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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, 1998
Commission File Number 001-11981
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
(Exact name of Registrant as specified in its charter)
Delaware 52-1449733
(State 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:
Name of each exchange
Title of each class on which registered
Growth 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 Growth Shares held by
non-affiliates of the registrant as of March 17, 1999 (computed by reference to
the closing price of such stock on the New York Stock Exchange) was
$291,026,822. The Company had 16,801,398 Growth Shares outstanding as of March
17, 1999, the latest practicable date.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Registrant's definitive Proxy Statement regarding the
1999 Annual Meeting of Shareholders to the extent
stated herein. Part III
Part I
Item 1. Description of Business.
General Development of Business.
Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage revenue
bonds issued by state and local government authorities to finance multifamily
housing developments. The Company also invests in other bond related investments
that it expects will produce tax-exempt interest income and that are backed by
multifamily housing developments. The Company, a Delaware limited liability
company, is the successor to the business of SCA Tax Exempt Fund Limited
Partnership (the "Partnership"), a closed-end limited partnership that was
merged into the Company 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 the Company is classified as a partnership for federal income
tax purposes, the Company is able to pass through to its shareholders all
income, including tax-exempt income, derived from its investments without paying
corporate income tax.
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 1995 Financing
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. For more information concerning the 1995 Financing, see Note 13 to
the Company's consolidated financial statements included herein.
The Merger
In connection with the August 1, 1996 merger of the Partnership into
the Company (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 Growth 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 1995 Financing. The Growth 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 Growth 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. The balance of
the Company's cash flow is available for distribution to Growth Shares and the
Company's current policy is to distribute to Growth 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 ("Adjusted Book Value"). The offer to purchase was made as a result of a
tender offer made by an unaffiliated third party, Sierra Fund 3 (the "1998
Sierra Offer"). The 1998 Sierra Offer was for 4.5% of the outstanding shares of
the Series I Preferred Shares at a price which was 60% of the September 30, 1998
Adjusted Book Value. The Company recognized there might be preferred
shareholders who desire liquidity. Accordingly, the Company determined to offer
80% of the September 30, 1998 Adjusted Book Value of each class so that
preferred shareholders who wish to liquidate would be able to do so at higher
prices. The offer expired at 12:00 noon, Eastern Standard Time, on December 18,
1998. 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 as a result of a tender offer made by an unaffiliated third
party, Sierra Fund 3 (the "Sierra Offer"). The Sierra Offer was for 4.9% of the
outstanding shares of each class of preferred shares at prices ranging from
between 50% to 60% of the September 30, 1997 book value of each class. The
Company recognized there might be preferred shareholders who desire liquidity.
Accordingly, the Company determined to offer 80% of the September 30, 1997 book
value of each class so that preferred shareholders who decide to liquidate would
be able to do so at higher prices than the Sierra Offer. The offer expired at
midnight, eastern time, on December 26, 1997. 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.
Raising Capital
The raw material which enables the Company to fund its investments is
capital. 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 Growth Share equity offerings.
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 which 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.
Securitizations
The Company has access to financing programs for the securitization of
tax-exempt instruments. Through 1998, the Company participated in a
securitization program which involves placing a bond in a trust, and selling
short term floating rate interests (the "P-FLOATS(sm)") in the trust to
qualified third party investors. The Company typically receives the net proceeds
from the sale of the P-FLOATS(sm) related to bonds it previously held and
purchases the residual interest (the "RITES(sm)") in the trust. The Company may
also purchase, for investment purposes, RITES(sm) in bonds that it did not own,
in which case no proceeds are received. The P-FLOATS(sm) are the senior
obligations of the trust and have first priority on the cash flow from the
bonds. The RITES(sm) 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 1998 and in December 1997, the Company raised $90 million
and $59 million, respectively, through securitizations of two and five mortgage
revenue bonds, respectively, at effective annual costs of approximately 5.2%.
Public Offerings
On July 22, 1998, the Company sold to the public 2.5 million Growth
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 Growth Shares at a price of $20.625 per share and granted the
underwriters an option to purchase up to an aggregate of 450,000 Growth 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 Growth 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, which 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.
The Company's investment in mortgage revenue bonds as of December 31,
1998 consisted of 41 mortgage bonds (13 participating bonds, 13
non-participating bonds, 12 participating subordinate bonds and three
non-participating subordinate bonds, which are collateralized by 39 individual
properties). See Notes 2 and 3 to the Company's consolidated financial
statements included herein for a complete discussion.
The Company's Preferred Shares, Preferred CD Shares, and Growth Shares
all participate in the income from the 11 original bonds and the 11 refunded
Series B Bonds. The Preferred Shares, because they have been structured so that
their holders are allocated the income they would have been allocated had the
1995 Financing not occurred, are allocated an additional amount equal to the
income generated by their pro rata portion of the 11 refunded Series A Bonds
that serve as the collateral for the Receipts issued in the 1995 Financing and
are no longer included in the Company's bond portfolio. Only the Growth Shares
and Term Growth Shares participate in the income from acquisitions subsequent to
the 1995 Financing and will participate in the income generated by additional
bonds acquired by the Company in the future. See Item 5 of this report for a
description of each class of the Company's shares.
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, 1998, the Company
purchased and/or sold interests in five bonds which it had previously
securitized, and at December 31, 1998, the Company owned the senior interests in
two bonds that it had previously securitized. (See Note 5 to the Company's
consolidated financial statements included herein.)
Acquisition Programs
The Company seeks to acquire investments that 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:
o Existing mortgage bonds for which the underlying mortgages are
refinanced. There are a significant number of mortgage bonds backed by
multifamily properties which 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 are likely to
consider refinancing them.
o 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.
o Bonds that are used to finance development or rehabilitation of
multifamily properties, in conjunction with the affordable housing tax
credit.
o 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.
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.
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 which are
custom tailored to meet the customer's needs.
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 has structured 30 transactions subsequent to the Merger.
The 38 properties collateralizing the mortgage loans underlying the investments
are geographically dispersed and include new
construction projects and acquisition or refinancing of existing properties.
Three of the post-Merger transactions contain a provision 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 bond related investments
was 93.4% at December 31, 1998.
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 as 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, 1998 and 1997 with respect to the properties collateralizing the
mortgage loans underlying the investments held by the Company at December 31,
1998.
Real Estate Table
Occupancy
--------------------------------------
Month Ended Month Ended Month Ended
Month/Year Apartment December 31, September 30, December 31,
Apartment Community Location Acquired Units 1998 1998 1997
------------------- -------- ---------- -------- ------------ -------------- -----------
Participating Mortgage Bonds:
Alban Place Frederick, MD Sep-86 194 90.7% 99.0% 90.7%
Creekside Village Sacramento, CA Nov-87 296 92.9% 94.3% 95.3%
Emerald Hills Issaquah, WA Mar-88 130 93.8% 93.3% 96.9%
Lakeview Miami, FL Sep-87 180 96.1% 92.8% 96.1%
Newport On Seven St. Louis Park, MN Aug-86 167 97.0% 99.4% 97.6%
North Pointe San Bernardino, CA Sep-86 540 92.6% 91.6% 92.0%
Northridge Park II Salinas, CA Aug-87 128 93.0% 96.7% 95.3%
Riverset (1) Memphis, TN Aug-88 352 96.6% 98.7% 97.7%
Southfork Village Lakeville, MN Jan-88 200 96.5% 97.5% 98.0%
Villa Hialeah Hialeah, FL Nov-87 245 91.8% 93.9% 92.7%
Mountain View (Willowgreen) Tacoma, WA Nov-86 241 95.9% 96.7% 94.6%
The Crossings Lithonia, GA Jan-97 200 97.0% 94.0% 97.5%
Palisades Park Universal City, TX Feb-98 328 96.0% 94.8% N/A
-------
Subtotal Participating Mortgage Bonds 3,201
-------
Non-participating Mortgage Bonds
Riverset II (1) Memphis, TN Jan-96 - - - -
Charter House (2) Lenexa, KS Dec-96 - - - -
Hidden Valley Kansas City, MO Dec-96 82 93.9% 93.9% 92.7%
Oakbrook Topeka, KS Dec-96 170 82.4% 86.5% 88.2%
Torries Chase Olathe, KS Dec-96 99 94.9% 95.2% 98.0%
Gannon Portfolio (3 ) ---- Feb-98 - - - -
Italian Gardens (4) San Jose, CA Apr-98 140 N/A N/A N/A
Coleman Senior (4) San Jose, CA Apr-98 141 N/A N/A N/A
Lake Piedmont (5) Indianapolis, IN Apr-98 648 59.9% 66.0% N/A
Orangevale (5) Orange, CA Apr-98 64 98.4% 79.7% N/A
Western Hills (6) Overland Park, KS Dec-98 80 N/A
Oakmont (6) Monroe, LA Dec-98 212 N/A
Towne Oaks (6) Monroe, LA Dec-98 152 N/A
Briarwood (6) Virginia Beach, VA Dec-98 600 N/A
-------
Subtotal Mortgage Bonds 2,388
-------
Participating Subordinate Mortgage Bonds:
Barkley Place Ft. Myers, FL May-87 156 96.8% 98.1% 95.5%
Gilman Meadows Issaquah, WA Mar-87 125 97.6% 96.6% 96.0%
Hamilton Chase Chattanooga, TN Feb-87 300 91.7% 91.5% 95.0%
Mallard Cove I & II Everett, WA Feb-87 198 99.0% 93.1% 96.0%
Meadows Memphis, TN Jan-88 200 95.0% 98.3% 98.0%
Montclair Springfield, MO Oct-86 159 95.0% 94.7% 97.5%
Newport Village Thornton, CO Dec-87 339 94.4% 98.2% 96.8%
Steeplechase Knoxville, TN Oct-88 450 93.1% 93.7% 89.8%
Whispering Lake Kansas City, MO Oct-87 384 93.2% 96.0% 96.6%
Riverset II (1) Memphis, TN Jan-96 148 97.3% 98.8% 96.0%
--------
Subtotal Participating Subordinate Mortgage Bonds 2,679
--------
Subordinate Mortgage Bonds:
Independence Ridge Independence, MO Aug-96 336 87.5% 86.9% 99.1%
Locarno Kansas City, MO Aug-96 110 96.4% 97.3% 99.1%
Olde English (7) Wichita, KS Jun-98 264 83.7% 92.0% N/A
--------
Subtotal Subordinate Mortgage Bonds 710
--------
Other Bond Related Investments and Loans:
Indian Lakes Virginia Beach, VA Jul-97 296 96.3% 98.6% 92.9%
Charter House (2) Lenexa, KS Dec-96 280 92.9% 91.1% 94.0%
Southgate Crossings Columbia, MD Jun-97 215 96.3% 98.0% 96.3%
Southwood (5) Richmond, VA Nov-97 1,286 91.8% 89.1% 87.6%
Village at Stone Mountain Stone Mountain, GA Oct-97 722 94.3% 95.2% 95.0%
Riverset II (1) Memphis, TN Jan-96 - - - -
Cinnamon Ridge Egan, MN Dec-97 264 95.1% 98.9% 97.0%
Gannon (Broward) (3) Lauderdale Lakes, FL Feb-98 315 97.8% 94.6% N/A
Gannon (Dade) (3,8) Miami, FL Feb-98 1,252 95.6% 97.0% N/A
Gannon (St. Louis) (3) St. Louis, MO Feb-98 336 92.0% 94.6% N/A
Villas at Sonterra (4) San Antonio, TX May-98 156 N/A N/A N/A
Queen Anne IV Weymouth, MA Jul-98 110 90.9% 96.4% N/A
Oklahoma City (9) Oklahoma City, OK Aug-98 772 87.5% 88.7% N/A
Rillito Village (10) Tucson, AZ Aug-98 272 90.8% 93.4% N/A
Wheeler Creek (11) Washington, DC Dec-98 180 N/A
Poplar Glen (11) Columbia, MD Jun-97 191 97.4% 97.5% 98.4%
--------
Subtotal Other Bond Related Investments 6,647
-------
Total/Weighted Average Investments 93.4% 95.3% 95.3%
Total Units 15,625
=======
Average Monthly Rent
Per Apartment Unit
--------------------------------------
Month Ended Month Ended Month Ended
Month/Year Apartment December 31, September 30, December 31,
Apartment Community Location Acquired Units 1998 1998 1997
------------------- -------- ---------- --------- ----------- ------------ ------------
Participating Mortgage Bonds:
Alban Place Frederick, MD Sep-86 194 $ 770 $ 745 $ 767
Creekside Village Sacramento, CA Nov-87 296 477 475 471
Emerald Hills Issaquah, WA Mar-88 130 894 882 848
Lakeview Miami, FL Sep-87 180 634 628 617
Newport On Seven St. Louis Park, MN Aug-86 167 886 877 856
North Pointe San Bernardino, CA Sep-86 540 590 588 586
Northridge Park II Salinas, CA Aug-87 128 854 848 804
Riverset (1) Memphis, TN Aug-88 352 658 655 674
Southfork Village Lakeville, MN Jan-88 200 852 829 817
Villa Hialeah Hialeah, FL Nov-87 245 608 608 605
Mountain View (Willowgreen) Tacoma, WA Nov-86 241 540 537 525
The Crossings Lithonia, GA Jan-97 200 679 649 665
Palisades Park Universal City, TX Feb-98 328 484 487 N/A
Subtotal Participating Mortgage Bonds 3,201
Non-participating Mortgage Bonds
Riverset II (1) Memphis, TN Jan-96 - - - -
Charter House (2) Lenexa, KS Dec-96 - - - -
Hidden Valley Kansas City, MO Dec-96 82 515 515 484
Oakbrook Topeka, KS Dec-96 170 446 446 430
Torries Chase Olathe, KS Dec-96 99 443 443 430
Gannon Portfolio (3 ) ---- Feb-98 - - - -
Italian Gardens (4) San Jose, CA Apr-98 140 N/A N/A N/A
Coleman Senior (4) San Jose, CA Apr-98 141 N/A N/A N/A
Lake Piedmont (5) Indianapolis, IN Apr-98 648 480 479 N/A
Orangevale (5) Orange, CA Apr-98 64 845 756 N/A
Western Hills (6) Overland Park, KS Dec-98 80 N/A
Oakmont (6) Monroe, LA Dec-98 212 N/A
Towne Oaks (6) Monroe, LA Dec-98 152 N/A
Briarwood (6) Virginia Beach, VA Dec-98 600 N/A
---------
Subtotal Mortgage Bonds 2,388
---------
Participating Subordinate Mortgage Bonds:
Barkley Place Ft. Myers, FL May-87 156 1,847 1,794 1,740
Gilman Meadows Issaquah, WA Mar-87 125 895 885 841
Hamilton Chase Chattanooga, TN Feb-87 300 594 597 576
Mallard Cove I & II Everett, WA Feb-87 198 671 663 629
Meadows Memphis, TN Jan-88 200 561 561 539
Montclair Springfield, MO Oct-86 159 1,675 1,648 1,587
Newport Village Thornton, CO Dec-86 220 710 716 680
Nicollet Ridge Burnsville, MN Dec-87 339 809 807 771
Steeplechase Knoxville, TN Oct-88 450 593 588 587
Whispering Lake Kansas City, MO Oct-87 384 589 605 569
Riverset II (1) Memphis, TN Jan-96 148 667 651 634
---------
Subtotal Participating Subordinate Mortgage Bonds 2,679
---------
Subordinate Mortgage Bonds:
Independence Ridge Independence, MO Aug-96 336 490 495 469
Locarno Kansas City, MO Aug-96 110 788 784 734
Olde English (7) Wichita, KS Jun-98 264 491 491 N/A
---------
Subtotal Subordinate Mortgage Bonds 710
---------
Other Bond Related Investments and Loans:
Indian Lakes Virginia Beach, VA Jul-97 296 671 659 644
Charter House (2) Lenexa, KS Dec-96 280 589 539 509
Southgate Crossings Columbia, MD Jun-97 215 798 791 760
Southwood (5) Richmond, VA Nov-97 1,286 466 467 468
Village at Stone Mountain Stone Mountain, GA Oct-97 722 666 658 651
Riverset II (1) Memphis, TN Jan-96 - - - -
Cinnamon Ridge Egan, MN Dec-97 264 834 787 750
Gannon (Broward) (3) Lauderdale Lakes, FL Feb-98 315 597 585 N/A
Gannon (Dade) (3,8) Miami, FL Feb-98 1,252 677 674 N/A
Gannon (St. Louis) (3) St. Louis, MO Feb-98 336 511 508 N/A
Villas at Sonterra (4) San Antonio, TX May-98 156 N/A N/A N/A
Queen Anne IV Weymouth, MA Jul-98 110 802 771 N/A
Oklahoma City (9) Oklahoma City, OK Aug-98 772 440 438 N/A
Rillito Village (10) Tucson, AZ Aug-98 272 434 434
Wheeler Creek (11) Washington, DC Dec-98 180 N/A
Poplar Glen (11) Columbia, MD Jun-97 191 787 777 753
----------
Subtotal Other Bond Related Investments 6,647
----------
Total/Weighted Average Investments $ 565 $ 683 $ 674
Total Units 15,625
==========
(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, a FLOATS interest and a RITES interest collateralized by the Charter House
property.
(3) The Company owns a non-participating bond and RITES interests collateralized by the Gannon Portfolio.
(4) New Construction.
(5) Properties under renovation.
(6) Fourth Quarter Activity.
(7) The Company owns a non-participating subordinate bond collateralized by Olde English Manor.
(8) The Dade Gannon Portfolio represents eight properties.
(9) The Oklahoma City Portfolio represents three properties.
(10) The Company owns a taxable loan collateralized by Rillito Village.
(11) The Company owns a $50,000 investment related to Wheeler Creek and a risk-sharing interest in Poplar Glen (See Note 8 to
the consolidated financial statements
included herein) which is included in restricted assets.
Asset Management
The Company is responsible for a full range of loan servicing and asset
management functions for each mortgaged property underlying the mortgage revenue
bonds held by the Company. 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 on a
case-by-case basis. After sending requisite default notices, Company management
typically holds discussions with the property owner/developer. In the event that
management determines that the owner/developer remains committed to the project
and capable of successful operations, a workout or other forbearance arrangement
may be negotiated. Where management 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 1999.
Employees
As of December 31, 1998, the Company had 27 employees. The Company is
not a part to any collective bargaining agreement.
Item 2. Properties.
The registrant 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 at 218 N. Charles, Baltimore, Maryland 21201 with a
term expiring in 2002.
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, 1998.
Part II
Item 5. Market for Registrant's Equity Securities and Related Stockholder
Matters
Beginning August 30, 1996, the Growth 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 Growth 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.
Municipal Mortgage and Equity
Item 5. table
Distributions
High Low Declared
-------- -------- ----------------
1997
First Quarter 17 7/8 15 1/2 0.3450
Second Quarter 17 3/8 16 1/4 0.3500
Third Quarter 19 7/8 17 0.3650
Fourth Quarter 20 7/8 19 0.3700
1998
First Quarter (through March 24) 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
1999
First Quarter (through March 16) 20 17 1/4 -
As of March 12, 1999, there were approximately 15,772 holders of record
of Growth 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 12, 1999, there were 1,181 and 526
holders of record of Preferred Shares and Preferred CD Shares, respectively.
Description of Shares
As of December 31, 1998 there were 22,940 Preferred Shares (15,590
Series I and 7,350 Series II), 11,860 Preferred CD Shares (8,325 Series I and
3,535 Series II), 2,000 Term Growth Shares, and 16,791,050 Growth 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 Growth Shares depending upon market conditions. In addition, the
Company is authorized to issue new classes of shares, which may be senior to the
Growth 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 Growth 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 Growth Shares
or other shares ranking junior to the Preferred Shares. The Preferred
Shareholders shall be permitted to convert such shares to either Growth 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 Growth 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).
Growth Shares. The holders of the Growth Shares, also referred to as
common shares, are entitled to such distributions as declared by the Board of
Directors out of funds legally available therefor. As of December 31, 1998, the
Company's policy is to distribute to the holders of the Growth 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 Growth Shares, however, so long there remains unpaid
any required distribution or redemption payment with respect to the Preferred
Shares and Preferred CD Shares.
The Growth 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 Growth 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 Growth 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 Growth Shares presented for a vote of the holders of those
shares.
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
----------- ------------ ------------- ------------- ----------
As of and for the year ended December 31,
INCOME STATEMENT DATA (000s):
Interest on mortgage revenue bonds and
other bond related investments $23,241 $17,219 $13,859 $13,363 $16,894
Interest on parity working capital loans, demand
notes and other loans 4,563 3,500 1,343 211 486
Net gain on sales 4,743 2,824 - 623 -
Equity in MLP II - - 2,141 3,150 -
Total revenues 35,458 25,339 18,670 17,713 17,590
Other-than-temporary impairments and valuation
adjustments related to investment in mortgage
revenue bonds (2,049) (2,580) (3,990) - (2,014)
Income before cumulative effect of accounting change 27,407 18,797 10,868 13,204 13,211
Cumulative effect of accounting change for mortgage
revenue bonds - - - - (11,881)
Net income $27,407 $18,797 $10,868 $13,204 $1,330
PER SHARE/BAC DATA:
Net income (loss) per BAC prior to August 1, 1996:
Series I:
Income before cumulative effect of accounting change - - $5.33 $43.74 $41.79
Cumulative effect of accounting change for mortgage
revenue bonds - - - - ($47.40)
Net income (loss) - - $5.33 $43.74 ($5.61)
Series II:
Income before cumulative effect of accounting change - - $26.05 $44.91 $49.04
Cumulative effect of accounting change for mortgage
revenue bonds - - - - ($23.71)
Net income - - $26.05 $44.91 $25.33
Net income per share subsequent to July 31, 1996:
Preferred shares
Series I $67.80 $43.07 $22.84 - -
Series II $64.74 $64.84 $27.24 - -
Preferred capital distribution shares
Series I $56.23 $32.59 $18.86 - -
Series II $48.97 $49.70 $21.53 - -
Growth shares (diluted earnings per share) $1.60 $1.50 $0.56 - -
Weighted average Growth Shares outstanding - diluted 15,938,249 12,537,517 11,123,048 - -
BALANCE SHEET DATA (000s):
Investments in mortgage revenue bonds and other
bond related investments $310,093 $220,961 $183,632 $146,142 $213,842
Investment in MLP II Acquisition LP - - - 65,299 -
Total assets $359,411 $243,101 $230,277 $224,815 $230,282
ITEM 6. SELECTED FINANCIAL DATA (continued)
1998 1997 1996 1995 1994
----------- ------------ ------------- ------------- ----------
CASH DISTRIBUTIONS PER 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 $25.00
For the six months ended December 31, paid in February - - - $26.25 $25.00
Series II BACS:
For the six months ended June 30, paid in July/August - - $27.50 $27.50 $27.50
For the six months ended December 31, paid in February - - - $27.50 $27.50
Distributions per share subsequent to July 31, 1996:
Preferred shares:
Series I:
For the year ended December 31, paid quarterly (1),(3) $80.77 $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) $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),(3) $79.44 $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) $53.36 $50.64 - - -
For the six months ended December 31, paid in February - - $25.00 - -
Special distribution/return of capital - August - - $252.03 - -
Growth shares
For the year ended December 31, paid quarterly (1) $1.53 $1.43 - - -
For the six months ended December 31, paid in February(2) - - $0.6325 - -
(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. Also, the affiliates
of the former Managing General Partner of the Partnership who received Growth Shares in the Merger did not receive the
July 1996 distribution paid to Growth Shareholders since they were not holders in July 1996.
(3) The 1998 distributions for the Series I Preferred Shares and the Series I Preferred Capital Distribution Shares include
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.
ITEM 6. SELECTED FINANCIAL DATA (continued)
1998 1997 1996 1995 1994
------------ --------- ------------- ------------- ----------
SHARES/BACs OUTSTANDING AND NUMBER OF HOLDERS
AS FOLLOWS:
BACS as of December 31,
Series I:
BACs outstanding - - - 200,000 200,000
Number of BAC holders - - - 9,607 9,739
Series II:
BACs outstanding - - - 96,256 96,256
Number of BAC holders - - - 4,172 4,226
Shares as of December 31,
Preferred shares:
Series I
Shares outstanding 15,590 16,329 16,329 - -
Number of shareholders 803 873 952 - -
Series II
Shares outstanding 7,350 7,637 7,637 - -
Number of shareholders 356 365 403 - -
Preferred capital distribution shares:
Series I
Shares outstanding 8,325 8,909 8,909 - -
Number of shareholders 378 425 481 - -
Series II
Shares outstanding 3,535 3,809 3,809 - -
Number of shareholders 170 194 222 - -
Growth shares
Shares outstanding 16,791,050 11,106,150 11,092,370 - -
Number of shareholders 15,772 13,405 11,052 - -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Business
The Company is in the business of originating, investing in and
servicing tax-exempt mortgage revenue bonds issued by state and local government
authorities to finance multifamily housing developments. The Company is a
limited liability company that, as a result of a merger effective August 1, 1996
(the "Merger"), is the successor to the business of SCA Tax Exempt Fund Limited
Partnership (the "Partnership"). Accordingly, the accompanying consolidated
financial statements present the financial position of the Company at December
31, 1998 and 1997; results of operations include those of the Partnership
through July 31, 1996 and those of the Company from August 1, 1996 through
December 31, 1998.
The Partnership was a closed-end limited partnership whose assets
consisted principally of 22 mortgage revenue bonds and related working capital
loans acquired with the $296 million proceeds from two 1986 offerings of
Beneficial Assignee Certificates ("BACs") representing the assignment of its
limited partnership interests. In August 1996, as a result of elections made by
the Partnership's BAC holders in connection with the Merger, the outstanding
BACs were exchanged for either Preferred Shares, Preferred Capital Distribution
Shares ("Preferred CD Shares"), or Growth Shares (or "Common Shares") (including
a limited number of Term Growth Shares) of the Company. As more fully explained
in Note 14 to the Company's consolidated financial statements included herein,
all of these shares participate, to varying degrees, in the investment results
of the bonds and related loans held by the Partnership at the time of the
Merger, and the Common Shares alone participate in the investment results of new
investments purchased with the proceeds from any financings or equity offerings.
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 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 cash available for distributions ("CAD") to Common Shares. This payout
ratio approximated 90% and 95% of the annual CAD for the years ended December
31, 1998 and 1997, respectively. For the five months ended December 31, 1996,
the payout ratio approximated 94% of CAD.
Certain of the bonds held by the Company are participating bonds that
provide for payment of contingent interest in addition to base interest at a
fixed rate. Additionally, the mortgage loans underlying all of the bonds and
certain bond related investments held by the Company are nonrecourse. As a
result of these two factors, all debt service on the bonds, and therefore cash
flow available for distribution to all shareholders, is dependent upon the
performance of the underlying properties.
Results of Operations
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 the same period last year 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 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 from the prior year 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's infrastructure, (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.
The Company recorded other-than-temporary impairments aggregating
$2.0 million on two bonds in 1998. 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.
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.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total income for the year ended December 31, 1997 increased by
approximately $6.7 million as compared to the same period in 1996. The increase
in total income is due primarily to (1) a $2.8 million gain on the sale of bonds
through securitization which includes a portion of the unrealized gain
associated with the bonds of approximately $3.1 million, net of selling expenses
of approximately $0.3 million; (2) an increase in interest income and fees of
$1.6 million earned on new acquisitions; and (3) an increase in interest income
of $1.1 million resulting from the contribution of mortgage servicing fees by
the former general partners of the Partnership.
Operating expenses for 1997 increased slightly over 1996 due primarily
to an increase in costs associated with the expansion and growth of the Company.
The Company recorded other-than-temporary impairments aggregating $2.6
million on two bonds in 1997. 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.
For the year ended December 31, 1997, the net adjustment to other
comprehensive income for unrealized holding gains on mortgage revenue bonds and
other bond related investments available for sale was $15.4 million. After a
reclassification adjustment for gains of $0.5 million included in net income,
other comprehensive income for the year ended December 31, 1997 was $14.9
million.
The Company believes that inflation has not had a material effect on
results of operations.
New Accounting Pronouncement
During July 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). This standard requires the
Company to recognize all derivatives as either assets or liabilities in its
financial statements and measure such instruments at their fair values. Hedging
activities must be redesignated and documented pursuant to the provisions of the
statement. This statement becomes effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. At this time, the Company is still
assessing the impact of SFAS No. 133 on its financial condition and results of
operations.
Liquidity and Capital Resources
The Company's primary objective is to maximize shareholder value
through increases in CAD per Common Share and appreciation in the value of its
Common Shares. The Company seeks to achieve its growth objectives by acquiring,
servicing and managing diversified portfolios of mortgage bonds and other bond
related investments. In order to facilitate this growth strategy, the Company
will require additional capital in order to pursue acquisition opportunities.
The Company expects to finance its acquisitions through a financing strategy
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 equity offerings, to finance its acquisitions.
For the year ended December 31, 1998, the Company participated in $252
million in investment transactions. Of this amount, $86 million of these
transactions were bond or loan originations retained by the Company. The
remaining investment transactions involve the securitizations discussed below.
Securitizations
Through securitizations, the Company seeks to enhance its overall
return on its investments and to generate proceeds which, along with equity
offering proceeds, facilitate the acquisition of additional investments. The
Company securitizes bonds through the sale of bonds to an investment bank, which
has to date been Merrill Lynch Pierce Fenner and Smith Incorporated ("Merrill
Lynch"), which, in turn, deposits the bonds into a trust. Short term floating
rate interests in the trust (the "senior interests" or the "P- FLOATS(sm)"),
which have first priority on the cash flow from the bonds, are sold to
accredited qualified third party investors. The Company purchases the residual
interests (or the "RITES(sm)") in the trust and receives the proceeds from the
sale of the senior interests less certain transaction costs. The Company may
also purchase, for investment purposes, residual interests in bonds that it 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 cash available for
distribution. 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 swaps, the Company would recognize gains or losses on
the liquidation, for net income, tax reporting and cash available for
distribution, which may be significant depending on market conditions. As of
December 31, 1998, $166 million of the senior interests were subject to annual
"rollover" renewal for liquidity and credit enhancement. During the first six
months of 1999, $141 million of these renewals were scheduled to come due. The
Company has already extended, in advance, the liquidity and credit enhancement
of these $141 million of senior interests through July 1, 1999. The Company
continues to review alternatives which would reduce and diversify credit risks.
Since the bonds securitized generally bear fixed rates of interest, the
residual interest in the trust created by the securitization may create 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 would wish to retain
this investment, it would be forced to purchase the remaining interests in the
bond.
From time to time, depending on the Company's capital position and
needs, the Company may purchase or sell on the open market interests in bonds
that it has securitized or bonds that the Company did not originally own but in
which it now holds a residual interest. During 1998, the Company purchased
and/or sold interests in five bonds which it previously securitized. At December
31, 1998, the Company owned the senior interests in two bonds that it had
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
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. Under this method, the
Company's leverage ratio at December 31, 1998 was approximately 41%.
In order to facilitate the securitization of certain assets at higher
leverage ratios, the Company has pledged additional bonds to the pool that acts
as collateral for the senior interests in the trust.
Term Securitization Facility
In order to reduce the Company's exposure to credit and annual renewal
risks associated with the liquidity and credit enhancement features of the
P-FLOATS(sm) trusts and the swap agreements, the Company is working with Merrill
Lynch to convert a portion of its investment in the P-FLOATS(sm) program into a
longer term securitization facility. To facilitate the conversion of the
Company's investment, the Company plans to sell to Merrill Lynch its subordinate
floating rate interests in certain P-FLOATS(sm) trusts. Merrill Lynch will then
collapse the P-FLOATS(sm) trust and deposit the bonds into a new securitization
trust (the "Term Securitization Facility").
Two classes of certificates will be sold out of the Term
Securitization Facility; Class A and Class B trust certificates.
The Class A certificates will bear interest at a fixed rate. The Class A
fixed interest rate will be set at the lowest rate that would result in the
sale of the Class A certificates at par. At each distribution date, the
Class B certificates will receive the residual interest from the Term
Securitization Facility after payment of (1) trustee fees and expenses,
(2) all interest and any principal due on the Class A certificates in
accordance with the terms of the documents and (3) servicing fees. Credit
enhancement of the bonds and liquidity support for the Class A certificates
will be provided by a subsidiary of the Company. The Class A certificates
will be sold to third party investors and a wholly owned subsidiary of the
Company intends to purchase the Class B certificates. Since the senior
interests are fixed rate instruments, the Company will no longer need to enter
into interest rate swap agreements in connection with the securitization of
these bonds. The Company anticipates this transaction will be consummated in
March 1999.
Public Offerings
On January 26, 1998, the Company 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 0.5 million Common Shares to cover
over-allotments at the same price. On February 13, 1998, the underwriters
exercised their option to purchase 0.2 million Common Shares. Net proceeds
generated from the offering of the 3.2 million Common Shares approximated $62.7
million. The net proceeds from this offering were used to fund bond acquisitions
and investments.
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 were used for
general corporate purposes, including new investments and working capital.
Cash Flow
At December 31, 1998, the Company had cash and cash equivalents of
approximately $23.2 million.
Cash flow from operating activities was $25.7 million, $18.8 million
and $12.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase in cash flow for 1998 versus 1997 is due primarily to
an increase in income from investment of equity offering proceeds. The increase
in cash flow for 1997 versus 1996 is due to the permanent investment of
financing proceeds. For the period January 1996 through July 1996, the income
from the temporary investment of financing proceeds, as well as the debt service
on certain notes, both of which were held by a subsidiary, were classified as
cash flow from investing activities. Had the cash flows from this subsidiary
been classified as cash flow from operating activities during this period, cash
flow from operating activities during the year ended December 31, 1996 would
have been $15.6 million.
The Company uses CAD as the primary measure of its dividend paying
ability. CAD differs from net income because of slight variations between
generally accepted accounting principles ("GAAP") income and actual cash
received. There are two primary differences between CAD and GAAP income. The
first is the treatment of loan origination fees, which for CAD purposes are
recognized as income when received but for GAAP purposes are amortized into
income over the life of the associated investment. The second difference is the
noncash gain and loss recognized for GAAP associated with valuations and sales
of investments, which are not included in the calculation of CAD.
For the years ended December 31, 1998 and 1997, cash available for
distribution to Common Shares was $26.6 million and $16.7 million, respectively.
The Company's Common Share dividend for 1998 of $1.53 represents a payout ratio
of 90.0% of CAD. The Company's Common Share dividend for 1997 of $1.43
represents a payout ratio of 95.4% of CAD.
Regular cash distributions to shareholders attributable to the years
ended December 31, 1998, 1997 and 1996 were $27.1 million, $18.3 million and
$16.1 million, respectively. In addition, during the year ended December 31,
1996, the Company, in accordance with the terms of the Merger, made a one-time
distribution of an aggregate of $2.5 million to the holders of the Preferred CD
Shares, consisting of their allocable share of the proceeds from a 1995
financing transaction and related expenses.
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 million in investment transactions in 1999. In order to achieve
its plan, the Company will be required to obtain additional financing of
approximately $100 million during 1999. 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
The Company has elected under Section 754 of the Internal Revenue Code
to adjust the basis of the Company's property on the transfer of shares to
reflect the price each shareholder paid for their shares. While the bulk of the
Company's recurring income is tax-exempt, from time to time, the Company may
sell or securitize various assets which may result in capital gains and losses
for tax purposes. Since the Company is taxed as a partnership, these capital
gains and losses are passed through to shareholders and are reported on each
shareholder's Schedule K-1. The capital gain and loss allocated from the Company
may be different to each shareholder due to the Company's 754 election and is a
function of, among other things, the timing of the shareholder's purchase of
shares and the timing of transactions which generate gains or losses for the
Company. This means that for assets purchased by the Company prior to a
shareholder's purchase of shares, the shareholder's basis in the assets may be
significantly different than the Company's basis in those same assets. Although
the procedure for allocating the basis adjustment is complex, the result of the
election is that each share is homogeneous, while each shareholder's basis in
the assets of the Company may be different. Consequently, the capital gains and
losses allocated to shareholders may be significant and different than the
capital gains and losses recorded by the Company.
Year 2000 Compliance
The Company is evaluating Year 2000 compliance issues, including
exposure related to vendors, borrowers, software and other systems to determine
whether internal and external concerns have been addressed. The Company has
established a Year 2000 Project Committee to oversee this evaluation and
implementation. The Company's internal goal is to be 100% compliant by June 30,
1999. As of the date of this writing, all equipment and software has been tested
and identified as to whether it is Year 2000 compliant. Anything identified as
not being Year 2000 compliant is expected to be upgraded or replaced no later
than June 30, 1999.
As disclosed in Note 10 - Related Party Transactions, the Company
directly reimburses an affiliate for certain administrative services which
include shared information systems. The file server hardware and software used
by the affiliate and the Company has already been upgraded to Year 2000
compliant systems. All desktop hardware and operating systems owned by the
Company have been inventoried and evaluated; the Company will upgrade or replace
any non-compliant equipment by June 30, 1999. The accounting software shared by
the Company and the affiliate already contains four-digit year data fields and
should present no Year 2000 problems. Also, the payroll hardware and software
shared by the Company and the affiliate has been converted to Year 2000
compliant systems.
The Company is currently evaluating all external business relationships
that could negatively impact its business if they failed to become Year 2000
compliant. Key business relationships have been identified
and questionnaires will be forwarded to those to request a written update of
their progress towards becoming Year 2000 compliant.
The Company believes that sufficient resources are being devoted to the
Year 2000 compliance issues through the formation of the Year 2000 Project
Committee. At this time, there are no plans to include the use of outside
consultants, or to have the Company's plan reviewed by its outside auditors.
Preliminary Year 2000 compliance issues have been discussed with the Company's
attorneys. At this time, the Company is unaware of any potential legal issues
that would adversely affect its business. Based on information currently
available, the Company does not expect to incur significant operating expenses
or material costs to become Year 2000 compliant.
Forward Looking Information
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.
Market Risk
The Company's balance sheet includes 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, while significantly hedged, 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 swaps.
As explained in Notes 5 and 6 to the Company's consolidated
financial statements, the Company manages its interest rate exposure on its
investments in RITES(sm), which are leveraged inverse floaters, through the use
of interest rate swaps in the notional amount of the outstanding P-FLOATS(sm) 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, 1998, the Company was not hedged by interest rate swaps on a
notional amount of $11.5 million, representing 7% of the outstanding
P-FLOATS(sm) in the securitization trusts. Based on the Company's unhedged
position at December 31, 1998 and assuming the remaining investments are
appropriately hedged, if interest rates increased 10%, the Company's interest
income and cash flows on
its RITES(sm) would decrease by $46,000 per year. The Company does not enter
into interest rate swap contracts for trading purposes.
The Company's investments in mortgage revenue bonds and other bond
related investments 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 2 to the Company's consolidated financial
statements included herein. In accordance with this policy, it is estimated that
a 10% decrease in market interest rates would result in a $0.7 million loss
(less than 1.0%) 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, such as brokers. However, for the participating mortgage
revenue bonds that are fair valued 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 factors to
consider in determining what causes discount and capitalization rates to change,
such as macro economic issues, real estate capital markets, local - supply and
demand and economic events, and investor risk perceptions. The information
presented here should be read in conjunction with Notes 2, 3, 4, 5 and 6 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 4, 1999, 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 1999 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 1999 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 1999 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 1999 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, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
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).
11 Computation of Earnings Per Share
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1998.
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 and Equity, L.L.C.
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, Chief Executive March 23, 1999
- ----------------------
Mark K. Joseph Officer (Principal Executive Officer),
and Director
/s/ Gary A. Mentesana Chief Financial Officer March 23, 1999
- ---------------------
Gary A. Mentesana
/s/ Charles Baum Director March 23, 1999
- ----------------------
Charles Baum
/s/ Richard O. Berndt Director March 23, 1999
- ----------------------
Richard O. Berndt
/s/ Robert S. Hillman Director March 23, 1999
- -----------------------
Robert S. Hillman
/s/ William L. Jews Director March 23, 1999
- ------------------------
William L. Jews
/s/ Carl W. Stearn Director March 23, 1999
- ------------------------
Carl W. Stearn
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Municipal Mortgage and Equity, L.L.C.
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. (successor to the
business of SCA Tax Exempt Fund Limited Partnership) and consolidated entities
as described in Note 1 at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
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
generally accepted auditing standards 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 $310,093,000 (86% of total assets)
and $220,961,000 (91% of total assets) at December 31, 1998 and 1997,
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.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 4, 1999
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 23,164 $ 7,370
Interest receivable 2,859 1,472
Investment in mortgage revenue bonds, net (Note 3) 166,390 182,035
Investment in mortgage revenue bonds pledged, net (Note 3) 96,566 -
Investment in other bond related investments, net (Notes 4 and 5) 47,137 38,926
Investment in parity working capital loans, demand
notes and other loans, net (Note 7) 17,246 11,491
Other assets 682 477
Restricted assets (Note 8) 5,367 1,330
--------- ---------
Total assets $ 359,411 $ 243,101
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,484 $ 1,000
Unearned revenue (Notes 8 and 9) 721 702
Guaranty liability (Note 7) 754 -
---------- ---------
Total liabilities 3,959 1,702
---------- ---------
Commitments and contingencies (Notes 2, 3, 4, 5, 6, 7, 8, 10 and 11) - -
Shareholders' equity:
Preferred shares:
Series I (15,590 and 16,329 shares issued and outstanding, respectively) 10,985 11,308
Series II (7,350 and 7,637 shares issued and outstanding, respectively) 5,970 6,230
Preferred capital distribution shares:
Series I (8,325 and 8,909 shares issued and outstanding, respectively) 4,351 4,559
Series II (3,535 and 3,809 shares issued and outstanding, respectively) 1,958 2,126
Term growth shares (2,000 shares issued and outstanding) 105 97
Growth shares (16,944,882 shares, including 16,938,446 issued
and 6,436 deferred at December 31, 1998 and 11,166,227 shares,
inlcuding 11,162,542 issued and 3,685 deferred at December 31, 1997) 310,109 192,504
Less growth shares held in treasury at cost (153,832 shares at
December 31, 1998 and 60,077 at December 31, 1997) (2,555) (922)
Less unearned compensation - deferred shares (Note 17) (2,892) (1,865)
Accumulated other comprehensive income 27,421 27,362
--------- ---------
Total shareholders' equity 355,452 241,399
--------- ---------
Total liabilities and shareholders' equity $ 359,411 $ 243,101
========= =========
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share, per share and per BAC data)
For the year ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
INCOME:
Interest on mortgage revenue bonds and other bond related investments $ 23,241 $ 17,219 $ 13,859
Interest on parity working capital loans, demand notes and other loans 4,563 3,500 1,343
Interest on short-term investments 1,330 627 1,096
Net gain on sales (Notes 4 and 7) 4,743 2,824 -
Equity in MLP II (Note 13) - - 2,141
Other income (Note 15) 1,581 1,169 231
--------------- ---------------- ----------------
Total income 35,458 25,339 18,670
--------------- ---------------- ----------------
EXPENSES:
Operating expenses 6,002 3,962 3,799
Minority interest - - 13
Other-than-temporary impairments related to investments in mortgage
revenue bonds (Note 3) 2,049 2,580 3,990
--------------- ---------------- ----------------
Total expenses 8,051 6,542 7,802
--------------- ---------------- ----------------
Net income $ 27,407 $ 18,797 $ 10,868
=============== ================ ================
Net income prior to August 1, 1996 allocated to:
General Partners $ - $ - $ 36
=============== ================ ================
Limited Partners:
Series I $ - $ - $ 1,065
=============== ================ ================
Series II - - 2,508
================================= ================
Net income per BAC prior to August 1, 1996:
Series I $ - $ - $ 5.33
=============== ================ ================
Series II - - 26.05
================================= ================
Net income subsequent to July 31, 1996 allocated to:
Preferred shares:
Series I $ 1,057 $ 703 $ 373
=============== ================ ================
Series II 476 495 208
=============== ================ ================
Preferred capital distribution shares:
Series I $ 468 $ 290 $ 168
=============== ================ ================
Series II 173 189 82
=============== ================ ================
Term growth shares $ 505 $ 381 $ 153
=============== ================ ================
Growth shares $ 24,728 $ 16,739 $ 6,275
=============== ================ ================
Basic net income per share subsequent to July 31, 1996:
Preferred shares:
Series I $ 67.80 $ 43.07 $ 22.84
=============== ================ ================
Series II 64.74 64.84 27.24
=============== ================ ================
Preferred capital distribution shares:
Series I $ 56.23 $ 32.59 $ 18.86
=============== ================ ================
Series II 48.97 49.70 21.53
=============== ================ ================
Growth shares $ 1.62 $ 1.51 $ 0.56