712
Villa Hialeah (2) 7.875 Oct. 2009 10,250 10,250 (2,577) 7,673 10,250 (2,609) 7,641
Willowgreen (2) 8.000 Dec. 2010 9,275 6,770 6 6,776 6,770 (13) 6,757
The Crossings (7) 8.000 July 2007 7,050 7,050 - 7,050 - - -
----------------------------- --------------------------
Subtotal participating bonds 112,756 1,114 113,870 105,706 (1,630) 104,076
----------------------------- --------------------------
Non-Participating Bonds:
Riverset II (4) 9.500 Oct. 2019 7,610 7,228 915 8,143 7,222 826 8,048
Charter House (4) 7.450 July 2026 7,635 7,711 153 7,864 7,752 (38) 7,714
Hidden Valley (4) 8.250 Jan. 2026 1,700 1,700 51 1,751 1,705 (46) 1,659
Oakbrook (4) 8.200 July 2026 3,195 3,227 64 3,291 3,242 14 3,256
Torries Chase (4) 8.150 Jan. 2026 2,070 2,070 96 2,166 2,080 20 2,100
Southgate (7) 8.000 June 2027 11,060 11,060 - 11,060 - - -
--------------------------- --------------------------
Subtotal non-participating bonds 32,996 1,279 34,275 22,001 776 22,777
----------------------------- --------------------------
Participating Subordinate Bonds (1):
Barkley Place (3) 16.000 Jan. 2030 3,480 2,445 880 3,325 2,445 483 2,928
Gilman Meadows (3) 3.000 Jan. 2030 2,875 2,530 859 3,389 2,530 964 3,494
Hamilton Chase (3) 3.000 Jan. 2030 6,250 4,140 788 4,928 4,140 778 4,918
Mallard Cove I (3) 3.000 Jan. 2030 1,670 798 288 1,086 798 146 944
Mallard Cove II (3) 3.000 Jan. 2030 3,750 2,429 516 2,945 2,429 420 2,849
Meadows (3) 16.000 Jan. 2030 3,635 3,716 862 4,578 3,716 719 4,435
Montclair (3) 3.000 Jan. 2030 6,840 1,691 3,056 4,747 1,691 2,798 4,489
Newport Village (3) 3.000 Jan. 2030 4,175 2,973 2,100 5,073 2,973 1,901 4,874
Nicollet Ridge (3) 3.000 Jan. 2030 12,415 6,075 494 6,569 6,075 573 6,648
Steeplechase Falls (3) 16.000 Jan. 2030 5,300 5,852 2,386 8,238 5,852 2,361 8,213
Whispering Lake (3) 3.000 Jan. 2030 8,500 4,779 1,939 6,718 4,779 1,182 5,961
Riverset II (4) 10.000 Oct. 2019 1,489 - 955 955 - 913 913
----------------------------- --------------------------
Subtotal participating subordinate bonds 37,428 15,123 52,551 37,428 13,238 50,666
----------------------------- --------------------------
Non-Participating Subordinate Bonds:
Independence Ridge (4) 12.500 Dec. 2015 1,045 1,045 11 1,056 1,045 - 1,045
Locarno (4) 12.500 Dec. 2015 675 675 3 678 675 - 675
----------------------------- --------------------------
Subtotal non-participating subordinate bonds 1,720 14 1,734 1,720 - 1,720
----------------------------- --------------------------
Other Bond Related Investments:
RITES -Hunters Ridge/South (4) 3,560 4,264 497 4,761 4,354 299 4,653
Interest rate swap (4),(5) 7,200 - (350) (350) - (260) (260)
RITES -Indian Lake (7) 3,360 3,536 244 3,780 - - -
Interest rate swap (5),(7) 6,500 - (132) (132) - - -
Purchase commitment (6) 33,900 - 170 170 - - -
----------------------------- --------------------------
Subtotal other bond related investments 7,800 429 8,229 4,354 39 4,393
----------------------------- --------------------------
Total investment in mortgage
revenue bonds and other bond related investments $192,700 $17,959 $210,659 $171,209 $12,423 $183,632
========= ======== ======== ========= ======= =========
(1) These bonds also contain additional interest features contingent on
available cash flow, except for Barkley Place, Meadows, and Steeplechase Falls.
(2) One of the original 22 bonds.
(3) Series B Bonds derived from original 22 bonds.
(4) 1996 Acquisitions.
(5) Amount represents notional amount of interest rate swap agreement.
(6) On November 12, 1996, the Company agreed to purchase a bond with a face
amount of $33,900,000. For further discussion see Note 8.
(7) 1997 Acquisition. The Crossing's bond paid an additional yield maintenance
fee of 3.31% until the bond refunding in July 1997 at which time the
base interest rate was changed to 8.00%.
On January 27, 1997, the Company acquired a $7.1 million tax-exempt mortgage
revenue bond collateralized by a 200-unit multifamily apartment project known
as The Crossings, located in DeKalb County, Georgia. Prior to refunding in July
1997, the stated annual interest rate on the bond was 5.5%. On July 11, 1997,
the bond was refunded, and as a result, the stated annual interest rate was
changed to 8.0% and the maturity date was extended to a 30-year term (2027) with
a prepayment option in the twelfth year. Also as part of the refunding, the
Company now may participate in the growth of the value of the underlying
property collateral through contingent interest payments from the property's
cash flow. These contingent interest payments are taxable income for federal
income tax purposes. Prior to the refunding, under the terms of the
transaction, the Company received an effective annual interest rate of 8.81% on
the bond as a result of a yield maintenance agreement entered into between the
borrower and the Company. The 3.31% yield maintenance fee earned on
the bonds was taxable income for federal income tax purposes.
Additionally, in conjunction with this bond purchase, the Company made
a taxable loan discussed further in Note 3.
On June 11, 1997, the Company acquired a $11,075,000 tax-exempt mortgage
revenue bond collateralized by a 215 unit multifamily apartment project known as
Southgate, located in Howard County, Maryland. The bond bears interest at a
stated annual rate of 8.0%. Principal payments begin in August 1997 until
maturity in 2027. Additionally, in conjunction with this bond purchase, the
Company made a taxable loan discussed further in Note 3.
On July 1, 1997, the Company purchased $3.36 million (par value)
in RITES, a security offered by Merrill Lynch through its P-FLOATS
program for $3.5 million (see discussion of the P-FLOATs program in Note
5 to the Company's 1996 Form 10-K). For the Series PA-152 P-FLOATs
and RITES, Merrill placed into a trust $10.1 million in multifamily revenue
bonds with a coupon of 7.375% collateralized by Indian Lakes Apartments,
located in Virginia Beach, Virginia. The trust was securitized into $6.72
million in P-FLOATs and $3.36 million in RITES. The premium paid for
the Indian Lakes RITES is being amortized into income to approximate a
level yield over the term of the RITES. The Indian Lakes RITES are subject
to mandatory semi-annual call provisions.
The Company entered into an interest rate swap contract with a
notional amount of $6.5 million to hedge against the interest rate exposure
on the Company's investment in the Indian Lakes RITES. Under the interest
rate swap agreement, the Company is obligated to pay Merrill Lynch
Capital Services, Inc. (the "Counterparty") a fixed rate equal to 4.79%. In
return, the Counterparty will pay the Company a floating rate equivalent to
the PSA Municipal Swap Index, an index of weekly tax-exempt variable
rate issues. The Indian Lakes interest rate swap agreement matures January
3, 2006. The swap contract in conjunction with the Indian Lakes RITES
is intended to produce a relatively constant yield of approximately 10.5%
over the effective duration of the RITES. Risk arises from the possible
inability of the Counterparty to meet the terms of the contract with the
Company. However, there is no current indication of such inability.
Under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," ("FAS 115"), investments in mortgage revenue bonds
and other bond related investments are classified as available-for-sale debt
securities and are carried at fair value. The fair values of participating
bonds, which are wholly collateral dependent and for which only a limited
market exists, are estimated by the Company. The fair values of non-
participating bonds and other bond related investments are based on values
from external pricing sources for these or similar bonds. For the nine
months ended September 30, 1997, the net adjustment to unrealized gains
and losses on mortgage revenue bonds and other bond related investments
available for sale increased shareholders' equity by approximately
$5,536,000.
Indicated impairments must be considered other-than-temporary
when it becomes probable that all amounts under the bond will not be
collected in accordance with the bond's contractual terms. During the
second quarter of 1996, the Partnership recorded other-than-temporary
impairments totaling $3,990,000 on five bonds. There were no other-than-
temporary impairments in the third quarter of 1996 and 1997. The
Company will continue to use its best efforts in estimating the fair value of
its mortgage revenue bonds and other bond related investments.
NOTE 3 - INVESTMENT IN PARITY WORKING CAPITAL LOANS, DEMAND
NOTES AND OTHER LOANS
As of September 30, 1997, the Company held ten parity working
capital loans relating to the 11 remaining original mortgage revenue bonds.
The terms of the loans are identical to the mortgage revenue bonds to
which they relate. At September 30, 1997 and December 31, 1996, the
parity working capital loans are net of valuation allowances of $653,000
and $713,000, respectively. A complete description is included in Note 6
to the Company's 1996 Form 10-K.
As of September 30, 1997, the Company held ten Working Capital
Demand Notes, eleven Accrued Interest Demand Notes and eleven Load
Loan Demand Notes (collectively the "Demand Notes"). The Demand
Notes are due on demand, but in no case later than January 2030. The
Demand Notes bear interest at a compound annual rate equal to the
Blended Annual Rate in effect for that calendar year as published by the
Internal Revenue Service. On July 1, 1997, nine of the Accrued Interest
Demand Notes were amended to increase the monthly principal payments
due on the notes (see further discussion in Note 7). A complete description
of the Demand Notes is included in Note 6 to the Company's 1996 Form
10-K.
On January 9, 1997, in conjunction with the purchase of the bond
collateralized by The Crossings property, the Company made a loan on the
property not to exceed $844,000 of which approximately $563,000 was
drawn by the borrower. The annual stated interest rate on the loan was
8.81% until the bond refunding. On July 11, 1997, in conjunction with the
bond refunding, the loan was amended resulting in a new annual stated
interest rate of 8% on the loan. An additional $181,000 was drawn on the
loan at the time of the bond refunding. Principal payments on the bond and
the loan will be made monthly through maturity in 2027.
On June 11, 1997, in conjunction with the purchase of the bond
collateralized by the Southgate property, the Company made a $380,000
loan on the property. The loan bears interest at an annual stated rate of
8.0%. Principal payments begin in August 1997 until maturity in 2027.
Interest on the parity working capital loans, Demand Notes and
other loans is taxable to the shareholders for federal income tax purposes.
NOTE 4 - RESTRICTED ASSETS
On June 30, 1997, the Company acquired a 99.9% member interest
in MMACap, LLC for $1.0 million. The other 0.1% member interest in
MMACap, LLC was purchased by MME I, Corporation, an affiliate of the
Company. As a result of this acquisition, the consolidated financial
statements of the Company include MMACap, LLC. The only asset of
MMACap, LLC is a $1.4 million Fannie Mae risk-sharing collateral
account. The collateral account is part of a structured finance program
developed by Fannie Mae to facilitate the credit enhancement of bonds for
which there is shared risk. The risk-sharing collateral account provides
additional security for three enhanced bonds currently within a cross
collateralized pool. In the event any of the bonds in the pool cannot fund
their debt service payments, the money in the collateral account can be used
to fund debt service short falls. The Company does not believe that any loss
is likely. The collateral account will not be released to the Company until
the interest and principal obligations on all the bonds are fulfilled. The
release of the collateral account is anticipated to be in 2006 when the bonds
are expected to be refunded. In the interim, the Company will receive the
interest earned on the balance of the collateral reserve account. The
approximate $360,000 discount on the purchase has been recorded as
unearned revenue and will be amortized into income as guarantee fee
revenue over the expected life of the collateral account.
As part of the purchase of this collateral account, the Company
assumed a Master Recourse Agreement with Fannie Mae. Under this
agreement, the Company can add additional assets to the existing pool
discussed above. This will enable the Company to securitize bonds with
Fannie Mae credit enhancement. As bonds are added to the pool, the
expected life on the collateral account may be adjusted.
NOTE 5 - UNEARNED REVENUE
In addition to the unearned revenue resulting from the purchase
discussed in Note 4, the Company receives loan acquisition fees on certain
bond purchases which are deferred and recorded as unearned revenue.
These fees are then amortized into income to approximate a level yield
over the estimated lives of the related investments. The Company also
received a loan guarantee fee in December 1996 (see further discussion in
Note 8) that was deferred and is being amortized into income over the term
of the guarantee period.
On July 7, 1997, the Company entered into a joint program with the
Montford Companies to originate tax-exempt transactions. The Company
and the Montford Companies agreed to work jointly over an initial two year
period to invest in tax-exempt trust certificates backed by tax-exempt
housing bonds. The Company anticipates acquiring up to $50 million in
senior interest tax-exempt bonds through this joint program; however, the
Company is not obligated to acquire any bonds as a result of entering this
joint program. The Company received a $250,000 program development
fee for structuring, documenting, underwriting and generally developing
the program. This fee is being amortized into income over the term of the
program.
NOTE 6 - NON-EMPLOYEE DIRECTORS' SHARE PLAN AND
EMPLOYEE INCENTIVE PLAN
Common Stock Options
On April 24, 1997, options to purchase 641,970 Growth Shares
were issued under the 1996 Share Incentive Plan. The options were issued
at an exercise price of $16 7/8, the fair value of the Growth Shares on the
date of grant. The options vest over three years.
On May 28, 1997, options to purchase 12,500 Growth Shares were
issued under the Non-Employee Directors' Share Plan. The options were
issued at an exercise price of $16 13/16, the fair value of the Growth Shares
on the date of grant. These options are exercisable in full on the first
anniversary of the date of grant.
Restricted Shares
On April 24, 1997, 10,769 restricted shares were granted under the
1996 Share Incentive Plan. The market value of the shares awarded was
approximately $182,000. This amount was recorded as unearned
compensation and is shown as a separate component of shareholders'
equity. Unearned compensation is being amortized into expense over the
vesting period.
NOTE 7 - RELATED PARTY TRANSACTIONS
Upon consummation of the Merger, all employees of an affiliate of
the former Managing General Partner of the Partnership who were
necessary for the prudent operations of the Company became employees of
the Company, which now incurs their salary expenses directly. Certain
administrative services, including services performed by shared personnel,
continue to be performed by an affiliate that receives direct reimbursement
from the Company on a monthly basis. The expense associated with the
shared personnel was previously charged to salaries as shown in the
following table.
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
(000's) (000's) (000's) (000's)
--------------- -------------- -------------- ---------------
Charged to Series I:
Salaries of noncontrolling persons &
related expenses $- $83 $- $321
Other administrative expenses - 2 - 51
--------------- -------------- -------------- ---------------
Expenses reimbursed $- $85 $- $372
=============== ============== ============== ===============
Charged to Series II:
Salaries of noncontrolling persons &
related expenses $- $40 $- $154
Other administrative expenses - 1 - 25
--------------- -------------- -------------- ---------------
Expenses reimbursed $- $41 $- $179
=============== ============== ============== ===============
Charged to Company subsequent to July 31, 1996:
Other administrative expenses $74 $21 $212 $21
=============== ============== ============== ===============
Total:
Salaries of noncontrolling persons &
related expenses $- $123 $- $475
Other administrative expenses 74 24 212 97
--------------- -------------- -------------- ---------------
Expenses reimbursed $74 $147 $212 $572
=============== ============== ============== ===============
Mr. Mark K. Joseph, the Company's Chairman and Chief Executive
Officer, controls and is an officer of, and Mr. Michael L. Falcone, the
Company's Executive Vice President, has an interest in and is an officer of,
an entity which is responsible for a full range of property management
functions for certain properties that serve as collateral for the Company's
bond investments. For these services, the affiliated entity receives
property management fees pursuant to management fee contracts. In
addition, certain former affiliated entities of the Partnership also receive
property management fees pursuant to management fee contracts.
Consistent with the Company's Amended and Restated Certificate of
Formation and Operating Agreement, as amended, (the "Operating
Agreement"), each affiliate and former affiliate property management
contract is presented to the independent members of the Board of Directors
for approval with information documenting the comparability of the
proposed fees to those in the market area of the property. During the nine
months ended September 30, 1997 and 1996, these fees approximated $534,000
and $770,000, respectively.
Mr. Joseph controls the general partners of 16 of the 22 operating
partnerships whose property collateralizes the Company's original bonds
and Mr. Thomas R. Hobbs, the Company's Senior Vice President, serves as
an officer of such general partners. These operating partnerships were
created as successors to the original borrowers to preserve the loan
obligations and the participation in cash flow for the Company and thereby
assure that the Company will continue to recognize tax-exempt income.
However, such entities could have interests which do not fully coincide
with, or even are adverse to, the interests of the Company. Such entities
could choose to act in accordance with their own interests, which could
adversely affect the Company. Among the actions such entities could desire
to take might be selling a property, thereby causing a redemption event, at
a time and under circumstances which would not be advantageous to the
Company.
On September 1, 1996, the eleven operating partnerships included in the
Financing entered into an agreement with the Company whereby the
principal amortization on the Working Capital and Load Loan Demand
Notes were suspended. The managing general partner of these operating
partnerships is an entity controlled by Mr. Joseph. This action did not
change the total cash payments received from the operating partnerships,
but did result in additional interest income of $78,000 and $703,000 for the
two and nine months ended September 30, 1996 and 1997, respectively.
Additionally, on July 1, 1997, nine of the eleven operating partnerships
included in the Financing entered into an agreement with the Company
whereby the principal amortization on the Accrued Interest Demand Notes
was increased. The increase in the principal payments on these notes was
equal to the amount of principal payments suspended on the Working
Capital and Load Loan Demand Notes discussed above. This action did not
change the total cash payments received from the operating partnerships,
nor did it change total income, but did result in a reclassification of
interest income on B Bonds to interest earned on Accrued Interest Demand
Notes of $234,000 for the three months ended September 30, 1997.
Shelter Development Holdings, Inc., the "Special Shareholder", is
personally liable for the obligations and liabilities of the Company. Mr.
Joseph has an ownership interest in the Special Shareholder. In the event
that a business combination or change in control occurs, and the Special
Shareholder does not approve of such transaction, then the Special
Shareholder has the right to terminate its status as the Special Shareholder.
In the event of such termination, the Company would be obligated to pay
the Special Shareholder $1,000,000.
Prior to the Merger, the former associate general partner received fees
for mortgage servicing from the operating partnerships owning the original
mortgaged properties. The fees paid by all operating partnerships to the
former associate general partner approximated $1.2 million for the seven
months ended July 31, 1996 . On August 1, 1996, the former general
partners and their affiliates contributed to the Company their mortgage
servicing activities in exchange for Growth Shares, and the Company now
receives the cash flow associated with these fees. Upon receipt of the
mortgage servicing activities, the Company terminated the mortgage
servicing fees paid on bonds collateralized by properties controlled by
affiliates of the Company. As a result, the Company now receives these
fees in two forms, (1) as mortgage servicing fees from the bonds
collateralized by properties controlled by non-affiliates which is now paid
to the Company, and (2) as additional bond interest for bonds
collateralized by properties controlled by affiliates of the Company. For the
two and nine months ended September 30, 1996 and 1997 the cash flow
associated with these fees paid to the Company approximated $83,000 and
$370,000, respectively, in mortgage servicing fees and $247,000 and
$1,108,000, respectively, in additional bond interest.
An affiliate of the former managing general partner was previously
engaged as a project acquisition and servicing agent. The affiliate received
as compensation, project selection and acquisition fees (one percent of the
gross proceeds) and annual mortgage servicing fees to the extent the net
proceeds raised by the Financing were permanently invested. On August
1, 1996, the rights to these fees were exchanged for Growth Shares in
connection with the Merger transaction.
In addition, 177061 Canada Ltd. (formerly Shelter Corporation of
Canada Limited), a general partner of the former Associate General Partner,
is contractually obligated to the nonaffiliated borrowers of North Pointe and
Whispering Lake to fund operating deficits. The unaccrued and unpaid
balances due under the limited operating deficit guarantees, including
interest as of September 30, 1997, totaled $43,000 and $55,000 for North
Pointe and Whispering Lake, respectively. Scheduled payments totaling
$47,000 and $85,000 were received on the North Pointe obligation and
recorded as income for the nine months ended September 30, 1997 and
1996, respectively. Under the Whispering Lake obligation, $66,000 and
$121,000 were received and recorded as income for the nine months ended
September 30, 1997 and 1996, respectively.
The borrower of the funds to be provided by the $33.9 million mortgage
revenue bond described in Note 8 will be the Shelter Foundation, a public
non-profit foundation that provides housing and related services to families
of low and moderate income. Mr. Joseph is the President and one of five
directors of the Shelter Foundation. In addition, companies of which Mr.
Joseph owns an indirect minority interest and Mr. Falcone owns a direct
minority interest, will receive a consulting fee of 1.0% of the loan amount
and will serve as property manager of the related apartment project for a fee
of $13,750 per month.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
On November 12, 1996, the Company committed to purchase a
$33,900,000 mortgage revenue bond to be issued by the DeKalb County
Housing Authority for a 722-unit multifamily apartment project known as
the Village of Stone Mountain located in suburban Atlanta, Georgia. The
bonds will provide for annual interest payments of 8.75% (of which 8% will
be required to be paid on a current basis, with the remaining .75% payable
from available net cash flow) plus contingent interest equal to the lesser of
(i) 7.25% or (ii) one-third of the property's net cash flow. Pending the
issuance of the bond, which was anticipated to occur in late 1997 or early
1998, the Company on December 17, 1996 guaranteed bridge financing
provided by NationsBank for a fee of 1.0% of the loan amount and an
annual guarantee fee of 1.0% until bond issuance.
The Company's exposure (in the event of the borrower's non-performance) for
the guarantee of the bridge financing is equal to the contractual amount of the
purchase commitment. The Company does not believe that any loss is likely.
NOTE 9 - SUBSEQUENT EVENTS
Distributions
On October 9, 1997, distributions for the three months ended
September 30, 1997 were declared for shareholders of record on October
20, 1997 and to be paid on November 3, 1997. The per share distributions
are shown in the following table:
Preferred Capital
BACs Growth Preferred Shares Distribution Shares
SeriesI SeriesII Shares Series I Series II Series I Series II
----------------- --------- ------------------- ---------------------
Distributions paid on July 31, 1996
to holders of record on June 30, 1996:
For the six months ended
June 30, 1996 from the Partnership
(prior to the Merger) $26.25 $27.50 N/A N/A N/A N/A N/A
Distributions paid on August 15, 1996
to holders of record on August 1, 1996:
Special distribution/return of capital
in accordance with the Prospectus N/A N/A N/A $ - $6.84 $177.59 $252.03
Distributions paid on May 9, 1997
to holders of record on April 28, 1997:
For the three months ended
March 31, 1997 N/A N/A 0.3450 - - - -
Distributions paid on August 4, 1997
to holders of record on July 21, 1997:
For the three months ended
June 30, 1997 N/A N/A 0.3500 - - - -
For the six months ended
June 30, 1997 N/A N/A - 26.25 30.64 21.57 25.00
Distributions to be paid on November 3, 1997
to holders of record on October 20, 1997
For the three months ended
September 30, 1997 N/A N/A 0.3650 13.50 15.35 11.00 12.50
--------------------------------------------------------------------
Total $26.25 $27.50 $1.0600 $39.75 $52.83 $210.16 $289.53
====================================================================
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Business
Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage
revenue bonds issued by state and local government authorities to finance
multifamily housing developments. The Company is a limited liability
company that, as a result of a merger effective August 1, 1996 (the
"Merger"), is the successor to the business of SCA Tax Exempt Fund
Limited Partnership (the "Partnership"). Accordingly, the financial
statements included herein present the financial position of the Company
at September 30, 1997 and December 31, 1996; results of operations
include the operations of the Company for the two and nine months ended
September 30, 1996 and 1997, respectively, and those of the Partnership
for the seven months ended July 31, 1996.
The Partnership was a limited partnership whose assets, until 1995,
consisted principally of 22 mortgage revenue bonds and related working
capital loans acquired with the $296 million proceeds from two 1986
offerings of Beneficial Assignee Certificates ("BACs") representing the
assignment of its limited partnership interests. In 1995, the Partnership, in
a financing transaction (the "Financing") described more fully in Note 4 to
the Company's 1996 Annual Report on Form 10-K (the "Company's 1996
Form 10-K"), raised $67.7 million of Financing proceeds of which $5.0
million was invested in demand notes and the remaining proceeds, after
expenses and working capital reserves, of $56.8 million are being used for
further investment in mortgage revenue bonds.
As a result of elections made by the Partnership's BAC holders in
connection with the Merger, the outstanding BACs were exchanged for
either Preferred Shares, Preferred Capital Distribution Shares ("Preferred
CD Shares"), or Growth Shares (including a limited number of Term
Growth Shares) of the Company. As more fully explained in Note 8 to the
Company's 1996 Form 10-K, all of these shares participate, to varying
degrees, in the investment results of the bonds and related loans held by the
Partnership at the time of the Merger, and only the Growth Shares and the
Term Growth Shares participate in the investment results of the bonds and
other bond related investments purchased with the proceeds from the
Financing and any future financing.
The Company is required to distribute to the holders of Preferred
Shares and 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 "Operating Agreement"). The Company
is required to distribute 2.0% of the net cash flow to the holders of Term
Growth Shares. The balance of the Company's net income is allocated to
the Growth Shares and the Company's policy is to distribute to Growth
Shareholders a portion, not less than 80%, of the cash flow associated with
this income.
Certain of the bonds held by the Company are participating bonds that
provide for payment of contingent interest, based upon the performance of
the underlying properties, in addition to base interest at a fixed rate.
Because the mortgage loans underlying all of the bonds held by the
Company are nonrecourse, all debt service on the bonds, and therefore cash
flow available for distribution to all shareholders, is dependent upon the
performance of the underlying properties.
Results of Operations
Quarterly Results Analysis
Total income for the three months ended September 30, 1997 increased
by approximately $500,000 over the same period last year due primarily to
(1) the contribution of mortgage servicing activities by the former general
partners of the Partnership which served to increase interest received from
the properties collateralizing the bonds by approximately $164,000, and (2)
an increase in interest revenue and acquisition fees earned on new
acquisitions of approximately $334,000.
Operating expenses for the three months ended September 30, 1997
decreased by approximately $299,000 from the prior year due to a decrease
in merger-related expenses partially offset by an increase in costs
associated with the administration of a public company and the Company's
expansion.
Year-to-Date Results Analysis
Total income for the nine months ended September 30, 1997 increased
by approximately $2,575,000 over the same period last year due primarily
to (1) the contribution of mortgage servicing activities by the former
general partners of the Partnership which served to increase interest
received from the properties collateralizing the bonds by approximately
$1,149,000, (2) an increase in interest revenue and acquisition fees earned
on new acquisitions of approximately $732,000, and (3) an increase in
interest collected from the properties of approximately $625,000 due to the
suspension of principal payments on the demand notes.
Operating expenses for the nine months ended September 30, 1997
decreased by approximately $541,000 from the prior year due to a decrease
in merger-related expenses partially offset by an increase in costs
associated with the administration of a public company and the Company's
expansion.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash and cash equivalents
of approximately $8.2 million available for investment.
The Company (including the predecessor Partnership) has financed its
operations with the proceeds from the Partnership's 1986 BAC offerings,
the proceeds from the Financing and cash provided by debt service and fees
relating to the bonds and related loans and notes acquired with such
proceeds. Cash flow from operating activities was $14.2 million and $9.0
million for the nine months ended September 30, 1997 and 1996,
respectively. The increase for the nine months ended September 30, 1997
over the same period in 1996 was due primarily to the fact that in the first
seven months of 1996 the income from the temporary investment of the
Financing proceeds, as well as the debt service on certain notes, both of
which were held by MLP II Acquisition Limited Partnership (a limited
partnership, which was accounted for under the equity method), were
classified as cash flow from investing activities. Had they been classified as
cash flow from operating activities during this period, cash flow from
operating activities would have been $12.0 million during the nine months
ended September 30, 1996.
On October 9, 1997, a distribution of 36.5 cents for the three months
ended September 30, 1997 was declared for holders of Growth Shares. For
the same period, $98,560 in distributions were declared for Term Growth
Shareholders. Also on October 9, 1997, for the same period a per share
distribution was declared to the preferred shareholders as follows: Preferred
Series I, $13.50; Preferred Series II, $15.35; Preferred Capital Distribution
Series I, $11.00; and Preferred Capital Distribution Series II, $12.50. All
distributions were for holders of record on October 20, 1997 and will be
paid on November 3, 1997.
The Company expects to meet its cash needs in the short-term from
operating cash flow. In addition, the Company's business plan anticipates
making additional investments of approximately $50 million to $75 million
of additional mortgage revenue bonds during 1997 (assuming the purchase
of a $33.9 million bond for which a commitment has been made ). In order
to achieve its plan, the Company will be required to obtain additional debt,
securitization or equity financing of approximately $50 million to $75
million during 1997. The Company currently has no commitments or
understandings with respect to such financing, and there can be no
assurance that any such financing will be available when needed.
PART II - OTHER INFORMATION
Item 5 - Other Information
On September 4, 1997, the Registrant filed a Form S-3 Registration
Statement under the Securities Act of 1933 registering growth shares to be
issued under its Dividend Reinvestment and Growth Share Purchase Plan
(the "Plan"). The Plan was created to provide growth shareholders with an
opportunity to acquire growth shares through dividend reinvestment.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K for the
period covered by this report.
PAGE
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
(Registrant)
By: /s/ Mark K. Joseph
Mark K. Joseph
Chief Executive Officer and Chief Financial Officer
DATED: October 24, 1997