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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 001-11981
MUNICIPAL MORTGAGE & EQUITY, LLC
(Exact name of Registrant as specified in its charter)
Delaware 52-1449733
-------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Shares New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Preferred Shares
Preferred Capital Distribution Shares
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Shares held by
non-affiliates of the registrant as of March 24, 2000 (computed by reference to
the closing price of such stock on the New York Stock Exchange) was
$291,940,842. The Company had 17,433,850 Common Shares outstanding as of March
24, 2000 the latest practicable date.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Registrant's definitive Proxy Statement Part II
regarding the I 2000 Annual Meeting of
Shareholders to the extent stated herein.
Part I
Item 1. Description of Business.
General Development of Business.
Municipal Mortgage & Equity, LLC ("MuniMae") and its subsidiaries
(together with MuniMae, the "Company") are principally engaged in originating,
investing in and servicing investments in multifamily housing debt and equity.
The Company primarily holds a portfolio of tax-exempt mortgage revenue bonds
issued by state and local government authorities to finance multifamily housing
developments secured by nonrecourse mortgage loans on the underlying properties.
MuniMae is a Delaware limited liability company and is the successor to the
business of SCA Tax Exempt Fund Limited Partnership (the "Partnership"), a
closed-end limited partnership that was merged into MuniMae on August 1, 1996.
As a limited liability company, the Company combines the limited liability,
governance and management characteristics of a corporation with the pass-through
income features of a partnership. Since MuniMae is classified as a partnership
for federal income tax purposes, no recognition of income taxes is made.
Instead, the distributive share of MuniMae's income, deductions and credits is
included in each shareholder's income tax return.
The Predecessor
The Partnership commenced operations in 1986 when it sold two series of
Beneficial Assignee Certificates ("BACs"), representing the assignment of its
limited partnership interests. The $296 million proceeds therefrom were invested
in 22 mortgage revenue bonds (the "original bonds") and related working capital
loans held in two separate pools, "Series I" and "Series II," corresponding with
the related series of BACs. In a February 1995 financing (the "1995 Financing"),
the Partnership raised $67.7 million through the sale of multifamily revenue
bond receipts (the "Receipts") secured by newly refunded bonds (the "Refunding")
issued in exchange for 11 of the original bonds and the cash stream from one
additional bond. Effective December 31, 1997, the one additional bond was
released as additional collateral. Of the $67.7 million of proceeds, $5.0
million was invested in demand notes and the remainder, after expenses and
working capital reserves, of $56.8 million has been principally invested in
additional mortgage revenue bonds and other bond related investments.
The Merger
In connection with the August 1, 1996 merger of the Partnership into
MuniMae (the "Merger"), the Partnership's BAC holders were given the opportunity
to elect among three different securities of the Company for which to exchange
their BACs--Preferred Shares, Preferred Capital Distribution Shares
(collectively the "Preferred Shares") or Common Shares. The Preferred Shares
were structured to give BAC holders a security substantially the same as their
BACs as if the 1995 financing had not occurred. Thus, the Preferred Shares
participate in their pro rata share of income from the 22 original bonds as they
existed immediately after the Refunding and before the 1995 Financing. The
Preferred Capital Distribution Shares (the "Preferred CD Shares") were
structured to give their holders the income they would have received from their
original BACs, but provided for a distribution of their pro rata share of the
proceeds of the 1995 Financing. Thus, the Preferred CD Shares participate in
their pro rata share of income from the 22 original bonds as they existed
immediately after the Refunding and the 1995 Financing. The Common Shares,
unlike either the Preferred Shares or Preferred CD Shares, were structured to
enable their holders to participate in all of the income from investment of the
proceeds of the 1995 Financing, as well as future financings, in addition to
their pro rata share of the income from the original bonds as they existed
immediately after the 1995 financing. As a result of the election process, the
holders of 8.09% of the outstanding BACs received Preferred Shares, the holders
of 4.29% of the outstanding BACs received Preferred CD Shares and the holders of
86.62% of the outstanding BACs received Common Shares of the Company.
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. Term Growth
Shares were issued to the former general partners of the Partnership in exchange
for their general partnership interests and to a Merrill Lynch Pierce Fenner &
Smith Incorporated affiliate in exchange for their subordinated BACs. The
balance of the Company's cash flow is available for distribution to Common
Shares and the Company's current policy is to distribute to Common Shareholders
at least 80% of the cash flow associated with this income.
Preferred Share Tender Offers
On November 19, 1998, the Company offered to purchase up to 20% of the
preferred shares for cash at approximately 80% of the September 30, 1998 book
value, reduced for distributions paid to holders of preferred shares on November
2, 1998, in response to a tender offer made by an unaffiliated third party. As a
result, on January 1, 1999, 657 Series I and 124 Series II Preferred Shares,
which had been tendered, were purchased at the per share price of $597.46 and
$746.83, respectively, and 527 Series I and 371 Series II Preferred CD Shares,
which had been tendered, were purchased at the per share price of $455.02 and
$544.02, respectively.
On November 26, 1997, the Company offered to purchase up to 20% of the
preferred shares for cash at approximately 80% of the September 30, 1997 book
value for each class in response to a tender offer made by an unaffiliated third
party. As a result, on January 1, 1998, 739 Series I and 287 Series II Preferred
Shares which had been tendered were purchased at a per share price of $593.43
and $711.77, respectively, and 584 Series I and 274 Series II Preferred CD
Shares which had been tendered were purchased at a per share price of $448.77
and $506.67, respectively.
Subsidiaries
In May 1999, MuniMae TE Bond Subsidiary, LLC ("TE Bond Sub"),
a newly formed indirect subsidiary of MuniMae, sold to institutional investors
42 shares of 6 7/8% Series A Cumulative Preferred Shares with a liquidation
preference of $2 million per share (the "Series A Preferred Shares" or the
"Preferred Share Offering") (see further discussion in Note 3 to the Company's
consolidated financial statements included herein). The Series A Preferred
Shares have a senior claim to the income derived from the investments owned by
TE Bond Sub. Any income from TE Bond Sub available after payment of the
cumulative distributions of the Series A Preferred Shares is allocated to the
Company. In connection with this transaction, the Company contributed certain of
its assets to TE Bond Sub and its subsidiaries. The assets of TE Bond Sub and
its subsidiaries, while indirectly controlled by MuniMae and thus included in
the consolidated financial statements of MuniMae, are legally owned by TE Bond
Sub and are not available to the creditors of MuniMae.
On October 20, 1999, the Company acquired Midland Financial Holdings,
Inc. and subsidiaries ("Midland") for approximately $45 million. Of this amount,
the Company paid approximately $23 million in cash and approximately $12 million
in common shares at the closing of the transaction. In addition, $3.33 million
in MuniMae common shares is payable annually over a three year period if Midland
meets certain performance targets, including an annual contribution to cash
available for distribution ("CAD").
Midland is a fully integrated real estate investment firm specializing
in providing debt and equity capital in the affordable multifamily housing
industry. Midland provides construction and permanent debt financing, mortgage
servicing and asset management services to the multifamily housing industry.
Midland is a Fannie Mae Delegated Underwriter and Servicer ("DUS") and a Federal
Housing Administration approved mortgagee. Midland syndicates equity for
investment in low income housing tax credits. Midland also syndicates equity and
originates debt for investment in student/conventional housing, a unique and
growing segment of the multifamily housing industry. A subsidiary of Midland is
a registered investment advisor with the Securities and Exchange Commission and
a wholly owned special purpose subsidiary of Midland provides advisory services
to pension funds. Midland currently manages approximately $259 million of
pension fund money.
Business 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 revenues associated with the investing segment consist primarily of
interest earned on mortgage revenue bonds, other bond related investments and
certain short-term taxable loans and investments. The revenues associated with
the operating segment consist primarily of loan servicing and loan origination
fees for the Company's own portfolio and for others, syndication and brokerage
fees associated with tax credit syndications originated, taxable interest and
fees earned on construction lending activities and other fee income. Segment
results include all direct revenues and expenses of each segment and allocations
of indirect expenses based on specific methodologies. The Company's reportable
segments are strategic business units that primarily generate different income
streams and are managed separately. The majority of the income generated by the
operating segment was acquired as a unit and the management of such unit was
retained.
For the year ended December 31, 1999, the Company's revenues, net
income and identifiable assets have been distributed among the following
segments (in thousands):
Investing Operating Adjustments (1) Total
----------- ------------ ---------------- ---------
Revenues $43,573 $ 10,394 $ (421) $ 53,546
Net Income 30,837 1,097 (421) 31,513
Identifiable Assets 502,052 299,694 - 801,746
(1) Represent origination fees on purchased investments that are deferred and
amortized into income over the life of the investment.
Prior to October 1999, the Company had an investing segment but not an
operating segment.
Raising Capital
Capital is the raw material that enables the Company to fund its
investments. In order to facilitate growth, the Company will require additional
capital to pursue acquisition opportunities. The Company has primarily used two
sources of capital: securitizations and equity offerings from MuniMae and
certain subsidiaries. The most economically efficient way to fund future
acquisitions is through securitizations. While this is the lowest cost of
capital available to the Company, there are limits to the use of leverage. The
Company has decided that a conservative capital structure that avoids over
leveraging is the most prudent course to take. Therefore, periodically the
Company, through equity offerings, will decrease outstanding off-balance sheet
debt to reduce leverage. Also, as a result of the Midland acquisition, the
Company has expanded its access to capital. Midland's syndication and pension
fund investors are essentially an alternative financing source to
securitizations, as is Fannie Mae through it's multifamily securitization
program.
Securitizations
The Company has access to financing programs for the securitization of
tax-exempt instruments. In 1999, the Company participated in a securitization
program that involves placing a bond in a trust, and selling short term floating
rate interests (the "senior certificates" or "P-FLOATs(sm)" in the trust to
qualified third party investors. The Company typically receives the net proceeds
from the sale of the senior certificates related to bonds it previously held and
purchases the residual interest (the "subordinate certificates" or "RITES(sm)")
in the trust. The Company may also purchase, for investment purposes,
subordinate certificates in bonds that it did not own, in which case it receives
no proceeds. The senior certificates are the senior obligations of the trust and
have first priority on the cash flow from the bonds. The subordinate
certificates are the subordinate security and receive the residual income after
payment of all fees and the floating rate obligation. To the extent these
transactions create interest rate risks, the Company enters into interest rate
swap contracts designed to reduce, but not eliminate such risks.
Throughout 1999 and 1998, the Company raised $116 million and $90
million, respectively, through securitizations of 12 and two mortgage revenue
bonds, respectively, at effective annual costs of approximately 5.3%.
In March 1999, the Company consummated a transaction with an affiliate
of Merrill that converted a portion of its investment in the securitization
trusts discussed above into a longer-term securitization facility. This
transaction enabled the Company to (a) reduce its exposure to credit and annual
renewal risks associated with the liquidity and credit enhancement features of
the securitization trusts and the swap agreements, (b) reduce the annual
financing costs and (c) eliminate the risk of receiving taxable net swap
payments which serve to hedge tax-exempt investments (see discussion in Note 4
to the consolidated financial statements included herein). As a result of
certain call provisions available to the subordinate certificate holders, the
Company has accounted for this transaction as a borrowing. Accordingly, the
senior certificates were recorded as long-term debt and the bonds associated
with this transaction are included in investments in mortgage revenue bonds.
Prior to this transaction, these assets and liabilities had received sale
treatment and therefore were off-balance sheet financing.
Public Offerings
On July 22, 1998, the Company sold to the public 2.5 million Common
Shares at a price of $21.125 per share. Net proceeds generated from the offering
approximated $49.6 million. The net proceeds from this offering have been used
for general corporate purposes, including new investments and working capital.
On January 26, 1998, the Company offered and sold to the public 3.0
million Common Shares at a price of $20.625 per share and granted the
underwriters an option to purchase up to an aggregate of 450,000 Common Shares
to cover over-allotments at the same price. The net proceeds from this offering
approximated $57.9 million. On February 13, 1998, the underwriters exercised
their option to purchase 246,000 Common Shares generating net proceeds of
approximately $4.8 million. The net proceeds from this offering were used to
fund bond acquisitions during 1998.
The Mortgage Revenue Bonds
The proceeds of the mortgage revenue bonds held by the Company were
used to make mortgage loans for the construction, acquisition or refinancing of
multifamily housing developments throughout the United States. The underlying
developments are "qualified residential rental properties" under section 142(d)
of the Internal Revenue Code of 1986, as amended (the "Code"), which requires
that a specified percentage of their rental units be rented to persons whose
incomes do not exceed specified percentages of local median income levels.
Certain of the mortgage bonds qualify as 501(c)(3) bonds under Section 145 of
the Code, which requires that the owner of the underlying property is a
501(c)(3) organization or a governmental unit that meets certain additional
requirements. Accordingly, the bonds are "qualified bonds" within the meaning of
section 141(e) of the Code, and the interest paid on the bonds is exempt from
federal income taxes.
Each mortgage revenue bond is secured by an assignment to the Company
of the related mortgage loan, which in turn is secured by a mortgage on the
underlying property and assignment of rents. Although the bonds are issued by
state or local governments or their agencies or authorities, the bonds are not
general obligations of any state or local government, no government is liable
under the bonds, nor is the taxing power of any government pledged to the
payment of principal or interest under the bonds. In addition, the underlying
mortgage loans are nonrecourse, which means that the owners of the underlying
properties, are also the borrowers under the mortgage loans, are not liable for
the payment of principal and interest under the loans. Accordingly, the sole
source of funds for payment of principal and interest under the bonds is the
revenue derived from operation of the mortgaged properties and amounts derived
from the sale, refinancing or other disposition of such properties.
As of December 31, 1999, the Company held $392 million of bonds or
certificates of participation in grantor trusts holding tax-exempt mortgage
revenue bonds ("COPs"). Of this amount, $149 million were participating, $164
million were non-participating, $57 million were participating subordinate and
$22 million were non-participating subordinate bonds or COPs. (See Note 5 to the
Company's consolidated financial statements included herein for a complete
discussion.)
Other Bond Related Investments
The Company's other bond related investments are primarily investments
in RITES(sm). As discussed above, the RITES(sm) are the subordinate security and
receive the residual interest. In conjunction with the purchase of the RITES(sm)
with respect to fixed rate bonds, the Company enters into interest rate swap
contracts to hedge against interest rate exposure on the Company's investment in
the RITES(sm). In order to facilitate the securitization of certain assets at
higher leverage ratios than otherwise available, the Company has pledged
additional bonds to a pool that acts as collateral for the senior interest in
the P-FLOATS(sm) trusts.
From time to time, the Company may purchase or sell in the open market
interests in bonds that it has securitized depending on the Company's capital
position and needs. During the year ended December 31, 1999, the Company
purchased and/or sold interests in two bonds that it had previously securitized.
(See Note 7 to the Company's consolidated financial statements included herein.)
Loans Receivable
The Company's investment in construction loans primarily consists of
short-term taxable loans originated by Midland. The proceeds of these loans are
used to build low-to-moderate income apartment communities. These construction
loans are typically underwritten so as to facilitate a permanent takeout through
Fannie Mae's DUS program. The Company, through Midland, is able to provide
funding for the construction of these properties by utilizing capital it manages
for various pension funds. The Company also provides taxable second loans and
parity working capital loans to certain properties in conjunction with the
purchase of tax-exempt bonds.
Acquisitions
Investment Acquisition Program
Through the investing segment, the Company seeks to acquire investments
that primarily generate tax-exempt interest income and that are available on
attractive terms. The Company believes that currently there are a substantial
number of mortgage bonds and similar investments available at attractive prices
including:
C Existing mortgage bonds for which the underlying mortgages are
refinanced. There are a significant number of mortgage bonds backed by
multifamily properties that were originated in the late 1980s. The
Company believes, in light of the current interest rate environment,
that many of the obligors on these mortgage bonds may consider
refinancing them.
C Bonds issued for the benefit of charitable organization obligors
(otherwise referred to as 501(c)(3) developers) which own and manage
multifamily housing. These properties generally serve moderate-income
families with incomes between 50% and 80% of a region's median income.
C Bonds that are used to finance development or rehabilitation of
multifamily properties, in conjunction with the affordable housing tax
credit.
C Other portfolios of bonds and related investments backed by multifamily
housing properties that meet the Company's underwriting criteria,
including having attractive risk-adjusted returns.
The Company will focus its efforts on supplying tax-exempt financing to
quality, multifamily housing owned or developed by tax credit and 501(c)(3)
developers as well as refinancings of existing mortgage bonds.
Midland Acquisition
On October 20, 1999, the Company acquired Midland for approximately $45
million. Of this amount, the Company paid approximately $23 million in cash and
approximately $12 million in common shares at the closing of the transaction. In
addition, $3.33 million in MuniMae common shares is payable annually over a
three year period if Midland meets certain performance targets, including an
annual CAD.
Midland is a fully integrated real estate investment firm specializing
in providing debt and equity capital in the affordable multifamily housing
industry. Midland provides construction and permanent debt financing, mortgage
servicing and asset management services to the multifamily housing industry.
Midland is a Fannie Mae Delegated Underwriter and Servicer and a Federal Housing
Administration approved mortgagee. Midland syndicates equity for investment in
low income housing tax credits. Midland also syndicates equity and originates
debt for investment in student/conventional housing, a unique and growing
segment of the multifamily housing industry. A subsidiary of Midland is a
registered investment advisor with the Securities and Exchange Commission and a
wholly owned special purpose subsidiary of Midland, provides advisory services
to pension funds. Midland currently manages approximately $259 million of
pension fund money
Competition
The need for capital for multifamily housing developments continues to
grow, especially in the affordable housing sector. Mature properties need to be
recapitalized and new properties are being built to meet increasing demands in
various markets. State and federal government programs, which provide incentives
and/or subsidies to build and reinvest in multifamily housing, motivate
continuous activity in multifamily development. Increasingly, these needs are
being financed with tax-exempt bonds and affordable housing tax credits.
The Company actively seeks investment opportunities throughout the
United States and is encouraged by the business opportunities that exist.
Although the Company operates in a competitive environment, there are only a
handful of competitors that are exclusively focused on providing tax-exempt
financing for multifamily housing consistent with the Company's acquisition
programs. As a result, the Company is able to offer financing programs that are
custom-tailored to meet the customer's needs. And, with the addition of Midland,
it extends the Company's lending reach and product offerings by providing access
to new forms of debt and equity capital. When MuniMae's tax-exempt lending is
coupled with Midland's debt and equity capital, the Company has the ability to
provide one stop shopping to borrowers seeking debt and equity financing for
affordable multifamily housing communities.
The primarily competitive factors in originating new investments are
pricing, service, ease of execution and certainty of execution. The Company's
ability to follow through on these factors is the key to continued growth.
Property Performance
The Company structured $200 million in investment transactions during
1999, of which $106 million were retained as investments in mortgage revenue
bonds or other bond related investments. The properties collateralizing the
mortgage loans underlying the investments are geographically dispersed and
include new construction projects and acquisition or refinancing of existing
properties. Of the $200 million in transactions structured in 1999, $16 million
contain provisions by which the Company participates in the cash flow of the
property. Aggregate occupancy for all of the properties collateralizing the
Company's bonds and other bond related investments was 93.8% at December 31,
1999.
The 22 original bonds held by the Partnership at the time of the 1995
Financing had been acquired by the Partnership in 1986 and 1987. Due to an
imbalance in the real estate markets in the late 1980's and early 1990's, many
of the mortgage properties collateralized by the original bonds were unable to
achieve the rent increases originally anticipated and, consequently, the net
cash flow from most of the properties was insufficient to pay the base interest
due. Consequently, the former managing general partners were forced to draw
funds from project level sources such as reserves and guarantees or declare
monetary defaults and initiate loan workout discussions in instances where no
project level sources existed.
Construction starts for new apartment units declined significantly
throughout the United States since the mid-1980s and fell to a record low in
1993. This decline in construction starts coupled with a general economic
recovery brought about tightening markets, stabilized and higher occupancies,
and an ability to realize greater rent increases. Apartment starts have
generally increased since 1993 with relative balance between new supply and
marginal demand for housing in most markets.
The following table provides certain information for the years ended
December 31, 1999 and 1998 with respect to the properties collateralizing the
mortgage loans underlying the investments held by the Company at December 31,
1999.
Real Estate Table
Avg. Monthly Rent
Per Apartment Unit
Occupancy -----------------------------
--------------------------------
Month Month Month Month Month Month
Ended Ended Ended Ended Ended Ended
Month/Year Apartment December June December December June December
31, 30, 31, 31, 30, 31,
Apartment Community Location Acquired Units 1999 1999 1998 1999 1999 1998
-------------------------------- -----------------------------
Participating Mortgage Bonds:
Alban Place Frederick, MD Sep-86 194 91.2% 99.0% 90.7% $795 $752 $770
Cobblestone San Antonio Aug-99 184 93.5% N/A N/A 544 N/A N/A
Creekside Village Sacramento, CA Nov-87 296 98.6% 96.0% 92.9% 488 478 477
Emerald Hills Issaquah, WA Mar-88 130 94.6% 91.2% 93.8% 879 903 894
Lakeview Miami, FL Sep-87 180 96.7% 94.2% 96.1% 638 633 634
Mountain View
(Willowgreen) Tacoma, WA Nov-86 241 96.7% 96.7% 95.9% 558 546 540
Newport On Seven St. Louis Park, MN Aug-86 167 95.2% 98.4% 97.0% 931 898 886
North Pointe San Bernardino, CA Sep-86 540 95.9% 96.2% 92.6% 592 591 590
Northridge Park II Salinas, CA Aug-87 128 92.2% 96.9% 93.0% 923 893 854
Riverset (1) Memphis, TN Aug-88 352 96.8% 95.8% 96.6% 685 662 658
Southfork Village Lakeville, MN Jan-88 200 96.5% 95.0% 96.5% 900 865 852
Village at Stone
Mountain Stone Mountain, GA Oct-97 722 97.2% 94.7% 94.3% 677 670 666
The Crossings Lithonia, GA Jan-97 200 100.0% 97.6% 97.0% 718 694 679
The Villas at LaRiveria Sacamento, CA Jun-99 199 96.0% N/A N/A 567 N/A N/A
Winter Oaks Winter Haven, FL Nov-99 460 N/A N/A N/A N/A N/A N/A
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Subtotal Participating Mortgage Bonds 4,193
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Mortgage Bonds
Riverset II (1) Memphis, TN Jan-96 --- ---- ---- ---- ---- ---- ----
Ceilo Vista El Paso, TX Aug-99 378 77.2% N/A N/A 422 N/A N/A
Charter House (2) Lenexa, KS Dec-96 ---- ---- ---- ---- ---- ---- ----
Gannon (Broward) Lauderdale Lakes, FL Feb-98 315 92.1% 93.3% 97.8% 604 577 597
Gannon (Dade) (3) Miami, FL Feb-98 1,252 96.1% 94.6% 95.6% 691 684 677
Gannon (St. Louis) St. Louis, MO Feb-98 336 91.1% 91.3% 92.0% 521 520 511
Gannon A Bond Feb-98 ---- ---- ---- ---- ---- ---- ----
Hidden Valley Kansas City, MO Dec-96 82 96.3% 97.6% 93.9% 512 512 515
Oakbrook Topeka, KS Dec-96 170 97.6% 93.4% 82.4% 446 446 446
Oakmont Monroe, LA Dec-98 212 93.9% 89.5% N/A 442 441 N/A
Orangevale Orange, CA Apr-98 64 100.0% 100.0% 98.4% 896 859 860
Lake Piedmont Indianapolis, IN Apr-98 648 78.2% 67.9% 59.9% 462 457 480
Honey Creek Dallas, TX Mar-99 656 95.7% 98.1% N/A 502 478 N/A
Parkwood Turlock, CA Jun-99 180 92.2% N/A N/A 429 N/A N/A
Torries Chase Olathe, KS Dec-96 99 91.9% 97.5% 94.9% 453 453 443
Towne Oak Monroe, LA Dec-98 152 95.4% 96.5% N/A 442 441 N/A
Villa Hialeah Hialeah, FL Nov-87 245 94.3% 97.6% 91.8% 637 621 608
-------
Subtotal Mortgage Bonds 4,789
-------
Participating Subordinate Mortgage Bonds:
Barkley Place Ft. Myers, FL May-87 156 93.6% 91.7% 96.8% 1,959 1,894 1,847
Gilman Meadows Issaquah, WA Mar-87 125 96.0% 94.6% 97.6% 936 910 895
Hamilton Chase Chattanooga, TN Feb-87 300 96.0% 90.9% 91.7% 604 593 594
Mallard Cove I & II Everett, WA Feb-87 198 90.9% 94.3% 99.0% 631 686 671
Meadows Memphis, TN Jan-88 200 96.0% 97.9% 95.0% 575 572 561
Montclair Springfield, MO Oct-86 159 98.1% 99.7% 95.0% 1,766 1,715 1,675
Newport Village Thornton, CO Dec-86 220 100.0% 98.8% 99.5% 720 690 710
Nicollet Ridge Burnsville, MN Dec-87 339 97.6% 98.7% 94.4% 828 838 809
Steeplechase Knoxville, TN Oct-88 450 97.6% 82.3% 93.1% 561 601 593
Whispering Lake Kansas City, MO Oct-87 384 95.1% 96.5% 93.2% 619 615 589
Riverset II Memphis, TN Jan-96 148 96.8% 95.8% 97.3% 683 668 667
-------
Subtotal Participating Subordinate Mortgage Bonds 2,679
-------
Subordinate Mortgage Bonds:
Farmington Meadows Aloha, OR Aug-99 69 92.8% N/A N/A N/A N/A N/A
Independence Ridge Independence, MO Aug-96 336 90.2% 90.5% 87.5% 520 520 474
Locarno Kansas City, MO Aug-96 110 90.0% 87.3% 96.4% 822 822 870
Olde English Manor Wichita, KS ---- ---- ---- ---- ---- ---- ----
-------
Subtotal Subordinate Mortgage Bonds 515
-------
Other Bond Related Investments:
Briarwood Virginia Beach, VA Dec-98 600 96.7% 94.8% N/A 548 526 N/A
RITES - Charter House Lenexa, KS Dec-96 280 95.4% 97.9% 92.9% 589 589 589
Cinnamon Ridge Egan, MN Dec-97 264 98.9% 99.7% 95.1% 824 811 793
RITES - Indian Lakes Virginia Beach, VA Jul-97 296 93.6% 93.9% 96.3% 701 689 671
RITES - Oklahoma City(4) Oklahoma City, OK Aug-98 772 92.9% 94.2% 87.5% 441 435 440
RITES - Olde English
Manor Wichita, KS Jun-98 264 90.5% 88.5% 83.7% 492 483 486
RITES - Palisades Park Universal City, TX Feb-98 328 93.9% 94.5% 96.0% 508 491 492
Poplar Glen Columbia, MD Jun-97 191 94.2% 97.9% 97.4% 823 802 787
RITES - Queen Anne IV Weymouth, MA Jul-98 110 98.2% 89.1% 90.9% 861 836 802
RITES - Rillito Village Tucson, AZ Aug-98 272 80.9% 81.0% 90.8% 449 434 434
RITES - Riverset II (1) Memphis, TN Jan-96 ---- ---- ---- ---- ---- ---- ----
RITES - Southgate
Crossing Columbia, MD Jun-97 215 95.3% 95.6% 96.3% 843 810 798
RITES - Southwood Richmond, VA Nov-97 1,286 88.4% 90.7% 91.8% 474 471 466
-------
Subtotal Other Bond Related Investments 4,878
-------
Total/Weighted Average Investments 17,054 93.7% 93.0% 92.5% $623 $622 $ 632
=======
Total/Same Stores 13,964 93.8% 92.7% 92.5% $646 $638 $ 632
Construction/Substantial Rehab Loans
Club West Dade Co. , FL Mar-99 194 97.4% N/A N/A N/A N/A N/A
Coleman Senior San Jose, CA Apr-98 141 37.6% N/A N/A N/A N/A N/A
Country Club Topeka, KS Jul-99 101 53.5% N/A N/A 575 N/A N/A
Delta Village Stockton, CA Jun-99 80 86.3% N/A N/A 455 N/A N/A
Italian Gardens San Jose, CA Apr-98 140 32.9% N/A N/A N/A N/A N/A
LaPaloma Azusa, CA Apr-99 119 69.7% 91.0% N/A 610 595 N/A
Meridian Bridgewater, NJ Nov-99 90 N/A N/A N/A N/A N/A N/A
Paola Paola, KS Jul-99 48 89.6% N/A N/A 474 N/A N/A
Pavillion Pico Rivera, CA Apr-99 132 90.2% 90.3% N/A 639 664 N/A
Sahuarita Sahuarita, AZ Jun-99 52 N/A N/A N/A N/A N/A N/A
Shadowbrook Selma, CA Jun-99 193 68.4% N/A N/A 460 N/A N/A
Silver Springs Kent, WA Dec-99 250 N/A N/A N/A N/A N/A N/A
Sonterra San Antonio, TX May-98 156 73.7% N/A N/A N/A N/A N/A
Western Hills Overland Park, KS Dec-98 80 85.0% 41.3% N/A 501 498 N/A
Wheeler Creek Washington, DC Dec-98 180 N/A N/A N/A N/A N/A N/A
Willow Key Orlando, FL Mar-99 384 N/A N/A N/A N/A N/A N/A
Woodglen Houston, TX Dec-99 250 N/A N/A N/A N/A N/A N/A
Woodmark Woodland, CA Jun-99 173 N/A N/A N/A N/A N/A N/A
-------
Subtotal Construction/Rehab Loans 2,763
-------
Total Units 19,817
=======
(1) The Company owns a participating bond, a participating subordinate bond and a RITES interest collateralized by the Riverset
property.
(2) The Company owns a non-participating bond and a RITES interest collateralized by the Charter House property.
(3) The Dade Gannon Portfolio represents eight properties.
(4) The Oklahoma City Portfolio represents three properties.
Portfolio Management
The Company is responsible for a full range of loan servicing and asset
management functions for its own investments and for others. Through Midland,
the Company is a Fannie Mae approved Delegated Underwriter and Servicer
authorized to process loans and collect origination and servicing fees. The
Company, through Midland, also manages equity syndication financings.
The Company monitors the timely receipt of all debt service payments
and promptly notifies a borrower of any delinquency, deficiency or default.
Reporting systems are in place which allow the Company to review and analyze the
revenue, expenses and leasing activity of each property on a monthly basis. In
addition, the Company inspects each property and market area at least annually.
The loan servicing and asset management oversight is designed to enable
the Company to track the performance of each property and to alert management to
potential problems. While actions will vary depending upon the nature of an
individual problem, the Company generally notifies borrowers of any problems or
concerns and recommends corrective action.
The Company responds to defaults on mortgage revenue bonds and
construction loans on a case-by-case basis. After sending requisite default
notices, the Company typically holds discussions with the property
owner/developer. In the event the Company determines that the owner/developer
remains committed to the project and capable of successful operations, a workout
or other forbearance arrangement may be negotiated. Whenever the Company
determines that successful operation by the current owner/developer is not
feasible, negotiations for the transfer of a deed, in lieu of foreclosure, to an
affiliated entity may be undertaken. In the absence of operating deficit
guarantees, the Company may face additional risk from operations with respect to
properties so transferred, which may require subsidies from Company reserves to
cover potential operating deficits before debt service. The Company does not
currently anticipate that any such operating deficits before debt service will
occur in 2000.
Employees
As of December 31, 1999, the Company had 160 employees. The Company is
not a party to any collective bargaining agreement.
Item 2. Properties.
The Company has no physical properties, as its assets consist primarily
of the mortgage revenue bonds and other bond related investments described under
Item 1 and certain related loans described in Note 7 to the Company's
consolidated financial statements included elsewhere herein. The Company leases
office space as follows:
Baltimore, Maryland. In November 1998, the Company assumed the lease agreement
from an affiliate for office space. The office space contains 11,124 square feet
and the lease expires in March, 2002.
Clearwater, Florida. In June 1996, Midland entered into a seven-year lease for a
14,876 square feet office facility. In September 1998, Midland negotiated a new
lease for an additional 6,180 square feet of space in the same location with an
expiration coinciding with the original lease.
The Company, through Midland, also leases office space for its regional
offices in Dallas, Texas, San Francisco, California and Detroit, Michigan. The
Company believes its facilities are suitable for its requirements and are
adequate for its current and contemplated future operations.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's shareholders during
the three months ended December 31, 1999.
Part II
Item 5. Market for Registrant's Equity Securities and Related Stockholder
Matters
Beginning August 30, 1996, the Common Shares were traded on the
American Stock Exchange (the "AMEX") under the symbol "MMA." Effective June 25,
1998, the Company began trading on The New York Stock Exchange, Inc. (the
"NYSE") under the same symbol. The following table sets forth the high and low
sale prices per share of the Common Shares as reported by the AMEX and the NYSE
for each calendar quarter since the commencement of trading, together with the
distributions declared with respect to such shares allocable to such period.
Distributions
High Low Declared
---------- --------- ----------------
1999:
First Quarter 20 17 1/4 $ 0.3950
Second Quarter 20 3/4 18 1/2 0.4000
Third Quarter 21 15/16 20 1/8 0.4050
Fourth Quarter 20 5/8 18 1/4 0.4075
1998:
First Quarter 21 3/4 19 5/8 $ 0.3750
Second Quarter 22 1/8 20 5/8 0.3800
Third Quarter 21 7/8 18 3/8 0.3850
Fourth Quarter 19 1/4 16 1/4 0.3900
As of March 24, 2000, there were approximately 3,162 holders of
record of Common Shares.
The Preferred Shares and the Preferred CD Shares are not listed for
trading on any national securities exchange and there is no established public
trading market for those shares. As of March 24, 2000, there were 1,130 and 547
holders of record of Preferred Shares and Preferred CD Shares, respectively.
Description of Shares
As of December 31, 1999 there were 22,159 Preferred Shares (14,933
Series I and 7,226 Series II), 10,962 Preferred CD Shares (7,798 Series I and
3,164 Series II), 2,000 Term Growth Shares and 17,392,064 Common Shares
outstanding. Shareholder approval may not be required for the Company to issue
additional shares in the future. Although the Company will not issue additional
Preferred Shares or Preferred CD Shares, it may from time to time issue
additional Common Shares depending upon market conditions. In addition, the
Company is authorized to issue new classes of shares, which may be senior to the
Common Shares but cannot be senior to the Preferred Shares or Preferred CD
Shares. No shareholders have pre-emptive rights.
The rights of the holders of each class of shares of the Company,
including the distributions to which each class is entitled, are set forth in
full in the Company's Operating Agreement, a copy of which is filed as an
exhibit to this report. The following is a summary of the rights, privileges and
preferences of the holders of each class.
Preferred Shares. The performance of, and distributions with respect
to, each series of Preferred Shares is based solely upon the performance of that
portion of the original bonds attributable to such series as they existed
immediately following the Refunding and prior to the 1995 Financing.
Accordingly, the holders of the Preferred Shares are entitled to their
proportionate share of distributions with respect to the 11 original bonds and
11 refunded Series B Bonds held by the Company, as well as the distributions
they would have received with respect to the 11 refunded Series A Bonds had the
1995 Financing not occurred. Distributions to the holders of the Preferred
Shares are satisfied, however, on a basis having priority over all payments with
respect to the Common Shares, Term Growth Shares and any other equity class
(other than Preferred CD Shares), out of all of the resources of the Company,
including revenue from investment of the proceeds from the 1995 financing. None
of the expenses incurred in connection with the 1995 financing or any future
financings are borne by the holders of the Preferred Shares.
The Preferred Shares must be partially redeemed upon (i) the sale or
repayment of a bond attributable to such shares, (ii) the sale of a related
mortgaged property, or (iii) beginning in the year 2000, an appraisal of a
related mortgaged property indicating that its fair market value exceeds the sum
of (a) the face value of the bond secured by the property and (b) unpaid accrued
interest on such bond. Upon liquidation, the holders of the Preferred Shares are
entitled to receive, after payment of creditors, the appraised value of the
Company's assets attributable to such shares, together with all unpaid accrued
distributions, before any distribution is made to the holders of Common Shares
or other shares ranking junior to the Preferred Shares. The Preferred
Shareholders shall be permitted to convert such shares to either Common Shares
or cash (at the discretion of the Board of Directors) once every two years
beginning in June 2004. Third party independent appraisals will be obtained to
determine the conversion value for each share.
The holders of the Preferred Shares do not have voting rights with
respect to the election of the Company's directors, but do have voting rights
with respect to any merger or consolidation of the Company in which it is not
the surviving entity or the sale of substantially all of its assets, the removal
of a director, and any alteration of the rights, privileges or preferences of
the Preferred Shares under the Operating Agreement. The voting power of the
Preferred Shares, relative to all of the Company's outstanding shares, is
equivalent to the relative voting power, immediately prior to the Merger, of the
BACs exchanged therefor. Such protection from loss of relative voting power,
however, does not extend to issuances of additional shares of the Company
subsequent to the Merger.
Preferred CD Shares. The performance of, and distributions with respect
to, each series of Preferred CD Shares is based solely upon the performance of
that portion of the original bonds attributable to such series as they existed
immediately following the 1995 Financing. Accordingly, the holders of the
Preferred CD Shares are entitled to their proportionate share of distributions
with respect to the 11 original bonds and 11 refunded Series B Bonds held by the
Company. Because the holders of the Preferred CD Shares received a distribution
of their pro rata share of the proceeds of the 1995 Financing, however, they,
unlike the holders of the Preferred Shares, (i) receive no distribution relating
to the performance of the 11 refunded Series A Bonds the Receipts for which were
sold in the 1995 Financing and (ii) bear their pro rata share of the expenses of
the 1995 Financing and any future financings utilizing any of the original
bonds.
The rights, privileges and preferences of the Preferred CD Shares are
otherwise substantially the same as those of the Preferred Shares.
Term Growth Shares. The holders of the Term Growth Shares are entitled
to distribution of 2% of the Company's cash flow. Except with respect to
distributions and various redemption features as defined in the Operating
Agreement, the rights and privileges of the Term Growth Shares are substantially
the same as those of the Common Shares. Term Growth Shares will be redeemed when
Preferred and Preferred CD Shares are fully redeemed or converted (subject to
certain conditions defined in the Company's Operating Agreement).
Common Shares. The holders of the Common Shares are entitled to such
distributions as declared by the Board of Directors out of funds legally
available therefor. As of December 31, 1999, the Company's policy was to
distribute to the holders of the Common Shares at least 80% of its cash flow
from operations (exclusive of capital-related items and reserves) after payment
of distributions to the holders of the Preferred Shares, Preferred CD Shares and
Term Growth Shares. No distributions may be declared or paid with respect to the
Common Shares, however, so long as there remains unpaid any required
distribution or redemption payment with respect to the Preferred Shares and
Preferred CD Shares.
The Common Shares are not redeemable (except pursuant to certain
anti-takeover provisions) and upon liquidation share ratably in any assets
remaining after payment of creditors and the liquidation preferences of the
Preferred Shares and Preferred CD Shares. The holders of the Common Shares
voting as a single class have the right to elect the directors of the Company
and, voting together with the holders of the Preferred Shares and Preferred CD
Shares, have voting rights with respect to a merger or consolidation of the
Company in which it is not the surviving entity or the sale of substantially all
of its assets, the removal of a director, the dissolution of the Company, and
certain anti-takeover provisions. Each Common Share entitles its holder to cast
one vote on each matter presented for shareholder vote. Because of provisions
providing limited protection against dilution of the voting rights of the
holders of the Preferred Shares and Preferred CD Shares, each Series I Preferred
Share and Series I Preferred CD Share and each Series II Preferred and Series II
Preferred CD Share currently entitles its holders to cast 38.10 and 43.95 votes,
respectively, on each matter on which the Preferred and Preferred CD Shares vote
along with the Common Shares presented for a vote of the holders of those
shares.
ITEM 6. SELECTED FINANCIAL DATA
of and for the year ended December 31, 1999 1998 1997 1996 1995
--------- ------------- ---------- ---------- ----------
INCOME STATEMENT DATA (000s):
Interest on mortgage revenue bonds and
other bond related investments $35,435 $23,241 $17,219 $13,859 $13,363
Interest on loans 6,543 4,563 3,500 1,343 211
Net gain on sales 2,680 4,743 2,824 - 623
Other income 8,888 2,911 1,796 1,327 366
Equity in MLP II - - - 2,141 3,150
--------- ------------ ----------- ---------- ---------
Total revenues 53,546 35,458 25,339 18,670 17,713
Operating expenses 10,112 6,002 3,962 3,812 4,509
Interest expense 6,665 - - - -
Other-than-temporary impairments related
to investments in mortgage revenue bonds (1,120) (2,049) (2,580) (3,990) -
--------- ------------ ----------- ---------- ---------
Net income before income allocated to
preferred shareholders in a subsidiary
company and income taxes 35,649 27,407 18,797 10,868 13,204
Income allocated to preferred shareholders
in a subsidiary company 3,433 - - - -
--------- ------------ ----------- ----------- ----------
Net income before income taxes 32,216 27,407 18,797 10,868 13,204
Income taxes 703 - - - -
--------- ------------ ----------- ---------- ---------
Net income $31,513 $27,407 $18,797 $10,868 $13,204
========= ============ =========== ========== ==========
PER SHARE/BAC DATA:
Net income (loss) per BAC prior to August 1, 1996:
Series I - - - $5.33 $43.74
Series II - - - $26.05 $44.91
Net income per share subsequent to July 31, 1996:
Preferred shares
Series I $68.44 $67.80 $43.07 $22.84 -
Series II $68.76 $64.74 $64.84 $27.24 -
Preferred capital distribution shares
Series I $55.96 $56.23 $32.59 $18.86 -
Series II $49.81 $48.97 $49.70 $21.53 -
Common shares (diluted earnings per share) $1.67 $1.60 $1.50 $0.56 -
Weighted average Common Shares outstanding - diluted 17,740,671 15,938,249 12,537,517 11,123,048 -
BALANCE SHEET DATA (000s):
Investments in mortgage revenue bonds and other
bond related investments $391,633 $310,093 $220,961 $183,632 $146,142
Loans receivable 286,489 17,246 11,491 10,158 2,890
Investment in MLP II Acquisition LP - - - - 65,299
Total assets 801,746 364,161 243,101 230,277 230,282
Notes payable 261,956 - - - -
Long-term debt 67,000 - - - -
Preferred shareholders' equity in a subsidiary
company 80,159 - - - -
Total shareholders' equity $363,611 $355,452 $241,399 $220,983 $216,282
ITEM 6. SELECTED FINANCIAL DATA (continued)
CASH DISTRIBUTIONS PER SHARE/BAC DISTRIBUTED
EACH YEAR AS FOLLOWS:
Distributions per BAC prior to August 1, 1996:
Series I BACS:
For the six months ended June 30, paid in
July/August - - - $26.25 $26.25
For the six months ended December 31, paid
in February - - - - $26.25
Series II BACS:
For the six months ended June 30, paid in July/August - - - $27.50 $27.50
For the six months ended December 31, paid in February - - - - $27.50
Distributions per share subsequent to July 31, 1996:
Preferred shares:
Series I:
For the year ended December 31, paid quarterly (1) $108.97 (4) $80.77 (3) $53.57 - -
For the six months ended December 31, paid in February - - - $26.25 -
Series II:
For the year ended December 31, paid quarterly (1) $217.93 (4) $68.52 $62.87 - -
For the six months ended December 31, paid in February - - - $30.64 -
Special distribution - August - - - $6.84 -
Preferred capital distribution shares:
Series I:
For the year ended December 31, paid quarterly (1) $99.21 (4) $79.44 (3) $43.79 - -
For the six months ended December 31, paid in February - - - $21.57 -
Special distribution/return of capital - August - - - $177.59 -
Series II:
For the year ended December 31, paid quarterly (1) $213.83 (4) $53.36 $50.64 - -
For the six months ended December 31, paid in February - - - $25.00 -
Special distribution/return of capital - August - - - $252.03 -
Common shares:
For the year ended December 31, paid quarterly (1) $1.6075 $1.53 $1.43 - -
For the six months ended December 31, paid in February(2) - - - $0.6325 -
SHARES/BACs OUTSTANDING AND NUMBER OF HOLDERS
AS FOLLOWS:
BACS as of December 31,
Series I:
BACs outstanding - - - - 200,000
Number of BAC holders - - - - 9,607
Series II:
BACs outstanding - - - - 96,256
Number of BAC holders - - - - 4,172
Shares as of December 31,
Preferred shares:
Series I
Shares outstanding 14,933 15,590 16,329 16,329 -
Number of shareholders 780 803 873 952 -
Series II
Shares outstanding 7,226 7,350 7,637 7,637 -
Number of shareholders 350 356 365 403 -
Preferred capital distribution shares:
Series I
Shares outstanding 7,798 8,325 8,909 8,909 -
Number of shareholders 379 378 425 481 -
Series II
Shares outstanding 3,164 3,535 3,809 3,809 -
Number of shareholders 168 170 194 222 -
Growth shares
Shares outstanding 17,392,064 16,791,050 11,106,150 11,092,370 -
Number of shareholders 15,536 15,772 13,405 11,052 -
(1) This amount represents total dividends declared for the year. Quarterly
distributions were paid to all preferred shareholders beginning with the
third quarter of 1997; the first semiannual distribution for 1997 was paid
in August 1997.
(2) This amount represents a $0.07 distribution for the one month ended July
31, 1996 from the former Partnership and a $0.5625 distribution for the
five months ended December 31, 1996 from the Company.
(3) The 1998 distributions for the Series I Preferred Shares and the Series I
Preferred Capital Distribution Shares includes a special distribution of
$24.93 and $33.88, respectively, for their proportionate share of the
Company's net proceeds from the sale of three consolidated demand notes in
December 1998.
(4) The distributions for the Series I and Series II Preferred and Preferred
Capital Distribution Shares includes two special distributions. The first
distribution relates to their proportionate share of the Company's net
proceeds from the sale of eight consolidated demand notes in March 1999 as
follows: Preferred Series I, $16.24; Preferred Series II, $25.59; Preferred
Capital Distribution Series I, $19.96 and Preferred Capital Distribution
Series II, $41.89. The second distribution relates to their pro-rata
portion of the return of capital from the refunding of the bond secured by
the Riverset property as follows: Preferred Series I, $38.51; Preferred
Series II, $133.24; Preferred Capital Distribution Series I, $37.60 and
Preferred Capital Distribution Series II, $131.84.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Business
The Company is principally engaged in originating, investing in and
servicing investments in multifamily housing debt and equity. MuniMae primarily
holds a portfolio of tax-exempt mortgage revenue bonds issued by state and local
government authorities to finance multifamily housing developments secured by
nonrecourse mortgage loans on the underlying properties.
In May 1999, TE Bond Sub sold to institutional investors 42 shares of 6
7/8% Series A Cumulative Preferred Shares with a liquidation preference of
$2,000,000 per share (the "Series A Preferred Shares" or the "Preferred Share
Offering") (see further discussion under Liquidity and Capital Resources and
Note 3 to the Company's consolidated financial statements). The Series A
Preferred Shares have a senior claim to the income derived from the investments
owned by TE Bond Sub and thus the assets of TE bond Sub are not available to
MuniMae's creditors. Any income from TE Bond Sub available after payment of the
cumulative distributions of the Series A Preferred Shares is allocated to the
Company. In connection with this transaction, the Company contributed certain of
its assets to TE Bond Sub and its subsidiaries.
On October 20, 1999, the Company acquired Midland for approximately $45
million. Of this amount, the Company paid approximately $23 million in cash and
approximately $12 million in common shares at the closing of the transaction. In
addition, $3.33 million in MuniMae common shares is payable annually over a
three year period if Midland meets certain performance targets, including an
annual contribution to CAD.
Midland is a fully integrated real estate investment firm specializing
in providing debt and equity capital in the affordable multifamily housing
industry. Midland provides construction and permanent debt financing, mortgage
servicing and asset management services to the multifamily housing industry.
Midland is a Fannie Mae Delegated Underwriter and Servicer and a Federal Housing
Administration approved mortgagee. Midland syndicates equity for investment in
low income housing tax credits. Midland also originates debt for investment in
student/conventional housing, a unique and growing segment of the multifamily
housing industry. A subsidiary of Midland is a registered investment advisor
with the Securities and Exchange Commission and a wholly owned special purpose
subsidiary of Midland provides advisory services to pension funds. Midland
currently manages approximately $259 million of pension fund money.
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 servicing and loan origination services and (2) an investing
segment consisting primarily of subsidiaries holding investments producing
tax-exempt interest income. The revenues associated with the investing segment
consist primarily of interest earned on mortgage revenue bonds, other bond
related investments and certain short-term taxable loans and investments. The
revenues associated with the operating segment consist primarily of loan
servicing and loan origination fees for the Company's own portfolio and for
others, syndication and brokerage fees associated with the origination of tax
credit syndications originated, taxable interest and fees earned on construction
lending activities and other fee income.
Results of Operations
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Total income for the year ended December 31, 1999 increased by
approximately $18.1 million over the same period last year due primarily to an
increase in interest income collected on investments of $9.5 million and the
inclusion of income generated by Midland of $9.0 million.
Salaries and benefits and operating expenses for the year ended
December 31, 1999 increased by approximately $3.8 million from the prior year
due primarily to an increase in salary and benefits expense as a result of an
increase in the number of employees and an increase in the incentive
compensation earned in 1999 totaling $1.6 million and the inclusion of the
Midland expenses of $2.5 million.
The Company incurred interest expense of $6.7 million during 1999. Of
this amount, $2.6 million was the result of the Term Securitization Facility in
March 1999 (see further discussion under the Liquidity and Capital Resources)
and the balance is interest expense incurred on borrowings by Midland used to
finance its construction lending activities.
The Company recorded other-than-temporary impairments aggregating $1.1
million on one investment in 1999. These noncash charges do not affect the cash
flow generated from the operation of the underlying properties, distributions to
shareholders, the tax-exempt status of the income stream, or the financial
obligations under the bonds.
The operating segment discussed above consists primarily of directly
and indirectly wholly owned subsidiaries of the Company subject to income taxes.
The Company recorded income tax expense of $703,000 for the year ended December
31, 1999 associated with these entities.
For the year ended December 31, 1999, the net adjustment to other
comprehensive income for unrealized holding losses on mortgage revenue bonds and
other bond related investments available for sale was $3.5 million. After a
reclassification adjustment for gains of $0.2 million included in net income,
other comprehensive loss for the year ended December 31, 1999 was $3.7 million
and total comprehensive income was $27.8 million.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Total income for the year ended December 31, 1998 increased by
approximately $10.1 million over 1997 due primarily to (1) an increase in
interest income and fees on new investments of $7.6 million, (2) an increase in
gain on sales of $1.9 million, and (3) an increase in interest on short-term
investments of $0.7 million as a result of the temporary investment of equity
offering proceeds. The $4.7 million gain on sales in 1998 was primarily the
result of the sale of certain notes in the fourth quarter ($4.2 million) and the
sale of the Hunters Ridge/ South Pointe investment in the first quarter ($0.3
million).
Operating expenses for the year ended December 31, 1998 increased by
approximately $2.0 million over 1997 due primarily to (1) an increase in salary
and benefits expense as a result of an increase in the number of employees and
an increase in the incentive compensation earned in 1998, (2) an increase in
costs associated with growing the Company, (3) an increase in costs associated
with growth in investment activities, and (4) an initial filing fee for listing
the Common Shares on the New York Stock Exchange. Also, the Company recorded
other-than-temporary impairments aggregating $2.0 million on two bonds in 1998.
For the year ended December 31, 1998, the net adjustment to other
comprehensive income for unrealized holding losses on mortgage revenue bonds and
other bond related investments available for sale was $1.4 million. After a
reclassification adjustment for losses of $1.5 million included in net income,
other comprehensive income for the year ended December 31, 1998 was $59,000 and
total comprehensive income was $27.4 million.
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" ("FAS 133") as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of FASB 133". This statement establishes 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 measure these instruments at their
fair values. 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 the statement. This statement becomes effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. At this time, the
Company is still assessing the impact of FAS 133 on its financial condition and
results of operations.
Liquidity and Capital Resources
The Company's primary objective is to maximize shareholder value
through increases in CAD per Common Share and appreciation in the value of its
Common Shares. The Company seeks to achieve its growth objectives by 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 includes structuring $200 to $250 million in investment
transactions in 2000. In order to achieve its plan, the Company will be required
to obtain additional financing of approximately $100 to $150 million during
2000. In order to facilitate this growth strategy, the Company will most likely
require additional capital in order to pursue acquisition opportunities. The
Company expects to finance its acquisitions through a financing strategy that
(1) takes advantage of attractive financing available in the tax-exempt
securities markets; (2) minimizes exposure to fluctuations of interest rates;
and (3) maintains maximum flexibility to manage the Company's short-term cash
needs. To date, the Company has primarily used two sources, securitizations and
Common Share or Preferred Share equity offerings, to finance its acquisitions.
Through Midland's management of capital for others, including Fannie Mae, the
Company has expanded its access to capital.
The Company's investment in bonds and other bond related investments
are secured by non-recourse mortgage loans on real estate properties. As a
result, the value of these investments is subject to all of the factors
affecting bond and real estate values, including interest rate changes,
demographics, local real estate markets and individual property performance.
Certain of the bonds held by the Company are participating bonds that
provide for payment of contingent interest in addition to the payment of base
interest at a fixed rate. Further, many of the Company's investments are
subordinated to the claims of other senior interests and uncertainties may exist
as to a borrower's ability to meet principal and interest payments. As a result
of these factors, debt service on the bonds, and therefore cash flow available
for distribution to all shareholders, is dependent upon the performance of the
underlying properties.
For the year ended December 31, 1999, the Company originated $200
million in investment transactions. Of this amount, $106 million of these
transactions were bond or loan originations retained by the Company. The
remaining investment transactions involve the securitizations discussed below.
Preferred Share Equity Offering
On May 27, 1999, TE Bond Sub sold to institutional investors 42 shares
of Series A Cumulative Preferred Shares. The Series A Preferred Shares bear
interest at 6.875% per annum or, if lower, the aggregate net income of TE Bond
Sub. The Series A Preferred Shares have a senior claim to the income derived
from the investments owned by TE Bond Sub. Any income from TE Bond Sub after
payment of the cumulative distributions of the Series A Preferred Shares is
allocated to the Company. Cash distributions on the Series A Preferred Shares
are paid quarterly on each January 31, April 30, July 31 and October 31. The
Series A Preferred Shares are subject to remarketing on June 30, 2009. On the
remarketing date, the remarketing agent will seek to remarket the shares at the
lowest distribution rate that would result in a resale of the Series A Preferred
Shares at a price equal to par plus all accrued but unpaid distributions. The
Series A Preferred Shares will be subject to mandatory tender on June 30, 2009
and on all subsequent remarketing dates at a price equal to par plus all accrued
but unpaid distributions. The Series A Preferred Shares must be redeemed no
later than June 30, 2049.
In connection with this transaction, the Company contributed certain of
its assets to TE Bond Sub and its subsidiaries. The assets of TE Bond Sub and
its subsidiaries, while controlled by MuniMae and thus included in the
consolidated financial statements of the Company, are legally owned by TE Bond
Sub and are not available to the creditors of MuniMae. The assets owned by TE
Bond Sub and its subsidiaries are identified in footnotes to the Investment in
Mortgage Revenue Bonds table and in footnotes to the Other Bond Related
Investments table in Note 5 and Note 7, respectively, of the Company's
consolidated financial statements. The fair value of such assets aggregated
$359.0 million at December 31, 1999.
Securitizations
Through securitizations, the Company seeks to enhance its overall
return on its investments and to generate proceeds that, along with equity
offering proceeds, facilitate the acquisition of additional investments. The
Company securitizes bonds through the sale of bonds to an investment bank that,
in turn, deposits the bonds into a trust. Short term floating rate interests in
the trust (the "senior interests"), which have first priority on the cash flow
from the bonds, are sold to accredited qualified third party investors. The
Company purchases the residual interests in the trust and receives the proceeds
from the sale of the senior interests less certain transaction costs. The
Company may also purchase, for investment purposes, residual interests in trusts
holding bonds that the Company did not own, in which case no proceeds are
received. The residual interests are the subordinate security and receive the
residual income after the payment of all fees and the floating rate obligation.
The Company recognizes taxable capital gains (or losses) upon the sale of its
bonds.
The investment bank (the "credit enhancer") provides liquidity to the
trust and credit enhancement to the bonds which enables the senior interests to
be sold to certain accredited third party investors seeking investments rated
"AA" or better. The liquidity and credit enhancement facilities are generally
for one-year terms and are renewable annually by the credit enhancer. To the
extent that the credit enhancer is downgraded below "AA", either an alternative
credit enhancement provider would be substituted to reinstate the desired
investment rating or the senior interests would be marketed to other accredited
investors. In either case, it is anticipated that the return on the residual
interests would decrease, which would negatively impact income. If the credit
enhancer does not renew the liquidity or credit enhancement facilities, the
Company would be forced to find alternative liquidity or credit enhancement
facilities, repurchase the underlying bonds or liquidate the underlying bond and
its investment in the residual interests. If the Company is forced to liquidate
its investment in the residual interests and potentially the related interest
rate swaps (discussed below), the Company would recognize gains or losses on the
liquidation, which may be significant depending on market conditions. As of
December 31, 1999, $179.2 million of the senior interests were subject to annual
"rollover" renewal for liquidity and credit enhancement. The Company has already
extended, in advance, the liquidity and credit enhancement of $116.1 million of
senior interests through June 15, 2000 and September 15, 2000, respectively. In
addition, the Company entered an agreement whereby the liquidity and credit
enhancement facilities will be automatically extended for six month increments
subsequent to June 15, 2000 and September 15, 2000 and each six month
anniversary thereafter unless notified by the credit enhancer six months in
advance of their termination of the facilities. The Company continues to review
alternatives that would reduce and diversify credit risks.
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 enters into
interest rate swaps, which are contracts exchanging an obligation to receive a
floating rate approximating the rate on the senior interests for an obligation
to pay a fixed rate. Net swap payments received, if any, will be taxable income,
even though the investment being hedged pays tax-exempt interest. The Company
recognizes taxable capital gains (or losses) upon the termination of an interest
rate swap contract. The interest rate swaps are for limited time periods which
generally approximate the term of the securitization trust and are for notional
amounts that generally approximate the outstanding senior interests in the
trust. Also, the interest rate swap agreements are subject to risk of early
termination on the annual optional termination date by the counterparty,
possibly at times unfavorable to the Company. There can be no assurance that the
Company will be able to acquire interest rate swaps at favorable prices, or at
all, when the existing arrangements expire or are terminated, in which case the
Company would be fully exposed to interest rate risk to the extent the swaps are
terminated by the counterparty while the securitization trust remains in
existence. In addition, there is no guarantee that the securitization trust will
be in existence for the duration of the swap, as these securitization trusts are
collapsed if the credit enhancement or liquidity facilities are not renewed, as
discussed above. If the securitization trusts are no longer in existence, the
Company would recognize gains and losses from changes in market values of the
swap instruments or from the termination of the swap agreements. Depending on
market conditions, these gains and losses on the interest rate swaps could be
significant.
The term of the securitization trusts is based on the anticipated
prepayment of the underlying bond in the trust. If the bond prepayment occurs as
anticipated, the Company will receive its pro rata share of proceeds from the
prepayment. However, there is no certainty that bond prepayment will occur at
the end of the term of the securitization trust. If the bond does not prepay
before the securitization trust terminates, the Company would be forced to
liquidate its subordinate investment or, if the Company wished to retain this
investment, it would be forced to purchase the remaining interests in the bond.
From time to time, depending on the Company's capital position and
needs, the Company may purchase or sell on the open market interests in bonds
that it has securitized or bonds that the Company did not originally own but in
which it now holds a residual interest. During 1999, the Company purchased
and/or sold interests in two bonds that it previously securitized.
Through the use of securitizations, the Company expects to employ
leverage and maintain overall leverage ratios in the 40% to 55% range, with
certain assets at significantly higher ratios, up to approximately 99%, while
not leveraging other assets at all. The Company calculates leverage by dividing
on-balance sheet debt 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 December 31, 1999 and 1998
was approximately 46% and 41%, respectively.
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 trusts.
Term Securitization Facility
In March 1999, the Company consummated a transaction with Merrill Lynch
that converted a portion of its investment in the securitization trusts
discussed above into a longer-term securitization facility. As a result, this
transaction enabled the Company to (a) reduce its exposure to credit and annual
renewal risks associated with the liquidity and credit enhancement features of
the securitization trusts and the swap agreements, (b) reduce the annual
financing costs and (c) eliminate the risk of receiving taxable net swap
payments which serve to hedge tax-exempt investments (see discussion in Note 4
to the consolidated financial statements).
This transaction was accounted for using the concepts outlined in
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". As a
result of certain call provisions available to the subordinate certificate
holders, the Company has accounted for this transaction as a borrowing.
Accordingly, the senior certificates were recorded as long-term debt and the
bonds associated with this transaction are included in investments in mortgage
revenue bonds. Prior to this transaction, these assets and liabilities had
received sale treatment and therefore were off-balance sheet financing.
Cash Flow
At December 31, 1999 and 1998, the Company had cash and cash
equivalents of approximately $54.4 million and $23.2 million, respectively.
Cash flow from operating activities was $30.7 million, $25.7 million
and $18.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in cash flow for 1999 versus 1998 and 1998 versus
1997 is due primarily to an increase in income from investment of equity
offering proceeds.
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 three primary differences between CAD and GAAP income. The
first is the treatment of loan origination fees, which for CAD purposes are
recognized as income when received but for GAAP purposes are amortized into
income over the life of the associated investment. The second difference is the
noncash gain and loss recognized for GAAP associated with valuations and sales
of investments, which are not included in the calculation of CAD. The third
difference is the treatment of goodwill and other intangibles, which are
amortized into expense for GAAP, and not included in the calculation of CAD.
The Company is required to distribute to the holders of Preferred
Shares and Preferred Capital Distribution 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 Company's 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 years ended December
31, 1999 and 1998, cash available for distribution to Common Shares was $29.8
million and $26.6 million, respectively. The Company's Common Share dividend for
1999 of $1.6075 represents a payout ratio of 92.0% of CAD. The Company's Common
Share dividend for 1998 of $1.53 represents a payout ratio of 90.0% of CAD.
Regular cash distributions to shareholders attributable to the years
ended December 31, 1999, 1998 and 1997 were $29.7 million, $27.1 million and
$18.3 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,
and securitization proceeds. In addition, the Company's business plan includes
structuring $200 to $250 million in investment transactions in 2000. In order to
achieve its plan, the Company will be required to obtain additional financing of
approximately $100 to $150 million during 2000. The Company currently has no
commitments or understandings with respect to such financings, and there can be
no assurance that any such financings will be available when needed.
Income Tax Considerations
MuniMae is organized as a limited liability company and as a result, no
recognition of income taxes is made. Instead, the distributive share of
MuniMae's income, deductions and credits is included in each shareholder's
income tax return. The Company records cash dividends received from subsidiaries
organized as corporations as dividend income for tax purposes.
However, 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 as discussed above. 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.
Assumptions relating to the foregoing involve judgements with respect
to, among other things, future economic market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking information are
reasonable, any of the assumptions could be inaccurate and, therefore there can
be no assurance that the forward-looking information included herein will prove
to be accurate. In light of the significant uncertainties inherent in
forward-looking information, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company's balance sheet consists of two items subject to interest
rate risk: investments in mortgage revenue bonds and investments in other bond
related investments. First, changes in interest rates do not have a direct
impact on the interest income collected on the fixed rate and participating
mortgage revenue bonds but may have an impact on the determination of the fair
value of these investments. Second, the Company is exposed to the impact of
interest rate changes on its floating rate other bond related investments.
Additionally, changes in interest rates have an impact on the fair values of the
floating rate investments and related interest rate swaps. It is also important
to note that a rising interest rate environment could reduce the demand for
multi-family tax-exempt and taxable financing which could limit the Company's
ability to structure transactions.
Through Midland, the Company's loans receivable and notes payable are
not expected to be subject to interest rate risk. The Company typically provides
loans to borrowers (loans receivable) by borrowing from third parties (notes
payable). The Company earns the interest income that represents the difference
between the interest charged to borrowers and the interest paid to the Company's
lenders. The Company attempts to match the terms and rates of its loans
receivable and notes payable to fix the interest income the Company will
receive.
As disclosed above and in Notes 7 and 8 to the Company's consolidated
financial statements, the Company manages its interest rate exposure on its
investments in residual interests in securitization trusts (or "RITESSM"), which
are inverse floaters, through the use of interest rate swaps in the notional
amount of the outstanding senior interests in the securitization trusts. The
Company attempts to hedge all of its floating interest rate exposure; however,
from time to time, a portion of the Company's floating rate investments may not
be fully hedged by interest rate swap contracts. 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. Additionally,
the counterparty to the Company's interest rate swaps may terminate the contract
at times unfavorable to the Company. At December 31, 1999, the Company was not
hedged by interest rate swaps on a notional amount of $19.6 million,
representing 11% of the outstanding senior interests in the securitization
trusts. Based on the Company's unhedged position at December 31, 1999 and
assuming perfect hedge correlation, if interest rates as of December 31, 1999
increased by 10%, the Company's interest income and cash flows on its RITESSM
would decrease by $98,000 per year. At December 31, 1998, the Company was not
hedged by interest rate swaps on a notional amount of $11.5 million,
representing 7% of the outstanding senior interests in the securitization
trusts. Based on the Company's unhedged position at December 31, 1998 and
assuming perfect hedge correlation, if interest rates as of December 31, 1998
increased by 10%, the Company's interest income and cash flows on its RITESSM
would decrease by $46,000 per year. The Company does not enter into interest
rate swap contracts for trading purposes.
To generate short-term financing proceeds, the Company occasionally
enters into total returns swaps with Merrill Lynch as explained in Note 7 to the
Company's consolidated financial statements. Similar to the RITESSM, these
investments are subject to interest rate risk and to-date the Company has not
always entered into interest rate swaps to hedge this exposure. 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. At
December 31, 1999, the Company had three total return swaps outstanding with a
notional amount of $45.3 million. If these investments were held for an entire
year and interest rates increased by 10%, the Company's interest income and cash
flow on its total return swaps would decrease by $243,000 per year.
The Company's investments in mortgage revenue bonds and other bond
related investments including total return swaps and interest rate swaps are
carried at fair value; therefore, changes in interest rates may affect the
carrying value of the Company's investments. Also, significant changes in market
interest rates could affect the amount and timing of unrealized and realized
gains or losses on these investments. The fair value of the Company's
investments is determined in accordance with the Company's valuation policy
discussed in Note 1 to the Company's consolidated financial statements included
herein. In accordance with this policy, it is estimated that a 10% increase in
market interest rates as of December 31, 1999 and 1998 would result in a 12% and
11% decrease in the carrying value of the Company's fixed rate mortgage revenue
bonds and bond related investments that are fair valued based on quotes from
external sources for the year ended December 31, 1999 and 1998, respectively.
However, for the participating mortgage revenue bonds for which the fair value
is determined by discounting the underlying collateral's expected future cash
flows using current estimates of discount rates and capitalization rates,
changes in market interest rates do not have a strong enough correlation from
which to draw a conclusion. There are many mitigating factors to consider in
determining what causes discount and capitalization rates to change, such as
macroeconomic issues, real estate capital markets, local supply and demand and
economic events, and investor risk perceptions. The information presented herein
should be read in conjunction with Notes 1, 5, 6, 7 and 8 to the Company's
consolidated financial statements included herein.
Assumptions relating to the foregoing involve judgements with respect
to, among other things, future economic market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking information are
reasonable, any of the assumptions could be inaccurate and, therefore there can
be no assurance that the forward-looking information included herein will prove
to be accurate. In light of the significant uncertainties inherent in
forward-looking information, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company, together with the
report thereon of PricewaterhouseCoopers LLP dated February 11, 2000, are listed
in Item 14(a)(1) and included at the end of this report.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is contained in the Company's proxy
statement for its 2000 annual shareholders meeting under the captions "Election
of Directors", "Identification of Executive Officers," and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934"and is incorporated herein
by reference.
Item 11. Executive Compensation.
The information required by Item 11 is contained in the Company's proxy
statement for its 2000 annual shareholders meeting under the heading "Report of
the Compensation Committee of the Board of Directors" and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is contained in the Company's proxy
statement for its 2000 annual shareholders meeting under the same caption and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is contained in the Company's proxy
statement for its 2000 annual shareholders meeting under the same caption and is
incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) List of Financial Statements. The following is a list of the
consolidated financial statements included at the end of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997 Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 1999, 1998 and 1997 Consolidated
Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997 Consolidated Statement of Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial
Statements
(2) List of Financial Statement Schedules.
All schedules prescribed by Regulation S-X have been omitted as the
required information is inapplicable or the information is presented
elsewhere in the consolidated financial statements or related notes.
(3) List of Exhibits. The following is a list of exhibits furnished.
3.1 Amended and Restated Certificate of Formation and Operating Agreement of
the Company (filed as Exhibit 4.1 to the Company's Registration Statement
on Form S-3/A, File No. 333-56049, and incorporated by reference herein).
3.2 By-laws of the Company (filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-3/A, File No. 333-56049, and incorporated by reference
herein).
10.1 Employment Agreement between the Registrant and Mark K. Joseph, dated
August 1, 1996 (filed as Item 7 (c) Exhibit 10.1 to the Company's report on
Form 8-K, filed with the Commission on January 28, 1998 and incorporated by
reference herein).
10.2 Employment Agreement between the Registrant and Michael L. Falcone, dated
August 1, 1996 (filed as Item 7 (c) Exhibit 10.2 to the Company's report on
Form 8-K, filed with the Commission on January 28, 1998 and incorporated by
reference herein).
10.3 Employment Agreement between the Registrant and Thomas R. Hobbs, dated
August 1, 1996 (filed as Item 7 (c) Exhibit 10.3 to the Company's report on
Form 8-K, filed with the Commission on January 28, 1998 and incorporated by
reference herein).
10.4 Master Repurchase Agreement among the Registrant, Trio Portfolio Investors,
L.L.C., Rio Portfolio Partners, L.P., Blackrock Capital Finance, L.P.,
Brazos Fund, L.P. and M.F. Swapco, Inc. dated June 30, 1997 (filed as Item
7 (c) Exhibit 10.4 to the Company's report on Form 8-K, filed with the
Commission on January 28, 1998 and incorporated by reference herein).
10.5 Stock Purchase and Contribution Agreement among the Registrant and Messrs.
Robert J. Banks, Keith J. Gloeckl and Ray F. Mathis dated September 30,
1999 (filed as Item 7 (c) Exhibit 2.1 to the Company's report on Form 8-K,
filed with the Commission on November 8, 1999 and incorporated by reference
herein).
10.6 Registration Rights Agreement among the Registrant and Messrs. Robert J.
Banks, Keith J. Gloeckl and Ray F. Mathis dated October 20, 1999 (filed as
Item 16 Exhibit 2.2 to the Company's report on Form S-3, File No.
333-56049, filed with the Commission on January 24, 2000 and incorporated
by reference herein).
10.7 Employment Agreement between the Registrant and Robert J. Banks, dated
October 20, 1999 (filed as part of the Company's Form 10-K for the fiscal
year ended December 31, 1999 and incorporated by reference herein).
10.8 Employment Agreement between the Registrant and Keith J. Gloeckl, dated
October 20, 1999 (filed as part of the Company's Form 10-K for the fiscal
year ended December 31, 1999 and incorporated by reference herein).
10.9 Employment Agreement between the Registrant and Ray F. Mathis, dated
October 20, 1999 (filed as part of the Company's Form 10-K for the fiscal
year ended December 31, 1999 and incorporated by reference herein).
11 Computation of Earnings Per Share
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
On October 8, 1999, the Company filed a report on Form 8-K
announcing an agreement to acquire 100% of the capital stock of Midland
Financial Holdings, Inc. from Messrs. Robert J. Banks, Keith J. Gloeckl and
Ray F. Mathis for up to $45 million.
On November 2, 1999 the Company filed a report on Form 8-K
announcing the consummation of its acquisition on October 20, 1999 of 100%
of the capital stock of Midland Financial Holdings, Inc. from Messrs.
Robert J. Banks, Keith J. Gloeckl and Ray F. Mathis for up to $45 million.
On December 27, 1999 the Company filed a report on Form 8-K/A
amending the November 2, 1999 Form 8-K filing to include pro forma
information with respect to the acquisition of 100% of the capital
stock of Midland Financial Holdings, Inc. from Messrs. Robert J. Banks,
Keith J. Gloeckl and Ray F. Mathis for up to $45 million.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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
By: /s/ Mark K. Joseph
-------------------
Mark K. Joseph
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons, in the capacities and on
the dates indicated.
Signature Title Date
/s/ Mark K. Joseph Chairman of the Board, March 29, 2000
- --------------------------- Chief Executive Officer
Mark K. Joseph (Principal Executive Officer),
and Director
/s/ Gary A. Mentesana Chief Financial Officer March 29, 2000
- ---------------------------
Gary A. Mentesana
/s/ Michael L. Falcone Chief Operating Officer March 29, 2000
- --------------------------- and Director
Michael L. Falcone
/s/ Robert J. Banks Senior Vice President March 29, 2000
- --------------------------- and Director
Robert J. Banks
/s/Charles Baum Director March 29, 2000
- ------------------
Charles Baum
/s/ Richard O. Berndt Director March 29, 2000
- -----------------------
Richard O. Berndt
/s/ Robert S. Hillman Director March 29, 2000
- ---------------------
Robert S. Hillman
/s/William L. Jews Director March 29, 2000
- ------------------
William L. Jews
/s/ Douglas A. McGregor Director March 29, 2000
- -----------------------
Douglas A. McGregor
/s/ Carl W. Stearn Director March 29, 2000
- ---------------------------
Carl W. Stearn
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Municipal Mortgage and Equity LLC
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of comprehensive income, of cash flows and of
shareholders' equity present fairly, in all material respects, the consolidated
financial position of Municipal Mortgage and Equity, L.L.C. at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As explained in Note 2, the financial statements include mortgage revenue bonds
and other bond related investments valued at $391,632,000 (49% of total assets)
and $310,093,000 (86% of total assets) at December 31, 1999 and 1998,
respectively, whose values have been estimated by the Company's management in
the absence of readily ascertainable market values. Those estimated values may
differ significantly from the values that would have been used had a ready
market for the investments existed, and the differences could be material.
/s/ PricewaterhouseCoopers, LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 11, 2000
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
1999 1998
--------------- ---------------
ASSETS
Cash and cash equivalents $ 54,417 $ 23,164
Interest receivable 8,118 2,859
Investment in mortgage revenue bonds, net (Note 5) 225,782 201,858
Investment in mortgage revenue bonds pledged, net (Note 5) 165,762 96,566
Investment in other bond related investments (Notes 6, 7 and 8) 8,33