G:\ACCOUNT\10-Q\2002\1ST QUARTER\10Q1Q2002DOCUMENTA-UNBLACKLINED.DOC
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: March 31, 2002
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Commission file number: 001-11981
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MUNICIPAL MORTGAGE & EQUITY, LLC
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1449733
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(State of Organization) (I.R.S. Employer Identification No.)
218 North Charles Street, Suite 500, Baltimore, Maryland 21201
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(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code:(443) 263-2900
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The registrant had 25,227,296 common shares outstanding as of May 8, 2002.
MUNICIPAL MORTGAGE & EQUITY, LLC
INDEX TO FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, 2002 December 31, 2001
---------------- --------------------
ASSETS
Cash and cash equivalents $ 75,775 $ 97,373
Interest receivable 15,189 15,859
Investment in tax-exempt bonds, net (Note 2) 641,920 616,460
Investment in other bond-related investments (Notes 3 and 4) 9,020 13,295
Investment in derivative financial instruments (Note 5) 2,452 2,912
Loans receivable, net (Note 6) 381,998 440,031
Restricted assets 14,545 16,710
Other assets 47,156 45,749
Mortgage servicing rights, net 10,013 9,161
Property and equipment 2,712 2,721
Goodwill 29,005 29,005
---------------- --------------------
Total assets $ 1,229,785 $ 1,289,276
================ ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable (Note 7) $ 333,757 $ 420,063
Accounts payable, accrued expenses and other liabilities 23,638 29,014
Investment in other bond-related investments (Notes 3 and 4) 5,630 7,979
Investment in derivative financial instruments (Note 5) 15,074 18,646
Distributions payable 3,147 2,960
Short-term debt 53,500 78,560
Long-term debt 138,370 134,881
---------------- --------------------
Total liabilities 573,116 692,103
---------------- --------------------
Commitments and contingencies - -
Preferred shareholders' equity in a subsidiary company (Note 8) 160,465 160,465
Shareholders' equity:
Preferred shares:
Series I (0 and 10,995 shares issued and outstanding, respectively) - 6,914
Series II (0 and 3,176 shares issued and outstanding, respectively) - 2,326
Preferred capital distribution shares:
Series I (0 and 5,742 shares issued and outstanding, respectively) - 2,552
Series II (0 and 1,391 shares issued and outstanding, respectively) - 411
Term growth shares (0 and 2,000 shares issued and outstanding, respectively) - 229
Common shares, par value $0, (27,894,597 shares authorized, 25,249,462 shares issued
and outstanding, and 23,320 deferred shares at March 31, 2002 and 24,594,597
authorized, 21,857,312 shares issued and outstanding, and 22,254 deferred
shares at December 31, 2001) 484,133 406,733
Less common shares held in treasury at cost (59,330 shares and
59,330 shares, respectively) (912) (912)
Less unearned compensation (deferred shares) (4,527) (4,145)
Accumulated other comprehensive income 17,510 22,600
---------------- --------------------
Total shareholders' equity 496,204 436,708
---------------- --------------------
Total liabilities and shareholders' equity $ 1,229,785 $ 1,289,276
================ ====================
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(unaudited)
For the three months ended
March 31,
-----------------------------
2002 2001
------------- ---------------
INCOME:
Interest on tax-exempt bonds and other bond-related investments $ 15,593 $ 11,770
Interest on loans 7,999 8,181
Loan origination and brokerage fees 822 940
Syndication fees 1,885 1,124
Loan servicing fees 1,908 1,632
Interest on short-term investments 487 1,002
Other income 1,689 4,813
Net gain on sales 2,166 166
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Total income 32,549 29,628
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EXPENSES:
Salaries and benefits 4,827 4,445
Professional fees 172 691
Operating expenses 2,191 1,531
Amortization 318 693
Interest expense 8,972 7,826
Other-than-temporary impairments related to investments in mortgage
revenue bonds and other bond-related investments 110 3,256
------------ ---------------
Total expenses 16,590 18,442
Net holding gains (losses) on trading securities 3,112 (4,865)
------------ ---------------
Net income before income taxes, income allocated to
preferred shareholders in a subsidiary company,
and cumulative effect of accounting change 19,071 6,321
Income tax expense 1,031 3
------------ ---------------
Net income before income allocated to preferred shareholders
in a subsidiary company and cumulative effect of
accounting change 18,040 6,318
Income allocable to preferred shareholders in a subsidiary company 2,994 2,606
------------ ---------------
Net income before cumulative effect of accounting change 15,046 3,712
Cumulative effect on prior years of change in
accounting for derivative financial instruments - (12,277)
------------- ---------------
Net income (loss) $ 15,046 $ (8,565)
============= ===============
The accompanying notes are an integral part of these financial statements.
Net income (loss) allocated to:
Preferred shares:
Series I $ - $ 164
============== ==============
Series II - 45
============== ==============
Preferred capital distribution shares:
Series I $ - $ 71
============== ==============
Series II - 11
============== ==============
Term growth shares $ 153 $ 208
============== ==============
Common shares $ 14,893 $ (9,064)
============== ==============
Basic net income (loss) per share:
Preferred shares:
Series I $ - $ 11.00
============== ==============
Series II - 6.28
============== ==============
Preferred capital distribution shares:
Series I $ - $ 9.10
============== ===============
Series II - 3.50
============== ===============
Common shares:
Income before cumulative effect of accounting change $ 0.63 $ 0.16
Cumulative effect on prior years of change in
accounting for derivative financial instruments - (0.61)
-------------- ---------------
Basic net income (loss) per common share $ 0.63 $ (0.45)
============== ===============
Weighted average common shares outstanding 23,584,635 19,970,707
Diluted net income (loss) per share:
Common shares:
Income before cumulative effect of accounting change $ 0.62 $ 0.16
Cumulative effect on prior years of change in
accounting for derivative financial instruments - (0.60)
-------------- ---------------
Diluted net income (loss) per common share $ 0.62 $ (0.44)
============== ===============
Weighted average common shares outstanding 24,200,030 20,432,300
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) (unaudited)
For the three months ended
March 31,
---------------------------
2002 2001
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Net income (loss) $ 15,046 $ (8,565)
----------- ------------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period (4,134) 3,762
Reclassification adjustment for (gains) losses
included in net income (956) 12,227
----------- -------------
Other comprehensive income (loss) (5,090) 15,989
----------- -------------
Comprehensive income $ 9,956 $ 7,424
=========== =============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (unaudited)
For the three months ended
March 31,
-----------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,046 $ (8,565)
Adjustments to reconcile net income to net cash provided by operating
activities:
Income allocated to preferred shareholders in a subsidiary company 2,994 2,606
Cumulative effect of accounting change - 12,277
Net holding (gains) losses on trading securities (3,112) 4,865
Other-than-temporary impairments related to investments in
mortgage revenue bonds 110 3,256
Net gain on sales (2,166) (166)
Net amortization of premiums, discounts and fees on investments 18 85
Depreciation and amortization 459 743
Tax benefit from deferred share benefit 171 -
Deferred share compensation expense 448 359
Common and deferred shares issued under the Non-Employee Directors' Share Plans 45 -
Decrease in interest receivable 670 1,340
Increase in other assets (1,441) (5,616)
Decrease in accounts payable, accrued expenses and other liabilities (5,376) (2,553)
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Net cash provided by operating activities 7,866 8,631
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tax-exempt bonds and other bond related investments (32,156) (22,536)
Loan originations (85,870) (101,015)
Purchases of property and equipment (132) (426)
Principal payments received 144,158 63,886
Net proceeds from sales of investments 4,179 5,000
Net (reduction) investment in restricted assets 2,165 (14,560)
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Net cash provided by (used in) investing activities 32,344 (69,651)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities 101,296 171,759
Repayment of credit facilities (187,602) (177,130)
Proceeds from short-term debt 3,905 -
Repayment of short-term debt (28,965) -
Proceeds from long-term debt 3,538 4,251
Repayment of long-term debt (49) (142)
Issuance of common shares 77,547 82,645
Redemption of preferred shares (19,298) -
Proceeds from stock options exercised 611 70
Distributions (9,831) (9,349)
Distributions to preferred shares in a subsidiary company (2,960) (2,606)
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Net cash (used in) provided by financing activities (61,808) 69,498
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Net increase(decrease) in cash and cash equivalents (21,598) 8,478
Cash and cash equivalents at beginning of period 97,373 27,504
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Cash and cash equivalents at end of period $ 75,775 $ 35,982
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 8,608 $ 9,349
============= =============
Income taxes paid $ 220 $ 551
============= =============
The accompanying notes are an integral part of these financial statements.
Preferred Capital Accumulated
Preferred Shares Distribution Shares Term Other
-------------------- -------------------- Growth Common Treasury Unearned Comprehensive
Series I Series II Series I Series II Shares Shares Shares Compensation Income (Loss) Total
--------- --------- --------- ---------- -------- ----------- -------- ------------ -------------- --------
Balance,
January 1, 2002 $ 6,914 $ 2,326 $ 2,552 $ 411 $ 229 $ 406,733 $ (912) $ (4,145) $ 22,600 $436,708
Net income - - - - 153 14,893 - - - 15,046
Unrealized gains on
investments,net
of reclassifications - - - - - - - - (5,090) (5,090)
Distributions (115) (15) (49) (1) (382) (9,422) - - - (9,984)
Redemption of
preferred shares (6,799) (2,311) (2,503) (410) - (7,275) - - - (19,298)
Options exercised - - - - - 611 - - - 611
Issuance of common
shares - - - - - 77,555 - - - 77,555
Deferred shares issued
under the Non-Employee
Directors' Share Plans - - - - - 37 - - - 37
Deferred share grants - - - - - 830 - (382) - 448
Tax benefit from
exercise of options
and vesting of
deferred shares - - - - - 171 - - - 171
--------- --------- --------- ---------- -------- ----------- -------- ------------ -------------- --------
$ - $ - $ - $ - $ - $ 484,133 $ (912) $ (4,527) $ 17,510 $496,204
========= ========= ========= ========== ======== =========== ======== ============ ============== ========
Preferred Capital
Preferred Shares Distribution Shares Term
-------------------- -------------------- Growth Common Treasury
Series I Series II Series I Series II Shares Shares Shares
--------- --------- --------- ---------- -------- ----------- --------
10,995 3,176 5,742 1,391 2,000 21,820,236 59,330
Redemption of preferred
shares (10,995) (3,176) (5,742) (1,391) (2,000) - -
Options exercised - - - - - 32,500 -
Issuance of common
shares - - - - - 3,300,188 -
Issuance of common
shares under employee
share incentive plans - - - - - 59,462 -
Deferred shares issued
under the Non-Employee
Directors' Share Plans - - - - - 1,066 -
--------- --------- --------- ---------- -------- ----------- --------
- - - - - 25,213,452 59,330
========= ========== ========= ========== ======= =========== ========
MUNICIPAL MORTGAGE & EQUITY, LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage & Equity, LLC ("MuniMae") and its subsidiaries (together
with MuniMae, the "Company") are principally engaged in originating, investing
in and servicing investments related to multifamily housing and other real
estate financings. A significant portion of the Company's investments are
tax-exempt bonds, or interests in bonds, issued by state and local governments
or their agencies or authorities to finance multifamily housing developments.
Interest income from the majority of these investments is exempt for federal
income tax purposes. Multifamily housing developments, as well as the rents paid
by the tenants, secure these investments. Midland Financial Holdings, Inc.
("Midland"), a wholly owned corporate subsidiary, is a fully integrated real
estate investment firm that specializes in originating, investing in and
servicing investments in the affordable multifamily housing industry. These
investments generate taxable, not tax-exempt, income.
The assets of MuniMae TE Bond Subsidiary, LLC and its subsidiaries
(collectively, "TE Bond Sub"), are solely those of TE Bond Sub and are not
available to creditors of MuniMae. Because MuniMae indirectly owns all of the
common equity interests of TE Bond Sub, TE Bond Sub's assets are consolidated on
MuniMae's financial statements. The equity interest in TE Bond Sub held by
MuniMae is subject to the claims of creditors of the Company and in certain
circumstances could be foreclosed upon.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and in the opinion of management contain all adjustments
(consisting of only normal recurring accruals) necessary to present a fair
statement of the results for the periods presented. These results have been
determined on the basis of accounting principles and policies discussed in Note
1 to the Company's Annual Report on Form 10-K for the year ended December 31,
2001 (the "Company's 2001 Form 10-K"). Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
The accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 2001 Form 10-K.
Certain 2001 amounts have been reclassified to conform to the 2002 presentation.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141")
and No. 142 "Goodwill and Other Intangible Assets," ("FAS 142") which are
effective July 1, 2001 and January 1, 2002, respectively, for the Company. FAS
141 requires that the purchase method of accounting be used for all business
combinations consummated after June 30, 2001. FAS 141 did not have an impact on
the Company for the year ended December 31, 2001. The Company adopted FAS 142 on
January 1, 2002. Upon adoption of FAS 142, amortization of goodwill, including
goodwill recorded in past business combinations, was discontinued. For the year
ended December 31, 2001, the Company recorded amortization expense of $1.6
million. Application of the nonamortization provision is expected to result in
additional net income of $1.6 million for the year ended December 31, 2002. All
goodwill will be tested for impairment in accordance with the provisions of the
FAS 142 prior to June 30, 2002.
FAS 142 requires that goodwill be tested for impairment using a two-step
process. Step one is to identify potential impairment. MuniMae will complete
this step in the first half of 2002. Step two measures the amount of any
identified impairment loss. This step will be completed by the end of 2002.
The Company's goodwill at March 31, 2002 and December 31, 2001, represents
the excess of cost over market value of the net assets acquired from the
acquisition of businesses in the Company's operating segment. For the three
months ended March 31, 2002, there was no change in the carrying value of the
Company's goodwill. The following table shows the effect of the goodwill
amortization on net income and earnings per share for the periods presented:
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
--------------------- ---------------------
Reported net income (loss) to common shares $ 14,893 $ (9,064)
Add back: goodwill amortization - 485
--------------------- ---------------------
Adjusted net income (loss) to common shares $ 14,893 $ (8,579)
===================== =====================
Basic net income (loss) per share:
Reported net income (loss) per share $ 0.63 $ (0.45)
Goodwill amortization - 0.02
--------------------- ---------------------
Adjusted net income (loss) per share $ 0.63 $ (0.43)
===================== =====================
Diluted net income (loss) per share:
Reported net income (loss) per share $ 0.62 $ (0.44)
Goodwill amortization - 0.02
--------------------- ---------------------
Adjusted net income (loss) per share $ 0.62 $ (0.42)
===================== =====================
NOTE 2 - INVESTMENTS IN TAX-EXEMPT BONDS
The Company holds a portfolio of tax-exempt bonds and certificates of
participation in grantor trusts holding tax-exempt bonds ("COPs"). The
tax-exempt bonds are issued by state and local government authorities to finance
multifamily housing developments or other real estate financings. The bonds are
typically secured by non-recourse mortgage loans on the underlying properties.
The COPs represent a pro rata interest in a trust that holds a tax-exempt bond.
The Company's rights and the specific terms of the bonds and COPs are defined by
the various loan and trust documents, which were negotiated at the time of
settlement. See further discussion of the general mortgage loan terms in Note 4
to the Company's 2001 Form 10-K.
During the first quarter, the Company funded $806,000 in tax-exempt bonds
collateralized by five multifamily apartment communities. Of this amount,
$153,000 was an initial funding of six bonds; the approximately $16.8 million
balance of the bonds is expected to be funded by the Company in the second and
third quarters of 2002. These six investments were non-participating bonds and
have a weighted average interest rate of 7.22%. The bonds' maturities range form
July 2034 to July 2044. All six investments relate to to-be-built communities.
The remaining investment of $653,000 was an investment in a subordinate
non-participating bond collateralized by the properties known as Oakmont and
Towne Oaks. This investment has an interest rate of 7.2% and a maturity of
January 2034. The Company recognized an other-than-temporary impairment of
$110,000 on this investment as a result of the interest rate on this investment
being below market.
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 first quarter, the Company repurchased all the
P-FLOATssm outstanding in the Sonterra ($10.1 million face amount), Rancho
Mirage ($12.8 million face amount), Gannon-Dade ($29.0 million face amount) and
Riverset II ($7.5 million face amount) securitization trusts.
In order to facilitate the securitization (see Note 3) of certain assets at
higher leverage ratios than otherwise available to the Company without the
posting of additional collateral, the Company has pledged additional bonds to a
pool that acts as collateral for senior interests in certain securitization
trusts. At March 31, 2002 and December 31, 2001, the total carrying amount of
the tax-exempt bonds pledged as collateral was $424.2 million and $358.4
million, respectively.
The table below provides certain information with respect to the bonds held
by the Company at March 31, 2002 and December 31, 2001.
March 31, 2002
-----------------------------------------------
Base Face Amortized Unrealized Fair
Investment in Tax-Exempt Year Interest Maturity Amount Cost Gain(Loss) Value
Bonds Acquired Rate (12) Date (000s) (000s) (000s) (000s)
----------------------------- ---------- --------- ---------- --------- ------------ ----------- ------------
Participating Bonds(1):
Arlington (9),(10) 2000 8.100 Jan. 2031 $12,625 $12,562 $ 63 $ 12,625
Cobblestone (9) 1999 7.125 Aug. 2039 6,800 6,732 (408) 6,324
Cool Springs (4),(10) 2000 7.750 Aug. 2030 14,472 14,313 159 14,472
Crossings (4),(19) 1997 8.000 Jul. 2007 6,795 6,708 676 7,384
Jefferson Commons (15) 2000 8.200 Jan. 2031 19,826 19,528 794 20,322
Palisades Park (9) 2001 7.125 Aug. 2028 8,471 8,458 (72) 8,386
Timber Ridge (4),(10) 2000 7.950 Jan. 2036 5,215 5,119 96 5,215
Villas at LaRiveria (4),(10) 1999 7.125 Jun. 2034 8,841 8,734 18 8,752
--------- ------------ ----------- ------------
Subtotal participating bonds 83,045 82,154 1,326 83,480
--------- ------------ ----------- ------------
Non-participating Bonds:
Alban Place (2),(4),(5),(8) 1986 8.150 Oct. 2008 10,065 10,065 1,139 11,204
Baytown (4),(10) 2000 7.750 Jun. 2030 4,995 4,945 (249) 4,696
Bedford Park (9) 2000 8.000 Nov. 2032 9,325 9,232 93 9,325
Buchanan Bay (9) 2001 5.830 Dec. 2031 10,725 9,098 769 9,867
Canterberry Crossing A (4) 2001 6.700 Dec. 2031 10,430 10,222 (1) 10,221
Canterberry Crossing B (4) 2001 6.700 Dec. 2021 2,000 1,960 - 1,960
Chancellor (4),(10) 2001 7.200 Jul. 2043 5,610 5,554 - 5,554
Chancellor II (10),(21) 2002 (21) (21) 51 51 - 51
Charter House 1996 7.450 Jul. 2026 25 25 2 27
Cielo Vista (4),(10) 1999 7.125 Sep. 2034 9,443 9,374 (966) 8,408
Club West (9) 2001 6.580 (17) 7,960 7,910 (348) 7,562
Country Club (10) 1999 7.250 Aug. 2029 2,468 2,437 (142) 2,295
Creekside Village (2),(4),(6) 1987 7.750 Nov. 2009 11,760 7,396 436 7,832
Delta Village (10) 1999 7.125 Jun. 2035 2,011 1,977 (106) 1,871
Elmbrook-Golden (4),(10) 2000 7.800 May. 2035 2,793 2,739 (16) 2,723
Gannon - Cedar Run (4),(10) 1998 7.125 Dec. 2025 13,200 13,238 28 13,266
Gannon - Dade (4),(10) 1998 7.125 Dec. 2029 54,814 55,127 (690) 54,437
Gannon - Whispering Palms (4),(10) 1998 7.125 Dec. 2029 12,437 12,497 (123) 12,374
Gannon Bond (4),(10) 1998 7.125 Dec. 2029 3,500 3,500 (26) 3,474
Harmony Hills Series 2000 2001 6.750 May. 2003 100 100 (3) 97
Harmony Hills Series 2001 (4) 2001 7.250 May. 2032 17,700 17,346 - 17,346
Hidden Valley (4),(10) 1996 8.250 Jan. 2026 1,620 1,620 - 1,620
Honey Creek (9) 2000 7.625 Jul. 2035 20,485 20,276 (713) 19,563
Hunter's Glen (20) 2001 6.350 Dec. 2029 10,740 9,111 1,629 10,740
La Paloma (9) 2001 6.710 May. 2030 4,378 4,378 (482) 3,896
Lakeview Garden (2),(4),(6),(8) 1987 7.750 Aug. 2007 9,003 4,918 1,405 6,323
Lake Piedmont (4),(6),(10) 1998 7.725 Apr. 2034 19,118 18,016 (5,589) 12,427
Las Trojas (10), (21) 2002 (21) (21) 51 51 - 51
Mountain View (Willowgreen) (2),(9) 2000 8.000 Dec. 2010 9,275 6,770 2,691 9,461
North Pointe (2),(4),(6),(8) 1986 7.300 Aug. 2006 25,185 12,739 11,429 24,168
Northridge Park (2),(4),(8) 1987 7.500 Jun. 2012 8,815 8,815 176 8,991
Oakbrook (9) 1996 8.200 Jul. 2026 3,045 3,074 (30) 3,044
Oakgrove (4),(10),(22) 2001 7.000 Dec. 2041 7,000 6,913 (193) 6,720
Oaklahoma (4) 2001 7.125 Jul. 2028 19,500 19,538 (6,863) 12,675
Oakmont/Towne Oaks (9) 1998 7.200 Jan. 2034 11,208 11,186 (987) 10,199
Orangevale (4),(10) 1998 7.000 Oct. 2013 2,213 2,213 (44) 2,169
Paola (10) 1999 7.250 Aug. 2029 1,041 1,028 (70) 958
Parkwood (9) 1999 7.125 Jun. 2035 3,910 3,842 811 4,653
Pavilion (9) 2001 6.710 May. 2030 5,100 5,100 (306) 4,794
Penn Valley (10) 2001 (23) (23) 2,360 2,338 (2) 2,336
Queen Anne (9) 2001 7.088 Aug. 2013 6,168 6,167 (61) 6,106
Rancho Mirage (4),(10) 2000 8.500 Jun. 2040 12,780 12,780 (383) 12,397
Riverset Phase II (4) 1999 9.500 Oct. 2019 7,610 7,716 8 7,724
Sahuarita (4),(10) 1999 7.125 Jun. 2029 2,111 2,099 (178) 1,921
Santa Fe Springs (4) 2000 (14) Jun. 2025 11,700 11,455 (1,276) 10,179
Shadowbrook (4),(10) 1999 6.850 Jun. 2029 5,780 5,768 (450) 5,318
Silver Spring (9) 2001 7.375 Dec. 2029 10,270 10,298 382 10,680
Sonterra (4),(10) 1998 7.000 Jun. 2035 10,074 10,100 (3,149) 6,951
Southwinds (4),(10) 2000 8.000 Sept.2030 4,340 4,253 (43) 4,210
Stone Mountain (4),(10) 1997 7.875 Oct. 2027 33,900 34,056 (834) 33,222
Torries Chase (9) 1996 8.150 Jan. 2026 1,970 1,970 40 2,010
University Courtyard (9) 2000 7.250 Mar. 2040 9,850 9,750 (195) 9,555
Village Green (9) 2001 7.625 Feb. 2035 6,420 6,439 (404) 6,035
Villa Hialeah - refunded (2),(4),(10) 1999 6.000 Aug. 2019 10,250 8,005 1,425 9,430
Walnut Tree (10),(21) 2002 (21) (21) 51 51 - 51
Western Hills (4),(10) 1998 7.000 Dec. 2029 3,017 3,018 (302) 2,716
Willow Key (9) 2001 6.717 (18) 17,440 17,440 (698) 16,742
Woodmark (4),(10) 1999 7.125 Jun. 2039 10,200 10,073 (77) 9,996
--------- ------------ ----------- ------------
Subtotal non-participating bonds 519,390 488,157 (3,536) 484,621
--------- ------------ ----------- ------------
March 31, 2002
----------------------------------------------
Base Face Amortized Unrealized Fair
Year Interest Maturity Amount Cost Gain (Loss) Value
Acquired Rate (12) Date (000s) (000s) (000s) (000s)
--------- --------- ---------- -------- ----------- ----------- -------------
Participating Subordinate Bonds(1):
Barkley Place (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,480 2,444 3,596 6,040
Gilman Meadows (3),(4),(6),(10) 1995 3.000 Jan. 2030 2,875 2,530 2,736 5,266
Hamilton Chase (3),(6),(10) 1995 3.000 Jan. 2030 6,250 4,140 (596) 3,544
Mallard Cove I (3),(4),(6),(10) 1995 3.000 Jan. 2030 1,670 799 474 1,273
Mallard Cove II (3),(4),(6),(10) 1995 3.000 Jan. 2030 3,750 2,429 1,187 3,616
Meadows (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,635 3,716 407 4,123
Montclair (3),(4),(6),(10) 1995 3.000 Jan. 2030 6,840 1,691 1,657 3,348
Newport Village (3),(4),(6),(10) 1995 3.000 Jan. 2030 4,175 2,973 3,563 6,536
Nicollet Ridge (3),(4),(6),(10) 1995 3.000 Jan. 2030 12,415 6,075 4,719 10,794
Riverset Phase II (6) 1996 10.000 Oct. 2019 1,489 - 719 719
Steeplechase (3),(4),(6),(10) 1995 16.000 Jan. 2030 5,300 4,223 (1,090) 3,133
Whispering Lake (3),(4),(6),(10) 1995 3.000 Jan. 2030 8,500 4,779 2,945 7,724
-------- ----------- ------------ ------------
Subtotal participating subordinate bonds 60,379 35,799 20,317 56,116
-------- ----------- ------------ ------------
Non-Participating Subordinate Bonds:
Cinnamon Ridge 1999 5.000 Jan. 2015 1,832 1,218 10 1,228
Farmington Meadows (10) 1999 8.000 Aug. 2039 1,981 1,936 45 1,981
Independence Ridge (10) 1996 12.500 Dec. 2015 1,045 1,045 84 1,129
Locarno (10) 1996 12.500 Dec. 2015 675 675 27 702
Oakmont/Towne Oaks (10) 2002 7.200 Jan. 2034 653 496 - 496
Olde English Manor (6),(11) 1998 10.570 Nov. 2033 1,273 1,268 (186) 1,082
Oxford C Bond 2001 9.125 May. 2039 5,420 5,250 (6) 5,244
Penn Valley B Bond (13) 2001 8.200 Apr. 2003 800 792 - 792
Rillito B Series (6),(7) 2000 13.000 Dec. 2033 1,054 1,241 (345) 896
Winter Oaks B Bond (6),(10) 1999 7.500 Jul. 2022 2,184 2,133 29 2,162
Winter Oaks C Bond (6),(10) 1999 10.000 Jul. 2022 2,141 1,654 337 1,991
-------- ----------- ------------ ------------
Subtotal non-participating subordinate bonds 19,058 17,708 (5) 17,703
-------- ----------- ------------ ------------
Total investment in tax-exempt bonds $681,872 $623,818 $ 18,102 $ 641,920
======== =========== ============ ============
December 31, 2001
-----------------------------------------------
Base Face Amortized Unrealized Fair
Year Interest Maturity Amount Cost Gain (Loss) Value
Acquired Rate (12) Date (000s) (000s) (000s) (000s)
----------------------------- ---------- ---------- ---------- --------- ------------ ------------ -----------
Participating Bonds(1):
Arlington (9),(10) 2000 8.100 Jan. 2031 $12,625 $12,562 $ 63 $ 12,625
Cobblestone (9) 1999 7.125 Aug. 2039 6,800 6,732 (340) 6,392
Cool Springs (4),(10) 2000 7.750 Aug. 2030 14,472 14,313 159 14,472
Crossings (4),(19) 1997 8.000 Jul. 2007 6,795 6,709 589 7,298
Jefferson Commons (15) 2000 8.200 Jan. 2031 19,857 19,559 894 20,453
Palisades Park (9) 2001 7.125 Aug. 2028 8,470 8,458 13 8,471
Timber Ridge (4),(10) 2000 7.950 Jan. 2036 5,215 5,119 (8) 5,111
Villas at LaRiveria (4),(10) 1999 7.125 Jun. 2034 8,844 8,738 18 8,756
--------- ------------ ------------ -----------
Subtotal participating bonds 83,078 82,190 1,388 83,578
--------- ------------ ------------ -----------
Non-Participating Bonds:
Alban Place (2),(4),(5),(8) 1986 8.150 Oct. 2008 10,065 10,065 1,014 11,079
Baytown (4),(10) 2000 7.750 Jun. 2030 5,000 4,950 (250) 4,700
Bedford Park (9) 2000 8.000 Nov. 2032 9,325 9,232 140 9,372
Buchanan Bay (9) 2001 5.830 Dec. 2031 10,725 9,098 876 9,974
Canterberry Crossing A (4) 2001 6.700 Dec. 2031 10,430 10,222 - 10,222
Canterberry Crossing B (4) 2001 6.700 Dec. 2021 2,000 1,960 - 1,960
Chancellor (4),(10) 2001 7.200 Jul. 2043 5,610 5,554 56 5,610
Chancellor II (10),(21) 2002 (21) (21) - - - -
Charter House 1996 7.450 Jul. 2026 25 25 3 28
Cielo Vista (4),(10) 1999 7.125 Sep. 2034 9,458 9,385 (873) 8,512
Club West (9) 2001 6.580 (17) 7,960 7,910 (269) 7,641
Country Club (10) 1999 7.250 Aug. 2029 2,472 2,440 (129) 2,311
Creekside Village (2),(4),(6) 1987 7.750 Nov. 2009 11,760 7,396 497 7,893
Delta Village (10) 1999 7.125 Jun. 2035 2,011 1,976 (96) 1,880
Elmbrook-Golden (4),(10) 2000 7.800 May. 2035 2,794 2,740 (2) 2,738
Gannon - Cedar Run (4),(10) 1998 7.125 Dec. 2025 13,200 13,238 94 13,332
Gannon - Dade (4),(10) 1998 7.125 Dec. 2029 54,883 55,111 (141) 54,970
Gannon - Whispering Palms (4),(10) 1998 7.125 Dec. 2029 12,473 12,534 (29) 12,505
Gannon Bond (4),(10) 1998 7.125 Dec. 2029 3,500 3,500 9 3,509
Harmony Hills Series 2000 2001 6.750 May. 2003 100 100 (2) 98
Harmony Hills Series 2001 (4) 2001 7.250 May. 2032 17,700 17,346 177 17,523
Hidden Valley (4),(10) 1996 8.250 Jan. 2026 1,620 1,620 - 1,620
Honey Creek (9) 2000 7.625 Jul. 2035 20,485 20,277 (816) 19,461
Hunter's Glen (20) 2001 6.350 Dec. 2029 10,740 9,111 1,629 10,740
La Paloma (9) 2001 6.710 May. 2030 4,378 4,378 (438) 3,940
Lakeview Garden (2),(4),(6),(8) 1987 7.750 Aug. 2007 9,003 4,918 1,399 6,317
Lake Piedmont (4),(6),(10) 1998 7.725 Apr. 2034 19,118 18,017 (5,590) 12,427
Las Trojas (10), (21) 2002 (21) (21) - - - -
Mountain View (Willowgreen) (2),(9) 2000 8.000 Dec. 2010 9,275 6,769 2,691 9,460
North Pointe (2),(4),(6),(8) 1986 7.300 Aug. 2006 25,185 12,739 11,366 24,105
Northridge Park (2),(4),(8) 1987 7.500 Jun. 2012 8,815 8,815 176 8,991
Oakbrook (9) 1996 8.200 Jul. 2026 3,065 3,094 (60) 3,034
Oakgrove (4),(10),(22) 2001 7.000 Dec. 2041 7,000 6,913 (123) 6,790
Oaklahoma (4) 2001 7.125 Jul. 2028 19,500 19,538 (6,551) 12,987
Oakmont/Towne Oaks (9) 1998 7.200 Jan. 2034 11,208 11,186 (871) 10,315
Orangevale (4),(10) 1998 7.000 Oct. 2013 2,213 2,212 (44) 2,168
Paola (10) 1999 7.250 Aug. 2029 1,042 1,029 (70) 959
Parkwood (9) 1999 7.125 Jun. 2035 3,910 3,842 850 4,692
Pavilion (9) 2001 6.710 May. 2030 5,100 5,100 (255) 4,845
Penn Valley (10) 2001 (23) (23) 2,360 2,338 22 2,360
Queen Anne (9) 2001 7.088 Aug. 2013 6,168 6,168 31 6,199
Rancho Mirage (4),(10) 2000 8.500 Jun. 2040 - - - -
Riverset Phase II (4) 1999 9.500 Oct. 2019 110 105 7 112
Sahuarita (4),(10) 1999 7.125 Jun. 2029 2,114 2,102 (149) 1,953
Santa Fe Springs (4) 2000 (14) Jun. 2025 11,700 11,455 (1,042) 10,413
Shadowbrook (4),(10) 1999 6.850 Jun. 2029 5,780 5,767 (392) 5,375
Silver Spring (9) 2001 7.375 Dec. 2029 10,270 10,298 382 10,680
Sonterra (4),(10) 1998 7.000 Jun. 2035 - - - -
Southwinds (4),(10) 2000 8.000 Sept.2030 4,344 4,258 - 4,258
Stone Mountain (4),(10) 1997 7.875 Oct. 2027 33,900 34,061 (839) 33,222
Torries Chase (9) 1996 8.150 Jan. 2026 1,985 1,985 50 2,035
University Courtyard (9) 2000 7.250 Mar. 2040 9,850 9,750 (195) 9,555
Village Green (9) 2001 7.625 Feb. 2035 6,441 6,460 (470) 5,990
Villa Hialeah - refunded (2),(4),(10) 1999 6.000 Aug. 2019 10,250 8,005 1,323 9,328
Walnut Tree (10),(21) 2002 (21) (21) - - - -
Western Hills (4),(10) 1998 7.000 Dec. 2029 3,021 3,021 (272) 2,749
Willow Key (9) 2001 6.717 (18) 17,440 17,440 (523) 16,917
Woodmark (4),(10) 1999 7.125 Jun. 2039 10,200 10,072 26 10,098
--------- ------------ ------------ -----------
Subtotal non-participating bonds 489,081 457,625 2,327 459,952
--------- ------------ ------------ -----------
December 31, 2001
------------------------------------------------
Base Face Amortized Unrealized Fair
Year Interest Maturity Amount Cost Gain (Loss) Value
Acquired Rate (12) Date (000s) (000s) (000s) (000s)
--------- --------- ----------- ------------ ----------- ------------ ----------
Participating Subordinate Bonds(1):
Barkley Place (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,480 2,445 3,559 6,004
Gilman Meadows (3),(4),(6),(10) 1995 3.000 Jan. 2030 2,875 2,530 2,680 5,210
Hamilton Chase (3),(6),(10) 1995 3.000 Jan. 2030 6,250 4,140 (621) 3,519
Mallard Cove I (3),(4),(6),(10) 1995 3.000 Jan. 2030 1,670 798 474 1,272
Mallard Cove II (3),(4),(6),(10) 1995 3.000 Jan. 2030 3,750 2,429 1,185 3,614
Meadows (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,635 3,716 355 4,071
Montclair (3),(4),(6),(10) 1995 3.000 Jan. 2030 6,840 1,691 1,654 3,345
Newport Village (3),(4),(6),(10) 1995 3.000 Jan. 2030 4,175 2,973 3,477 6,450
Nicollet Ridge (3),(4),(6),(10) 1995 3.000 Jan. 2030 12,415 6,075 4,611 10,686
Riverset Phase II (6) 1996 10.000 Oct. 2019 1,489 - 725 725
Steeplechase (3),(4),(6),(10) 1995 16.000 Jan. 2030 5,300 4,223 (1,108) 3,115
Whispering Lake (3),(4),(6),(10) 1995 3.000 Jan. 2030 8,500 4,779 2,892 7,671
------------ ----------- ------------ ---------
Subtotal participating subordinate bonds 60,379 35,799 19,883 55,682
------------ ------------ ------------ ---------
Non-Participating Subordinate Bonds:
Cinnamon Ridge 1999 5.000 Jan. 2015 1,832 1,218 28 1,246
Farmington Meadows (10) 1999 8.000 Aug. 2039 1,983 1,938 45 1,983
Independence Ridge (10) 1996 12.500 Dec. 2015 1,045 1,045 94 1,139
Locarno (10) 1996 12.500 Dec. 2015 675 675 34 709
Oakmont/Towne Oaks (10) 2002 7.200 Jan. 2034 - - - -
Olde English Manor (6),(11) 1998 10.570 Nov. 2033 1,273 1,268 (173) 1,095
Oxford C Bond 2001 9.125 May. 2039 5,420 5,250 (6) 5,244
Penn Valley B Bond (13) 2001 8.200 Apr. 2003 800 793 - 793
Rillito B Series (6),(7) 2000 13.000 Dec. 2033 1,054 1,241 (334) 907
Winter Oaks B Bond (6),(10) 1999 7.500 Jul. 2022 2,184 2,133 29 2,162
Winter Oaks C Bond (6),(10) 1999 10.000 Jul. 2022 2,141 1,654 316 1,970
------------ ----------- ------------ ---------
Subtotal non-participating subordinate bonds 18,407 17,215 33 17,248
------------ ----------- ------------ ---------
Total investment in tax-exempt bonds $ 650,945 $592,829 $ 23,631 $ 616,460
============ =========== ============ =========
(1) These bonds also contain additional interest features contingent on
available cash flow.
(2) One of the original 22 bonds.
(3) Series B Bonds derived from original 22 bonds.
(4) These assets were pledged as collateral as of March 31, 2002.
(5) TE Bond Sub or its subsidiaries own an 87% interest in these investments.
(6) At December 31, 2001 these bonds were on non-accrual status.
(7) The underlying bonds are held in a trust; TE Bond Sub owns an 18%
subordinate interest in the trust.
(8) These bonds were reissued or refunded during 2001. Prior to the reissuance
or refunding the bonds were participating. Following the transaction, the
new bonds are non-participating.
(9) The underlying bonds are held in a trust; TE Bond Sub owns a certificate in
the trust which represents the residual cash flows generated on the
underlying bonds.
(10) Investments held by TE Bond Sub or its subsidiaries.
(11) The underlying bonds are held in a trust; TE Bond Sub owns an 81% senior
interest in the trust.
(12) The base interest rate represents the permanent base interest rate on the
investment.
(13) The bond has a face value of $800,000 with an interest rate of 8.20% and
matures April 1, 2003.
(14) The interest rate on the Santa Fe bond will reset in May 2002. At that time
the bond will be remarketed at par or a rate not exceeding a rate that will
allow the property to perform at a 1.05 debt service coverage on the bond.
(15) The underlying bonds are held in a trust; TE Bond Sub owns a certificate in
the trust which represents the residual cash flows generated on 81% of
underlying bond. TE Bond Sub also owns the 19% certificate which is pledged
as collateral at March 31, 2002.
(16) This bond was paid off during 2001.
(17) This investment is comprised of two bonds. The Series A-1 bond has a face
amount of $725,000 and a maturity date of July 2009. The Series A-2 bond
has a face amount of $7,235,000 and a maturity date of July 2033.
(18) This investment is comprised of two bonds. The 1998 Series I-1 bond has a
face amount of $1,565 and a maturity date of June 11, 2009. The 1998 Series
I-2 bond has a face amount of $15,875 and a maturity date of June 11, 2033.
(19) The underlying bond is held in a trust; TE Bond Sub owns the principal and
base interest trust certificate.
(20) The underlying bonds are held in a trust; the Company owns a certificate in
the trust which represents the residual cash flows generated on the
underlying bonds.
(21) This investment is comprised of two bonds. The Series 2002-1 bond has a
face amount of $41,000 with an interest rate of 6.973% and matures on July
1, 2034. The Series 2002-2 bond has a face amount of $10,000 with an
interest rate of 8.232% and matures on July 1, 2044.
(22) This investment is comprised of two bonds. The Series 2001 A-1 bond has a
face amount of $5,600,000 with an interest rate of 7.000% and matures on
December 1, 2041. The Series 2001 A-2 bond has a face amount of $1,400,000
with an interest rate of 7.000% and matures on December 1, 2041.
(23) This investment is comprised of two bonds. The Series 2001 FF-1 bond has a
face amount of $1,888,000 with an interest rate of 6.816% and matures on
August 1, 2033. The Series 2001 FF-2 bond has a face amount of $472,000
with an interest rate of 8.537% and matures on August 1, 2043.
NOTE 3 - SECURITIZATION TRANSACTIONS
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 uses
various programs to facilitate the securitization and credit enhancement of its
bond investments. See further discussion of the Company's various credit
enhancement and securitization investment vehicles in Note 5 to the Company's
2001 Form 10-K.
In order to facilitate the securitization of certain assets at higher
leverage ratios than otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional bonds and taxable
loans to a pool that acts as collateral for senior interests in certain
securitization trusts and credit enhancement facilities. At March 31, 2002 and
December 31, 2001, the total carrying amount of the bonds and taxable loans
pledged as collateral was $428.0 million and $361.8 million, respectively.
In the first quarter, the Company securitized one bond with a face amount
of $3.9 million through the Merrill Lynch Puttable Floating Option Tax-Exempt
Receipts ("P-FLOATssm") program. This transaction was accounted for as a
borrowing. Accordingly, the Company recorded $3.9 million as short-term debt and
the related bond (Parkwood) remained in investments in mortgage revenue bonds.
In the first quarter, the Company sold its investment in the Indian Lakes
Residual Interest Tax-Exempt Securities Receipts ("RITESsm") for $4.2 million.
The Company recognized a $1.0 million gain on this transaction. The Indian Lakes
bond was subsequently deposited into a new P-FLOATssm trust by the purchaser and
the Company purchased a $5,000 RITESsm interest in the new trust for $1.1
million.
NOTE 4 - OTHER BOND-RELATED INVESTMENTS
At March 31, 2002 and December 31, 2001, the Company's other bond-related
investments are investments in RITESsm, a security offered by Merrill Lynch
through its P-FLOATssm Program. A detailed listing of the other bond-related
investments owned by the Company at March 31, 2002 and December 31, 2001 appears
in a table at the end of this note.
RITESsm Valuation Analysis
The fair value of a RITESsm investment is derived from the quote on the
underlying bond reduced by the outstanding corresponding P-FLOATssm face amount.
The Company bases the fair value of the underlying bond, which has a limited
market, on quotes from external sources, such as brokers, for these or similar
bonds. The RITESsm investments are not subject to prepayment risk as the term of
the securitization trusts is only for a period during which the underlying bond
cannot be prepaid. Based on historical information, credit losses were estimated
to be zero.
At March 31, 2002 and December 31, 2001, a 10% and 20% adverse change in
key assumptions used to estimate the fair value of the Company's RITESsm would
have the following impact:
(In thousands) March 31, 2002 December 31, 2001
-------------- -----------------
Fair value of retained interests $3,390 $5,316
Residual cash flows discount rate (annual rate) 5.5% - 10.5% 4.5% - 12.9%
Impact on fair value of 10% adverse change ($18,124) ($22,821)
Impact on fair value of 20% adverse change ($34,760) ($43,783)
The sensitivity analysis presented above is hypothetical in nature and
presented for information purposes only. The analysis shows the effect on fair
value of a variation in one assumption and is calculated without considering the
effect of changes in any other assumption. In reality, changes in one assumption
may affect the others, which may magnify or offset the sensitivities.
March 31,2002
----------------------------------------------------------------------
Face Amortized Unrealized Fair Value
Year Amount Cost Gain (Loss) Assets Liabilities (2)
Other Bond Related Investments: Acquired (000s) (000s) (000s) (000s) (000s)
---------------------------------------- ----------- ----------- ------------- ------------- ------------ --------------
Investment in RITES:
Barrington (1) 2000 $ 5 $ 2 $ 3 $ 5 $ -
Briarwood (1) 1999 135 105 97 202 -
Charter House (1) 1996 80 188 685 873 -
Cinnamon Ridge (1) 2000 5 327 1,607 1,934 -
Fort Branch (1) 2000 8 8 308 316 -
Hidden Brooks (1) 2001 5 64 (1,276) - (1,212)
Indian Lakes (1) 2002 5 1,051 (419) 632 -
LeMirador (Coleman Senior) (1) 1999 165 3 159 162 -
Lincoln Corner (1) 2001 10 39 (589) - (550)
Meridian at Bridgewater (1) 1999 5 36 (457) - (421)
Museum Towers 2001 5 4 106 110 -
North White Road (1) 2001 5 43 (375) - (332)
Olde English Manor (1) 1999 76 94 (455) - (361)
Park at Landmark 2000 5 10 332 342 -
Park Center (1) 2001 1,270 104 (262) - (158)
Rancho Mirage/Castle Hills (1) 2000 - - - - -
Rillito Village (1) 1999 65 63 (311) - (248)
Riverset Phase I (1) 2000 5 1,067 1,408 2,475 -
Riverset Phase II (1) 1996 - - - - -
Riverview (1) 2000 5 5 160 165 -
Sienna (Italian Gardens) (1) 1999 160 (1) 39 38 -
Sonterra (1) 1998 - - - - -
Southgate Crossings (1) 1997 68 414 1,347 1,761 -
Southwood (1) 1997 415 319 (2,448) - (2,129)
Village at Sun Valley (1) 2000 5 5 - 5 -
Woodglen (1) 1999 5 32 (251) - (219)
----------- ------------- ------------- ------------ --------------
Total other bond related investments $ 2,512 $3,982 $ (592) $ 9,020 $ (5,630)
=========== ============= ============= ============ ==============
December 31,2001
----------------------------------------------------------------------
Face Amortized Unrealized Fair Value
Year Amount Cost Gain (Loss) Assets Liabilities (2)
Other Bond Related Investments: Acquired (000s) (000s) (000s) (000s) (000s)
---------------------------------------- ----------- ------------ ------------ ------------- ------------ --------------
Investment in RITES:
Barrington (1) 2000 $ 5 $ 5 $ - $ 5 $ -
Briarwood (1) 1999 135 104 164 268 -
Charter House (1) 1996 80 199 830 1,029 -
Cinnamon Ridge (1) 2000 5 327 1,681 2,008 -
Fort Branch (1) 2000 8 8 370 378 -
Hidden Brooks (1) 2001 5 65 (1,075) - (1,010)
Indian Lakes (1) 2002 3,170 3,254 641 3,895 -
LeMirador (Coleman Senior) (1) 1999 165 3 227 230 -
Lincoln Corner (1) 2001 10 32 (470) - (438)
Meridian at Bridgewater (1) 1999 5 37 (316) - (279)
Museum Towers 2001 5 5 105 110 -
North White Road (1) 2001 5 44 (39) 5 -
Olde English Manor (1) 1999 76 95 (382) - (287)
Park at Landmark 2000 5 12 330 342 -
Park Center (1) 2001 1,270 74 (232) - (158)
Rancho Mirage/Castle Hills (1) 2000 5 5 (255) - (250)
Rillito Village (1) 1999 65 63 (312) - (249)
Riverset Phase I (1) 2000 5 1,069 1,596 2,665 -
Riverset Phase II (1) 1996 5 120 35 155 -
Riverview (1) 2000 5 5 213 218 -
Sienna (Italian Gardens) (1) 1999 160 (1) 106 105 -
Sonterra (1) 1998 5 32 (3,062) - (3,030)
Southgate Crossings (1) 1997 71 432 1,445 1,877 -
Southwood (1) 1997 420 321 (2,497) - (2,176)
Village at Sun Valley (1) 2000 5 5 - 5 -
Woodglen (1) 1999 5 32 (134) - (102)
------------ ------------ ------------- ------------ ---------------
Total other bond related investments $ 5,700 $6,347 $(1,031) $ 13,295 $ (7,979)
============ ============ ============= ============ ===============
(1) Investment held by TE Bond Sub or its subsidiaries at March 31, 2002.
(2) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of
these investments is considered temporary and is not indicative of the
future earnings on these investments.
NOTE 5 - INVESTMENT IN DERIVATIVE FINANCIAL INSTRUMENTS
At March 31, 2002 and December 31, 2001, the Company's investments in
derivative financial instruments consisted of interest rate swaps and put option
contracts. See further discussion of the Company's investment in derivatives in
Note 7 to the Company's 2001 Form 10-K. The following table provides certain
information with respect to the derivative financial instruments held by the
Company at March 31, 2002 and December 31, 2001:
March 31, 2002 December 31, 2001
--------------------------------------------- ----------------------------------------------
Notional Fair Value Notional Fair Value
Amount(3) Assets Liabilities(2) Amount(3) Assets Liabilities(2)
(000s) (000s) (000s) (000s) (000s) (000s)
------------ ------------ --------------- --------------- ----------- ---------------
Interest rate agreements (1) $ 419,230 $ 2,452 $ (15,074) $ 422,230 $ 2,912 $ (18,646)
Put option agreements 107,275 - - 107,275 - -
------------ --------------- ----------- ---------------
Total investment: $ 2,452 $ (15,074) $ 2,912 $ (18,646)
============ =============== =========== ===============
(1) The Company enters into interest rate swap contracts to offset against
interest rate exposure on the Company's investment in RITES. The amounts
disclosed represent the net fair values of all the Company's swaps at the
reporting date.
(2) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of
these investments is considered temporary and is not indicative of the
future earnings on these investments.
(3) For the interest rate agreement, notional amount represents total amount of
the Company's interest rate swaps contracts less the total amount of the
Company's reverse interest rate swap contracts. For put option agreements,
the notional amount represents the Company's aggregate obligation under the
put option agreements.
NOTE 6 - LOANS RECEIVABLE
The Company's loans receivable primarily consist of construction loans,
permanent loans, taxable loans and other loans. The general terms of the loans
owned by the Company are discussed in Note 8 to the Company's 2001 Form 10-K.
The following table summarizes loans receivable by loan type at March 31, 2002
and December 31, 2001.
(in thousands) March 31, 2002 December 31, 2001
------------------ ---------------------
Loan Type:
Taxable construction loans $ 259,371 $ 271,383
Taxable permanent loans 34,395 86,182
Taxable loans 31,567 30,959
Other loans 57,440 52,405
------------------ ---------------------
382,773 440,929
Allowance for loan losses (775) (898)
------------------ ---------------------
Total $ 381,998 $ 440,031
================== =====================
NOTE 7 - NOTES PAYABLE AND DEBT
The Company's notes payable primarily consist of notes payable and advances
under line of credit arrangements. The notes payable are borrowings by Midland
used to finance construction lending and working capital needs. The general
terms of the Company's notes payable are discussed in Note 11 to the Company's
2001 Form 10-K. The following table summarizes notes payable at March 31, 2002
and December 31, 2001:
(in thousands) March 31, 2002 December 31, 2001
---------------- -------------------
Notes payable $ 223,084 $ 235,420
Group Trust warehouse facility and lines of credit 54,498 65,318
Residential Funding warehouse facility 39,761 98,033
Bank lines of credit 9,409 13,521
Midland Multifamily Equity REIT Credit Line 6,943 7,459
Other 62 312
---------------- -------------------
Total $ 333,757 $ 420,063
================ ===================
The Company's short and long-term debt of $191.9 million and $213.4 million
at March 31, 2002 and December 31, 2001, respectively, relates to securitization
transactions that the Company has recorded as borrowings (see Notes 1 and 5 to
the Company's 2001 Form 10-K).
NOTE 8 - PREFERRED SHAREHOLDERS' EQUITY IN A SUBSIDIARY COMPANY
The Company's preferred shareholders' equity in a subsidiary represents
four classes of preferred shares issued by TE Bond Sub, Series A, A-1, B and B-1
Preferred Shares (collectively, the "TE Bond Preferred Shares"). The income
allocable to the TE Bond Preferred Shares is senior to the Company's ownership
interest in TE Bond Sub. Therefore, only income from TE Bond Sub available after
payment of the cumulative distributions of the TE Bond Preferred Shares is
allocated to the Company. The following table provides a summary of certain
terms of the TE Bond Preferred Shares.
Series A Series A-1 Series B Series B-1
Preferred Shares Preferred Shares Preferred Shares Preferred Shares
---------------- ---------------- ---------------- ----------------
Issue date May 27, 1999 October 9, 2001 June 2, 2000 October 9, 2001
Number of shares 42 8 30 4
Par amount per share $2,000,000 $2,000,000 $2,000,000 $2,000,000
Dividend rate 6.875% 6.30% 7.75% 6.80%
First remarketing date June 30, 2009 June 30, 2009 November 1, 2010 November 1, 2010
Mandatory tender date June 30, 2009 June 30, 2009 November 1, 2010 November 1, 2010
Redemption date June 30, 2049 June 30, 2049 June 30, 2050 June 30, 2050
The following table reflects the composition of the TE Bond Preferred
Shareholders' equity in TE Bond Sub.
(in thousands) Series A Series A-1 Series B Series B-1 Total
----------- ------------ ----------- ------------ ------------
Balance, January 1, 2001 $ 80,060 $ - $ 57,604 $ - $137,664
Offering costs adjustment - - (9) - (9)
Issuance of preferred shares - 15,206 - 7,604 22,810
Income allocable to preferred shares 5,775 230 4,650 124 10,779
Distributions (5,775) (230) (4,650) (124) (10,779)
---------- ------------ ----------- ------------ ------------
Balance, December 31, 2001 80,060 15,206 57,595 7,604 160,465
Income allocable to preferred shares 1,444 252 1,162 136 2,994
Distributions (1,444) (252) (1,162) (136) (2,994)
---------- ------------ ----------- ------------ ------------
Balance, March 31, 2002 $ 80,060 $ 15,206 $ 57,595 $ 7,604 $160,465
========== ============ =========== ============ ============
The assets of TE Bond Sub and its subsidiaries, while indirectly controlled
by MuniMae and thus included in the consolidated financial statements of the
Company, are legally owned by TE Bond Sub and are not available to the creditors
of the Company. The assets owned by TE Bond Sub and its subsidiaries are
identified in footnotes to the Investment in Tax-exempt Bonds table in Note 2
and in footnotes to the Other Bond-Related Investments table in Note 4. The fair
value of such assets aggregated $520.8 million and $501.4 million at March 31,
2002 and December 31, 2001, respectively. The equity interest in TE Bond Sub
held by MuniMae is subject to the claims of creditors of MuniMae and in certain
circumstances could be foreclosed upon.
NOTE 9 - COMMON SHARE OFFERING
On February 8, 2002, the Company sold to the public 3.0 million common
shares at a price of $24.70 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. Net proceeds on the 3.0 million shares approximated $70.5
million. On February 15, 2002, the underwriters exercised their option to
purchase 300,000 additional common shares generating net proceeds of
approximately $7.1 million. The net proceeds from this offering will be used for
general corporate purposes, including new investments and working capital.
NOTE 10 - EARNINGS PER SHARE
The following table reconciles the numerators and denominators in the basic
and diluted EPS calculations for common shares for the three months ended March
31, 2002 and 2001.
For the three months ended March 31, 2002 For the three months ended March 31, 2001
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ---------------- ----------- -------------- -------------- ------------
(In thousands, except share and
per share data)
Basic EPS
Income allocable to common shares $ 14,893 23,584,635 $ 0.63 $ (9,064) 19,970,707 $ (0.45)
=========== ============
Effect of Dilutive Securities
Options and deferred shares - 482,540 - 461,593
Earnings contingency - 132,855 - -
-------------- ---------------- -------------- --------------
Diluted EPS
Income allocable to common shares
plus assumed conversions $ 14,893 24,200,030 $ 0.62 $ (9,064) 20,432,300 $ (0.44)
============== ================ =========== ============== ============== ============
For the three months ended March 31, 2002, the effect of all potentially
dilutive securities was included in the calculation.
NOTE 11 - DISTRIBUTIONS
On April 18, 2002, the Board of Directors declared a distribution of
$0.4350 for the three months ended March 31, 2002 to common shareholders of
record on April 29, 2002. The payment date was May 10, 2002.
Preferred Share Redemption
In accordance with the Company's Operating Agreement, the preferred shares
and the preferred CD shares must be partially redeemed when any bond
attributable to the shares is sold or repaid or, beginning in the year 2000,
when any bond attributable to the shares reaches par value based on receipt of
an appraisal securing the bond. The Company must redeem the preferred shares and
preferred CD shares within six months of the occurrence of a redemption event.
In addition to the bonds that reached par value in December 2000, the
remaining bonds attributable to the shares were either paid off, sold and/or
reached par value during the last four months of 2001 and in January 2002. As a
result, in March 2002, the Company redeemed the remaining Series I and Series II
preferred shares and preferred CD shares at an aggregate cost of approximately
$19.3 million. The Operating Agreement also requires that the term growth shares
be redeemed after the last preferred share is redeemed. As a result, the term
growth shares were redeemed in 2002 and the final distribution of $153,000 is
included in distributions payable as of March 31, 2002.
NOTE 12 - BUSINESS SEGMENT REPORTING
The Company has two reportable business segments: (1) an operating segment
consisting of Midland and other subsidiaries that primarily generate taxable fee
income by providing loan servicing, loan origination and other related services
and (2) an investing segment consisting primarily of subsidiaries holding
investments producing tax-exempt interest income. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. A complete description of the Company's reporting segments
is described in Note 21 to the Company's 2001 Form 10-K.
The following table reflects the results of the Company's segments for the
three months ended March 31, 2002 and 2001.
Municipal Mortgage & Equity, LLC
Segment Reporting for the three months ended
March 31, 2002 and 2001
(unaudited)
(in thousands)
For the three months ended March 31, 2002
-----------------------------------------------------------
Total
Investing Operating Adjustments Consolidated
------------ ------------ ------------- ----------------
INCOME:
Interest on tax-exempt bonds and
other bond related investments 14,108 1,485 - 15,593
Interest on loans 848 7,151 - 7,999
Loan origination and brokerage fees - 1,241 (419) (1) 822
Syndication fees - 1,885 - 1,885
Loan servicing fees - 1,908 - 1,908
Interest on short-term investments 441 46 - 487
Other income 357 1,332 - 1,689
Net gain on sales 956 1,210 - 2,166
------------ ------------ ------------- ---------------
Total income 16,710 16,258 (419) 32,549
------------ ------------ ------------- ---------------
EXPENSES:
Salaries and benefits 1,108 3,719 - 4,827
Professional Fees 100 72 - 172
Operating expenses 413 1,778 - 2,191
Goodwill and other intangibles amortization - 318 - 318
Interest expense 2,389 6,583 - 8,972
Other-than-temporary impairments related to investments in
tax-exempt bonds and other bond related investments 110 - 110
------------ ------------ ------------- ---------------
Total expenses 4,120 12,470 - 16,590
------------ ------------ ------------- ---------------
Net holding gains (losses) on trading securities 3,112 3,112
Net income before income taxes, income allocated to -
preferred shareholders in a subsidiary company, and -
cumulative effect of accounting change 15,702 3,788 (419) 19,071
Income taxes - 1,031 - 1,031
------------ ------------ ------------- ---------------
Net income before income allocated to preferred
shareholders in a subsidiary company and cumulative
effect of accounting change 15,702 2,757 (419) 18,040
Income allocable to preferred shareholders in a subsidiary company 2,994 - - 2,994
------------ ------------ ------------- ---------------
Net income before cumulative effect of accounting -
change 12,708 2,757 (419) 15,046
Cumulative effect on prior year changes in accounting for
derivative financial instruments - - - -
------------ ------------ ------------- ---------------
Net income $12,708 $ 2,757 $ (419) $ 15,046
============ ============ ============= ===============
Notes:
(1) Adjustments represent origination fees on purchased investments which are
deferred and amortized into income over the life of the investment.
Municipal Mortgage & Equity, LLC
Segment Reporting for the three months ended
March 31, 2002 and 2001
(unaudited)
(in thousands)
For the three months ended March 31, 2001
-----------------------------------------------------------
Total
Investing Operating Adjustments Consolidated
------------ ------------ ------------- ----------------
INCOME:
Interest on tax-exempt bonds and
other bond related investments $ 11,342 $ 428 $ - $ 11,770
Interest on loans 481 7,700 - 8,181
Loan origination and brokerage fees - 1,240 (300) (1) 940
Syndication fees - 1,124 - 1,124
Loan servicing fees - 1,632 - 1,632
Interest on short-term investments 741 261 - 1,002
Other income - 4,813 - 4,813
Net gain on sales - 166 - 166
------------ ------------ ------------- ---------------
Total income 12,564 17,364 (300) 29,628
------------ ------------ ------------- ---------------
EXPENSES:
Salaries and benefits 343 4,102 - 4,445
Professional Fees 217 474 - 691
Operating expenses 206 1,325 - 1,531
Goodwill and other intangibles amortization - 693 - 693
Interest expense 1,624 6,202 - 7,826
Other-than-temporary impairments related to investments in
tax-exempt bonds and other bond related investments - 3,256 - 3,256
------------ ------------ ------------- ---------------
Total expenses 2,390 16,052 - 18,442
------------ ------------ ------------- ---------------
Net holding gains (losses) on trading securities (4,865) - - (4,865)
Net income before income taxes, income allocated to
preferred shareholders in a subsidiary company, and
cumulative effect of accounting change 5,309 1,312 (300) 6,321
Income taxes - 3 - 3
------------ ------------ ------------- ---------------
Net income before income allocated to preferred
shareholders in a subsidiary company and cumulative
effect of accounting change 5,309 1,309 (300) 6,318
Income allocable to preferred shareholders in a subsidiary company 2,606 - - 2,606
------------ ------------ ------------- ---------------
Net income before cumulative effect of accounting
change 2,703 1,309 (300) 3,712
Cumulative effect on prior year changes in accounting for
derivative financial instruments (12,277) - - (12,277)
------------ ------------ ------------- ---------------
Net income $ (9,574) $ 1,309 $ (300) $ (8,565)
============ ============ ============= ===============
Item 2. 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 related to multifamily housing and other real estate
financings.
Results of Operations
Quarterly Results Analysis
Total income for the first quarter of 2002 increased $2.9 million over the
same period last year due primarily to: (1) an increase of $3.6 million in
interest income on bonds and other bond related investments, as well as an
increase in interest earned on loans; (2) a $0.5 million decrease in interest on
short-term investments resulting from the use of equity offering proceeds to
repurchase senior interests in current securitization trusts and funding of
other operations, as well as a decrease in interest collected on margin call
accounts; (3) a decrease in other income of $3.1 million primarily due to other
income associated with the assumption of a bond purchase obligation in the first
quarter of 2001; (4) a $2.0 million increase in gain on sales associated with a
$1.2 million gain on the sale of taxable loans and a $1.0 million sale of an
investment in RITES; and (5) an increase in loan origination, brokerage and
syndication fees of $0.6 million due primarily to an increase in fees associated
with tax credit and conventional equity transactions.
Total expenses for the first quarter of 2002 decreased $1.9 million over
the same period last year due primarily to: (1) an increase of $0.4 million in
salary and related benefits expense associated with 2001 new hires; (2) an
increase of $0.7 million in other operating expenses driven primarily by
deployment of accounting information systems and other upgrades in technology
infrastructure, as well as commissions earned on increased syndication
production, which was partially offset by a decrease of $0.5 million in
professional fees; (3) an increase of $1.1 million in interest expense primarily
associated with increased construction lending production and an increase in
financing costs associated with securitizations accounted for as borrowings; (4)
a decrease of $0.4 million in amortization expense due to changes in accounting
guidelines relating to amortization of goodwill; and (5) a $3.1 million charge
recorded on two investments in the first quarter of 2001.
Income tax expense increased $1.0 million for the first quarter of 2002
over the same period last year due to an increase in taxable income earned at
the Company's subsidiaries organized as corporations of $1.4 million. There was
no change in the Company's effective tax rate for the periods presented.
Critical Accounting Policies
Since December 31, 2001 there has been no material change to the Company's
critical accounting policies, except as noted below.
New Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("FAS 141")
and No. 142 "Goodwill and Other Intangible Assets," ("FAS 142") which are
effective July 1, 2001 and January 1, 2002, respectively, for the Company. FAS
141 requires that the purchase method of accounting be used for all business
combinations consummated after June 30, 2001. FAS 141 did not have an impact on
the Company for the year ended December 31, 2001. The Company adopted FAS 142 on
January 1, 2002. Upon adoption of FAS 142, amortization of goodwill, including
goodwill recorded in past business combinations, was discontinued. For the year
ended December 31, 2001, the Company recorded amortization expense of $1.6
million. All goodwill and intangible assets will be tested for impairment in
accordance with the provisions of the FAS 142 prior to June 30, 2002.
Liquidity and Capital Resources
The Company's primary objective is to maximize shareholder value through
increases in Cash Available for Distribution ("CAD") per common share and
appreciation in the value of its common shares. The Company seeks to achieve its
growth objectives by growing its investing and operating business segments. The
Company grows its investment segment by acquiring, servicing and managing
diversified portfolios of mortgage bonds and other bond related investments.
Growth in the operating segment is derived from increasing levels of fees
generated by affordable housing equity syndications, loan servicing and
origination and brokerage services. The Company's business plan includes
structuring $1.4 billion to $1.6 billion in investment transactions in 2002. 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 adequate flexibility to manage the Company's short-term cash
needs. To date, the Company has primarily used two sources, securitizations and
equity offerings, to finance its acquisitions. Through Midland's management of
capital for others, including Fannie Mae, the Company has expanded its access to
capital.
For the three months ended March 31, 2002, the Company structured $30.4
million in tax-exempt bond transactions. Of this amount, $0.8 million
represented investments retained by the Company. In addition, MuniMae originated
$153.1 million of construction loans and taxable permanent loans and equity
investments totaling $30.0 million.
Common Share Offerings
On February 8, 2002, the Company sold to the public 3.0 million common
shares at a price of $24.70 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. Net proceeds on the 3.0 million shares approximated $70.5
million. On February 15, 2002, the underwriters exercised their option to
purchase 300,000 additional common shares generating net proceeds of
approximately $7.1 million. The net proceeds from this offering will be used for
general corporate purposes, including new investments and working capital.
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 uses
various programs to facilitate the securitization and credit enhancement of its
bond investments.
Through the use of securitizations, the Company expects to employ leverage
and maintain overall leverage ratios in the 50% to 65% 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 third party owned 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 was
approximately 50% and 53% at March 31, 2002 and December 31, 2001, respectively.
In order to facilitate the securitization of certain assets at higher
leverage ratios than otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional bonds to a pool that
acts as collateral for senior interests in certain securitization trusts and
credit enhancement facilities. At March 31, 2002 and December 31, 2001, the
total carrying amount of the tax-exempt bonds and taxable loans pledged as
collateral was $428.0 million and $361.8 million, respectively.
The Company's 2001 Form 10-K contains a complete description of the
Company's various credit enhancement and securitization investment vehicles.
Since December 31, 2001 there has been no material change to the information
relating to these vehicles included in the Company's 2001 Form 10-K.
Factors That Could Affect Future Results
The Company's 2001 Form 10-K contains a complete description of the
Company's related party transactions. Since December 31, 2001 there has been no
material change to the information related to factors that could affect future
results included in the Company's 2001 Form 10-K.
Cash Flow
At March 31, 2002 the Company had cash and cash equivalents of
approximately $75.8 million.
Cash flow from operating activities was $7.9 million and $8.6 million for
the three months ended March 31, 2002 and 2001, respectively. The decrease in
cash flow for 2002 versus 2001 is due primarily to an decrease in accounts
payable and accrued expenses due to timing of payments.
The Company uses CAD as the primary measure of its ability to pay
distributions. 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
non-cash gain and loss recognized for GAAP associated with valuations, sales of
investments and capitalization of mortgage servicing rights net of deferred
taxes, which are not included in the calculation of CAD. The third difference is
the treatment of certain intangibles, which are amortized into expense for GAAP,
but not included in the calculation of CAD.
Until the redemption of the Company's preferred shares in 2002, the Company
was required to distribute to the holders of its preferred shares the cash flow
attributable to such shares (as defined in the Company's Amended and Restated
Certificate of Formation and Operating Agreement). The Company was also required
to distribute 2.0% of the Company's net cash flow to the holders of term growth
shares until they were redeemed in March 2002. The balance of the Company's net
cash flow is available for distribution to the common shares and the Company's
current policy is to distribute to common shareholders at least 80% of the
annual CAD to common shares. For the three months ended March 31, 2002 and 2001,
cash available for distribution to common shares was $11.8 million and $9.9
million, respectively. The Company's distribution per common share for the three
months ended March 31, 2002 of $0.4350 represents a payout ratio of 92.8% of
CAD. The Company's common share distribution for the three months ended March
31, 2001 of $0.4250 represents a payout ratio of 91.9% of CAD.
Regular cash distributions to shareholders, for the three months ended
March 31, 2002 and 2001, were $11.1 million and $9.6 million, respectively.
The Company expects to meet its cash needs in the short term, which consist
primarily of funding new investments, operating expenses and dividends on the
common shares and other equity, from cash on hand, operating cash flow, equity
proceeds and securitization proceeds.
Related Party Transactions
The Company's 2001 Form 10-K contains a complete description of the
Company's related party transactions. Since December 31, 2001 there has been no
material change to the related party transaction information included in the
Company's 2001 Form 10-K.
Income Tax Considerations
MuniMae is organized as a limited liability company. This structure allows
MuniMae to combine the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. MuniMae does not pay tax at the corporate level. Instead, the
distributive share of MuniMae's income, deductions and credits is included in
each shareholder's income tax return. In addition, the tax-exempt income derived
from certain investments remains tax-exempt when it is passed through to the
shareholders. The Company records cash dividends received from subsidiaries
organized as corporations as dividend income for tax purposes. Approximately
100%, 93% and 83% of MuniMae's tax basis net income for the years ended December
31, 2001, 2000 and 1999, respectively, was tax-exempt for federal income tax
purposes.
As a result of the Midland acquisition, in October 1999, the Company
restructured its operations into two segments: an operating segment and an
investing segment as discussed above. The operating segment 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 for each shareholder due to the Company's 754 election and is a
function of, among other things, the timing of the shareholder's purchase of
shares and the timing of transactions, which generate gains or losses for the
Company. This means that for assets purchased by the Company prior to a
shareholder's purchase of shares, the shareholder's basis in the assets may be
significantly different than the Company's basis in those same assets. Although
the procedure for allocating the basis adjustment is complex, the result of the
election is that each share is homogeneous, while each shareholder's basis in
the assets of the Company may be different. Consequently, the capital gains and
losses allocated to shareholders may be significantly different than the capital
gains and losses recorded by the Company.
A portion of the Company's interest income is derived from private activity
bonds that for income tax purposes are considered tax preference items for
purposes of alternative minimum tax ("AMT"). AMT is a mechanism within the
Internal Revenue Code to ensure that all taxpayers pay at least a minimum amount
of taxes. All taxpayers are subject to the AMT calculation requirements although
the vast majority of taxpayers will not actually pay AMT. As a result of AMT,
the percentage of the Company's income that is exempt from federal income tax
may be different for each shareholder depending on that shareholder's individual
tax situation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
------------------------------------------------------------------
Since December 31, 2001 there has been no material change to the
information included in Item 7A of the Company's 2001 Form 10-K.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
At the annual meeting of the Company's shareholders held on May 9, 2002,
the shareholders voted on one proposal in addition to the election of the
Company's directors. The shareholders elected the following directors: Mark K.
Joseph (23,013,348 in favor and 213,179 abstaining), Charles C. Baum (23,084,997
in favor and 141,530 abstaining) and Robert J. Banks (23,020,776 in favor and
205,751 abstaining). At this meeting, the shareholders also voted to approve the
restatement of the Company's Amended and Restated Certificate of Formation and
Operating Agreement in order to eliminate provisions that relate to classes of
shares that have been fully redeemed. The votes cast on this proposal were as
follows: 22,935,197 in favor; 120,184 opposed; 171,146 abstaining; and no broker
non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amendment No. 1 to the Amended and Restated Certificate of Formation and
Operating Agreement of the Company (filed as Item 6 (a) Exhibit 3.1 to the
Company's report on Form 10-Q, filed with the Commission on May 14, 1998
and incorporated by reference herein).
3.2 Amended and Restated Certificate of Formation and Operating Agreement of
the Company (filed as Exhibit 3.1 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997, filed with the
Commission on May 29, 1998 and incorporated by reference herein).
3.3 By-laws of the Company (filed as Exhibit 3.2 to the Company's Annual Report
on Form 10-K, filed with the Commission on May 29, 1998 and incorporated by
reference herein).
(b) Reports on Form 8-K:
On January 31, 2002, the Company filed a Form 8-K to report the final
redemption of all four classes of its preferred shares and term growth shares.
On February 11, 2002 the Company filed a Form 8-K to report the pricing of
an underwritten offering of 3,000,000 of common shares and that the Company had
granted the underwriters an over allotment option of up to 450,000 additional
shares.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUNICIPAL MORTGAGE & EQUITY, LLC
(Registrant)
By: ____/s/ Mark K. Joseph_________________________________________
----------------------------------------------------------------
Mark K. Joseph
Chairman of the Board, Chief Executive Officer (Principal Executive
Officer), and Director
By: ___/s/William S. Harrison_________________________________________
----------------------------------------------------------------------
William S. Harrison
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
DATED: May 13, 2002