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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2002
MUNICIPAL MORTGAGE & EQUITY, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1449733
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
218 North Charles Street, Suite 500, 21201
Baltimore, Maryland
(Address of Principal Executive Offices) (Zip Code)
(443) 263-2900
(Registrant's Telephone Number, including Area Code)
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 25,312,150 common shares outstanding as of August 7,
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 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
- ----------------------------
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 30, 2002 December 31, 2001
----------------- ---------------------
ASSETS
Cash and cash equivalents $ 33,210 $ 97,373
Interest receivable 16,710 15,859
Investment in tax-exempt bonds, net (Note 2) 653,925 616,460
Investment in other bond-related investments (Notes 3 and 4) 10,219 13,295
Investment in derivative financial instruments (Note 5) 9,254 2,912
Loans receivable, net (Note 6) 401,570 440,031
Restricted assets 25,133 16,710
Investment in partnerships (Note 7) 82,231 5,393
Other assets 44,837 40,356
Mortgage servicing rights, net 10,239 9,161
Property and equipment 2,721 2,721
Goodwill 29,005 29,005
----------------- ---------------------
Total assets $ 1,319,054 $ 1,289,276
================= =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable (Note 8) $ 379,363 $ 420,063
Accounts payable, accrued expenses and other liabilities 26,118 29,014
Investment in other bond-related investments (Notes 3 and 4) 6,840 7,979
Investment in derivative financial instruments (Note 5) 29,596 18,646
Distributions payable 2,994 2,960
Short-term debt (Note 8) 82,115 78,560
Long-term debt (Note 8) 138,157 134,881
----------------- ---------------------
Total liabilities 665,183 692,103
----------------- ---------------------
Commitments and contingencies - -
Preferred shareholders' equity in a subsidiary company (Note 9) 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 (28,944,597 shares authorized, 25,341,212 shares issued
and outstanding, and 26,110 deferred shares at June 30, 2002 and 24,594,597
authorized, 21,857,312 shares issued and outstanding, and 22,254 deferred
shares at December 31, 2001) 477,993 406,733
Less common shares held in treasury at cost (59,330 shares) (912) (912)
Less unearned compensation (deferred shares) (4,113) (4,145)
Accumulated other comprehensive income 20,438 22,600
----------------- ---------------------
Total shareholders' equity 493,406 436,708
----------------- ---------------------
Total liabilities and shareholders' equity $ 1,319,054 $ 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 For the six months ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
INCOME:
Interest on tax-exempt bonds and other bond-related investments $ 15,723 $ 12,209 $ 31,316 $ 23,979
Interest on loans 8,270 8,768 16,269 16,949
Loan origination and brokerage fees 1,213 852 2,035 1,792
Syndication fees 2,672 2,511 4,557 3,635
Loan servicing fees 1,660 1,729 3,568 3,361
Interest on short-term investments 244 693 731 1,695
Other income 2,393 1,643 4,082 6,456
Net gain on sales 703 1,969 2,869 2,135
------------ ------------ ------------ ------------
Total income 32,878 30,374 65,427 60,002
------------ ------------ ------------ ------------
EXPENSES:
Salaries and benefits 5,930 5,030 10,757 9,475
Professional fees 1,437 913 1,609 1,604
Operating expenses 2,227 2,150 4,418 3,681
Amortization of intangible assets 333 628 651 1,321
Interest expense 8,487 7,769 17,459 15,595
Other-than-temporary impairments related to investments in tax-exempt
bonds and other bond-related investments - - 110 3,256
------------ ------------ ------------ ------------
Total expenses 18,414 16,490 35,004 34,932
Net holding gains (losses) on trading securities (7,721) 1,272 (4,609) (3,593)
------------ ------------ ------------ ------------
Net income before income taxes, income allocated to
preferred shareholders in a subsidiary company,
and cumulative effect of accounting change 6,743 15,156 25,814 21,477
Income tax expense 828 224 1,859 227
------------ ------------ ------------ ------------
Net income before income allocated to preferred shareholders
in a subsidiary company and cumulative effect of
accounting change 5,915 14,932 23,955 21,250
Income allocable to preferred shareholders in a subsidiary company 2,995 2,606 5,989 5,212
------------ ------------ ------------ ------------
Net income before cumulative effect of accounting change 2,920 12,326 17,966 16,038
Cumulative effect on prior years of change in
accounting for derivative financial instruments - - - (12,277)
------------ ------------ ------------ ------------
Net income $ 2,920 $ 12,326 $ 17,966 $ 3,761
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)
For the three months ended For the six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net income allocated to:
Preferred shares:
Series I $ - $ 180 $ - $ 344
============== ============== ============== ==============
Series II - 49 - 94
============== ============== ============== ==============
Preferred capital distribution shares:
Series I $ - $ 66 $ - $ 137
============== ============== ============== ==============
Series II - 2 - 13
============== ============== ============== ==============
Term growth shares $ - $ 216 $ 153 $ 424
============== ============== ============== ==============
Common shares $ 2,920 $ 11,813 $ 17,813 $ 2,749
============== ============== ============== ==============
Basic net income per share:
Preferred shares:
Series I $ - $ 13.21 $ - $ 24.11
============== ============== ============== ==============
Series II - 8.34 - 14.42
============== ============== ============== ==============
Preferred capital distribution shares:
Series I $ - $ 9.27 $ - $ 18.37
============== ============== ============== ==============
Series II - 0.82 - 4.59
============== ============== ============== ==============
Common shares:
Income before cumulative effect of accounting change $ 0.12 $ 0.55 $ 0.73 $ 0.72
Cumulative effect on prior years of change in
accounting for derivative financial instruments - - - (0.59)
-------------- -------------- -------------- --------------
Basic net income per common share $ 0.12 $ 0.55 $ 0.73 $ 0.13
============== ============== ============== ==============
Weighted average common shares outstanding 25,252,124 21,524,016 24,423,091 20,747,361
Diluted net income per share:
Common shares:
Income before cumulative effect of accounting change $ 0.11 $ 0.54 $ 0.71 $ 0.71
Cumulative effect on prior years of change in
accounting for derivative financial instruments - - - (0.58)
-------------- -------------- -------------- --------------
Diluted net income per common share $ 0.11 $ 0.54 $ 0.71 $ 0.13
============== ============== ============== ==============
Weighted average common shares outstanding 25,835,808 22,014,990 25,022,631 21,222,890
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------ -------------- ------------
Net income $ 2,920 $ 12,326 $ 17,966 $ 3,761
------------- ------------ -------------- ------------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period 2,928 1,364 (1,166) 5,126
Reclassification adjustment for (gains) losses
included in net income - - (996) 12,227
------------- ------------ -------------- ------------
Other comprehensive income (loss) 2,928 1,364 (2,162) 17,353
------------- ------------ -------------- ------------
Comprehensive income $ 5,848 $ 13,690 $ 15,804 $ 21,114
============= ============ ============== ============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months ended
June 30,
----------------- -----------------
2002 2001
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,966 $ 3,761
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to preferred shareholders in a subsidiary company 5,989 5,212
Cumulative effect of accounting change - 12,277
Net holding losses on trading securities 4,609 3,593
Other-than-temporary impairments related to investments in
tax-exempt bonds 110 3,256
Decrease in valuation allowance on parity working capital loans - (21)
Net gain on sales (2,869) (1,045)
(Income) loss from investment in partnerships 229 (73)
Net amortization of premiums, discounts and fees on investments 26 155
Depreciation and amortization 942 1,442
Tax benefit from deferred share benefit 400 -
Deferred share compensation expense 862 738
Common and deferred shares issued under the Non-Employee Directors' Share Plans 96 -
Increase in interest receivable (851) (22)
Increase in other assets (4,516) (5,483)
Increase (decrease) in accounts payable, accrued expenses and other liabilities (2,896) 312
----------------- -----------------
Net cash provided by operating activities 20,097 24,102
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tax-exempt bonds and other bond-related investments (49,399) (45,892)
Loan originations (181,216) (197,467)
Principal payments received 220,134 192,369
Purchases of property and equipment (291) (911)
Investment in partnerships (86,352) (5,595)
Return of capital invested in partnerships 9,285 11,877
Net proceeds from sales of investments 12,179 5,000
Net reduction in restricted assets (8,312) (5,699)
----------------- -----------------
Net cash used in investing activities (83,972) (46,318)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities 344,543 284,125
Repayment of credit facilities (385,243) (311,598)
Proceeds from short-term debt 32,547 -
Repayment of short-term debt (28,992) (11,695)
Proceeds from long-term debt 3,538 10,703
Repayment of long-term debt (262) (206)
Issuance of common shares 77,555 82,645
Redemption of preferred shares (19,298) (7,168)
Proceeds from stock options exercised 2,255 905
Distributions on common shares (20,976) (18,967)
Distributions to preferred shares in a subsidiary company (5,955) (5,212)
----------------- -----------------
Net cash (used in) provided by financing activities (288) 23,532
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (64,163) 1,316
Cash and cash equivalents at beginning of period 97,373 27,504
----------------- -----------------
Cash and cash equivalents at end of period $ 33,210 $ 28,820
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 14,771 $ 17,740
================= =================
Income taxes paid $ 731 $ 316
================= =================
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
Preferred Capital 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 17,813 - - - 17,966
Unrealized losses on
investments, net of
reclassifications - - - - - - - - (2,162) (2,162)
Distributions (115) (15) (49) (1) (382) (20,414) - - - (20,976)
Redemption of
preferred shares (6,799) (2,311) (2,503) (410) - (7,275) - - - (19,298)
Options exercised - - - - - 2,255 - - - 2,255
Issuance of common
shares - - - - - 77,555 - - - 77,555
Deferred shares
issued under the
Non-Employee
Directors' Share
Plans - - - - - 96 - - - 96
Deferred share grants - - - - - 830 - (830) - -
Amortization of
deferred
compensation - - - - - - - 862 - 862
Tax benefit from
exercise of options
and vesting of
deferred shares - - - - - 400 - - - 400
-------- ---------- --------- --------- -------- ----------- -------- ------------- ------------- ---------
Balance, June 30, 2002 $ - $ - $ - $ - $ - $ 477,993 $ (912) $ (4,113) $ 20,438 $493,406
======== ========== ========= ========= ======== =========== ======== ============= ============= =========
Preferred Capital
Preferred Shares Distribution Shares Term
-------- ---------- ------------------- Growth Common Treasury
SHARE ACTIVITY: Series I Series II Series I Series II Shares Shares Shares
-------- ---------- --------- --------- -------- ----------- --------
Balance,
January 1, 2002 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 - - - - - 123,731 -
Issuance of common
shares - - - - - 3,300,707 -
Issuance of common
shares under
employee share
incentive plans - - - - - 59,462 -
Deferred shares
issued under the
Non-Employee
Directors'
Share Plans - - - - - 3,856 -
-------- ---------- --------- --------- -------- ----------- --------
Balance, June 30, 2002 - - - - - 25,307,992 59,330
======== ========== ========= ========= ======== =========== ========
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage & Equity, LLC ("MuniMae") and its subsidiaries (together
with MuniMae, the "Company") are principally engaged in originating, investing
in and servicing investments related to multifamily housing and other real
estate financings. The Company's operations are structured into two business
segments, an investing segment and an operating segment. The Company's investing
segment consists primarily of investments in 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 derived from the
majority of these investments is exempt income for federal income tax purposes.
Multifamily housing developments, as well as the rents paid by the tenants,
secure these investments.
The Company's operating segment specializes in originating, investing in
and servicing investments in the affordable housing industry, both for its own
account and on behalf of third parties. These investments generate taxable, not
tax-exempt, income.
The Company also invests in (1) other housing-related debt and equity
investments, including tax-exempt bonds, or interests in bonds, secured by
student housing or assisted living developments, and equity investments in real
estate operating partnerships and (2) tax-exempt community development bonds,
typically secured by special taxes imposed on single-family or other community
development districts or by assessments imposed on the residents or other lot
owners of those developments. These investments may be held in the investing
segment or the operating segment, depending on the tax and other characteristics
of the individual investment.
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 were
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 and
indefinitely lived intangible assets, including goodwill and indefinitely lived
intangible assets 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 was tested for impairment in accordance with the provisions of the
FAS 142 and the Company found no instances of impairment. The Company determined
that none of the intangible assets recorded by the Company were indefinitely
lived, therefore, amortization of these intangible assets was not ceased.
The Company's goodwill at June 30, 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 and six months ended June 30, 2002, there was no change in the carrying
value of the Company's goodwill. The following table shows the effect of
goodwill amortization on net income and net income per share for the periods
presented:
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- --------------
Reported net income to common shares $ 2,920 $ 11,813 $ 17,813 $ 2,749
Add back: goodwill amortization - 357 - 843
------------- ------------- ------------- --------------
Adjusted net income to common shares $ 2,920 $ 12,170 $ 17,813 $ 3,592
-============ ============- ============= ==============
Basic net income per share:
Reported net income per share $ 0.12 $ 0.55 $ 0.73 $ 0.13
Goodwill amortization - 0.02 - 0.04
------------- ------------- ------------- --------------
Adjusted net income per share $ 0.12 $ 0.57 $ 0.73 $ 0.17
============= ============- ============= ==============
Diluted net income per share:
Reported net income per share $ 0.11 $ 0.54 $ 0.71 $ 0.13
Goodwill amortization - 0.02 - 0.04
------------- ------------- ------------- --------------
Adjusted net income per share $ 0.11 $ 0.56 $ 0.71 $ 0.17
-============ ============- ============= ==============
NOTE 2 - INVESTMENT 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 second quarter of 2002, the Company funded $17.8 million in
tax-exempt bonds collateralized by six multifamily apartment communities. Of
this amount, $153,000 was an investment in non-participating bonds; the
approximately $44.0 million balance of these bonds is expected to be funded by
the Company in the third and fourth quarters of 2002. These investments have a
weighted average interest rate of 6.99% per annum and maturities ranging from
July 2034 to August 2045. All of these investments relate to to-be-built
communities. The remaining $17.6 million in funding was attributable to
investments in non-participating bonds: investments in a $4.4 million tax-exempt
bond, a $2.6 million tax-exempt bond and a $1.0 million tax-exempt bond, all
collateralized by two properties known as Lakeside and Golf Villas; and a $9.6
million tax-exempt bond collateralized by a property known as Park Center. The
$8.0 million investment in the Lakeside and Golf Villas bonds were sold later in
the second quarter for $8.0 million.
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 June 30, 2002 and December 31, 2001, the total carrying amount of the
tax-exempt bonds pledged as collateral was $410.8 million and $358.4 million,
respectively.
The table on pages 11 and 12 provides certain information with respect to
the bonds held by the Company at June 30, 2002 and December 31, 2001.
June 30, 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) 2000 8.100 Jan. 2031 $12,625 $12,562 $ 189 $ 12,751
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 6,794 6,701 774 7,475
Jefferson Commons (15) 2000 8.200 Jan. 2031 19,822 19,523 696 20,219
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 5,119 148 5,267
Villas at LaRiveria (4),(10) 1999 7.125 Jun. 2034 8,836 8,731 106 8,837
---------------------- ----------- ------------
Subtotal participating bonds 83,034 82,139 1,745 83,884
---------------------- ----------- ------------
Non-Participating Bonds:
Alban Place (2),(4),(5) 1986 8.150 Oct. 2008 10,065 10,065 1,139 11,204
Baytown (4),(10) 2000 7.750 Jun. 2030 4,987 4,938 (250) 4,688
Bedford Park (9) 2000 8.000 Nov. 2032 9,325 9,232 (839) 8,393
Buchanan Bay (9) 2001 5.830 Dec. 2031 10,725 9,098 876 9,974
Canterberry Crossing A 2001 6.700 Dec. 2031 10,430 10,222 (1) 10,221
Canterberry Crossing B 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) 2002 (21) (21) 51 51 - 51
Charter House 1996 7.450 Jul. 2026 25 25 3 28
Cielo Vista (4),(10) 1999 7.125 Sep. 2034 9,436 9,363 (965) 8,398
Club West (9) 2001 6.580 (17) 7,960 7,910 (308) 7,602
Coronel Village (10) 2002 7.350 Jul. 2034 51 51 - 51
Country Club (10) 1999 7.250 Aug. 2029 2,465 2,433 (141) 2,292
Creekside Village (2),(4),(6),(8) 1987 7.750 Nov. 2009 11,760 7,396 586 7,982
Delta Village (10) 1999 7.125 Jun. 2035 2,011 1,976 (95) 1,881
Elmbrook-Golden (4),(10) 2000 7.800 May 2035 2,789 2,736 12 2,748
Gannon - Cedar Run (4),(10) 1998 7.125 Dec. 2025 13,200 13,238 (71) 13,167
Gannon - Dade (4),(10) 1998 7.125 Dec. 2029 54,797 55,110 (450) 54,660
Gannon - Whispering Palms (4),(10) 1998 7.125 Dec. 2029 12,437 12,497 (92) 12,405
Gannon Bond (4),(10) 1998 7.125 Dec. 2029 3,500 3,500 (9) 3,491
Harmony Hills Series 2000 2001 6.750 May 2003 100 100 (10) 90
Harmony Hills Series 2001 2001 7.250 May 2032 17,700 17,346 (531) 16,815
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 (508) 19,769
Hunter's Glen (9) 2001 6.350 Dec. 2029 10,740 9,111 1,736 10,847
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 1,521 6,439
Lake Piedmont (4),(6),(10) 1998 7.725 Apr. 2034 19,118 18,017 (2,722) 15,295
Las Trojas (10) 2002 (21) (21) 51 51 - 51
Mountain View (Willowgreen) (2),(9) 2000 8.000 Dec. 2010 9,275 6,769 2,784 9,553
Mountainview Village (10) 2002 (16) (16) 51 51 - 51
North Pointe (2),(4),(6) 1986 7.300 Aug. 2006 25,185 12,739 11,679 24,418
Northridge Park (2),(4),(5) 1987 7.500 Jun. 2012 8,815 8,815 220 9,035
Oakbrook (9) 1996 8.200 Jul. 2026 3,045 3,074 1 3,075
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 (875) 10,311
Orangevale (4),(10) 1998 7.000 Oct. 2013 2,192 2,192 (43) 2,149
Paola (10) 1999 7.250 Aug. 2029 1,039 1,026 (59) 967
Park Center (4),(10) 2002 6.375 Apr. 2034 9,600 9,130 (10) 9,120
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 (255) 4,845
Penn Valley (10) 2001 (13) (13) 2,360 2,338 (2) 2,336
Queen Anne (9) 2001 7.088 Aug. 2013 6,168 6,168 - 6,168
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 7,715 (30) 7,685
Sahuarita (4),(10) 1999 7.125 Jun. 2029 2,108 2,096 (93) 2,003
Santa Fe Springs (4) 2000 (14) Jun. 2025 11,700 11,455 (2,095) 9,360
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 10,298 177 10,475
Sonterra (4),(10) 1998 7.000 Jun. 2035 10,074 10,100 (3,048) 7,052
Southwinds (4),(10) 2000 8.000 Sept.2030 4,333 4,247 (44) 4,203
Stone Mountain (4),(10) 1997 7.875 Oct. 2027 33,900 34,052 (999) 33,053
Sycamore Senior Village (10) 2002 (20) (20) 51 51 - 51
Torries Chase (9) 1996 8.150 Jan. 2026 1,970 1,970 20 1,990
University Courtyard (9) 2000 7.250 Mar. 2040 9,850 9,750 (392) 9,358
Villa Hialeah (2),(4),(10) 1999 6.000 Aug. 2019 10,250 8,005 1,733 9,738
Village Green (9) 2001 7.625 Feb. 2035 6,420 6,439 (340) 6,099
Walnut Tree (10) 2002 (21) (21) 51 51 - 51
Western Hills (4),(10) 1998 7.000 Dec. 2029 3,014 3,014 (272) 2,742
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 529,068 497,356 (1,017) 496,339
----------- ----------- ----------- -------------
December 31, 2001
--------------------------------------------------
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) 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) 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 2001 6.700 Dec. 2031 10,430 10,222 - 10,222
Canterberry Crossing B 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) 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
Coronel Village (10) 2002 7.350 Jul. 2034 - - - -
Country Club (10) 1999 7.250 Aug. 2029 2,472 2,440 (129) 2,311
Creekside Village (2),(4),(6),(8) 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 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 (9) 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) 2002 (21) (21) - - - -
Mountain View (Willowgreen) (2),(9) 2000 8.000 Dec. 2010 9,275 6,769 2,691 9,460
Mountainview Village (10) 2002 (16) (16) - - - -
North Pointe (2),(4),(6) 1986 7.300 Aug. 2006 25,185 12,739 11,366 24,105
Northridge Park (2),(4),(5) 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
Park Center (4),(10) 2002 6.375 Apr. 2034 - - - -
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 (13) (13) 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
Sycamore Senior Village (10) 2002 (20) (20) - - - -
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
Villa Hialeah (2),(4),(10) 1999 6.000 Aug. 2019 10,250 8,005 1,323 9,328
Village Green (9) 2001 7.625 Feb. 2035 6,441 6,460 (470) 5,990
Walnut Tree (10) 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
----------- ----------- -------------- -----------
June 30, 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 2,445 3,485 5,930
Gilman Meadows (3),(4),(6),(10) 1995 3.000 Jan. 2030 2,875 2,530 2,810 5,340
Hamilton Chase (3),(4),(6),(8) 1995 3.000 Jan. 2030 6,250 4,140 (593) 3,547
Mallard Cove I (3),(4),(6),(10) 1995 3.000 Jan. 2030 1,670 798 416 1,214
Mallard Cove II (3),(4),(6),(10) 1995 3.000 Jan. 2030 3,750 2,429 1,133 3,562
Meadows (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,635 3,716 478 4,194
Montclair (3),(4),(6),(10) 1995 3.000 Jan. 2030 6,840 1,691 1,595 3,286
Newport Village (3),(4),(6),(10) 1995 3.000 Jan. 2030 4,175 2,973 3,672 6,645
Nicollet Ridge (3),(4),(6),(10) 1995 3.000 Jan. 2030 12,415 6,075 4,723 10,798
Riverset Phase II (6) 1996 10.000 Oct. 2019 1,489 - 521 521
Steeplechase (3),(4),(6),(10) 1995 16.000 Jan. 2030 5,300 4,223 (908) 3,315
Whispering Lake (3),(4),(6),(10) 1995 3.000 Jan. 2030 8,500 4,779 2,845 7,624
---------- ----------- ------------ -----------
Subtotal participating subordinate bonds 60,379 35,799 20,177 55,976
---------- ----------- ------------ -----------
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 1,979 1,934 45 1,979
Independence Ridge (10) 1996 12.500 Dec. 2015 1,045 1,045 73 1,118
Locarno (10) 1996 12.500 Dec. 2015 675 675 20 695
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 Nov. 2039 5,420 5,250 (6) 5,244
Penn Valley B Bond 2001 8.200 Apr. 2003 800 793 - 793
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 1,654 379 2,033
---------- ----------- ------------ -----------
Subtotal non-participating subordinate bonds 19,056 17,707 19 17,726
---------- ----------- ------------ -----------
Total investment in tax-exempt bonds $691,537 $633,001 $ 20,924 $ 653,925
========== =========== ============ ===========
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),(4),(6),(8) 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 Nov. 2039 5,420 5,250 (6) 5,244
Penn Valley B Bond 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
========== =========== ============ =============
Notes:
(1) These bonds also contain additional interest features contingent on
available cash flow.
(2) One of the original 22 bonds.
(3) Series B Bonds derived from original 22 bonds.
(4) These assets were pledged as collateral as of June 30, 2002.
(5) TE Bond Sub or its subsidiaries own an 87% interest in these investments.
(6) At June 30, 2002 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) TE Bond Sub or its subsidiaries own an 66% interest in Creekside Village,
54% interest in Lakeview Garden and a 67% interest in Hamilton Chase.
(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) 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.
(14) The interest rate on the Santa Fe bond resets annually. As of June 30, 2002
the intrest rate was 6.53%.
(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 June 30, 2002.
(16) This investment is comprised of two bonds. The Series 2002 T-1 bond has a
face amount of $40,800 with an interest rate of 6.555% and matures on April
1, 2035. The Series 2002 T-2 bond has a face amount of $10,200 with an
interest rate of 7.852% and matures on April 1, 2045.
(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 $1,565,000 and a maturity date of June 11, 2009. The 1998
Series I-2 bond has a face amount of $15,875,000 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) This investment is comprised of two bonds. The Series 2002 S-1 bond has a
face amount of $40,800 with an interest rate of 6.555% and matures on
August 1, 2035. The Series 2002 S-2 bond has a face amount of $10,200 with
an interest rate of 7.852% and matures on August 1, 2045.
(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.
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 and borrowings, 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, 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 June 30, 2002 and December 31, 2001, the total carrying amount of
the bonds and taxable loans pledged as collateral was $414.7 million and $361.8
million, respectively.
In the second quarter of 2002, the Company sold three bonds with a face
amount of $30.1 million to Merrill Lynch Pierce Fenner & Smith Incorporated
("Merrill Lynch") in anticipation of placing the bonds in the Merrill Lynch
Puttable Floating Option Tax-Exempt Receipts ("P-FLOATssm") program in the third
quarter. This transaction was accounted for as a secured borrowing. Accordingly,
the Company recorded $28.6 million as short-term debt and the related bonds
(Canterberry Crossing and Harmony Hills) remained in investments in tax-exempt
bonds.
NOTE 4 - OTHER BOND-RELATED INVESTMENTS
At June 30, 2002 and December 31, 2001, the Company's other bond-related
investments are investments in Residual Interest Tax-Exempt Securities Receipts
("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
June 30, 2002 and December 31, 2001 appears in a table on page 15.
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 contractually be prepaid. Based on historical information, credit losses
were estimated to be zero.
At June 30, 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) June 30, 2002 December 31, 2001
-------------- ------------- -----------------
Fair value of retained interests $3,379 $5,316
Residual cash flows discount rate (annual rate) 4.2% - 10.3% 4.5% - 12.9%
Impact on fair value of 10% adverse change ($17,234) ($22,821)
Impact on fair value of 20% adverse change ($33,010) ($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.
June 30, 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 $ 5 $ 409 $ 414 $ -
Briarwood (1) 1999 135 105 228 333 -
Charter House (1) 1996 80 176 797 973 -
Cinnamon Ridge (1) 2000 5 326 1,598 1,924 -
Fort Branch (1) 2000 8 8 370 378 -
Hidden Brooks (1) 2001 5 63 (2,329) - (2,266)
Indian Lakes (1) 2002 5 1,045 (366) 679 -
LeMirador (Coleman Senior) (1) 1999 165 2 190 192 -
Lincoln Corner (1) 2001 10 39 (589) - (550)
Meridian at Bridgewater (1) 1999 5 35 (456) - (421)
Museum Towers 2001 5 5 158 163 -
North White Road (1) 2001 5 42 (374) - (332)
Olde English Manor (1) 1999 76 94 (382) - (288)
Park at Landmark (1) 2000 5 8 502 510 -
Park Center (1) 2001 1,270 134 116 250 -
Rancho Mirage/Castle Hills (1) 2000 - - - - -
Rillito Village (1) 1999 65 62 (248) - (186)
Riverset Phase I (1) 2000 5 1,066 1,409 2,475 -
Riverset Phase II (1) 1996 - - - - -
Riverview (1) 2000 5 5 - 5 -
Sienna (Italian Gardens) (1) 1999 160 (1) 29 28 -
Sonterra (1) 1998 - - - - -
Southgate Crossings (1) 1997 64 395 1,355 1,750 -
Southwood (1) 1997 415 325 (3,020) - (2,695)
Village at Sun Valley (1) 2000 5 5 140 145 -
Woodglen (1) 1999 5 32 (134) - (102)
----------- ----------- ------------- ----------- --------------
Total other bond-related investments $ 2,508 $ 3,976 $ (597) $ 10,219 $ (6,840)
=========== =========== ============= =========== ==============
Decmber 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 (1) 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 June 30, 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 June 30, 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 June 30, 2002 and December 31, 2001:
June 30, 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 $ 9,254 $ (29,596) $ 422,230 $ 2,912 $ (18,646)
Put option agreements 107,275 - - 107,275 - -
------------ -------------- -------------- --------------
Total investment in derivative financial instruments $ 9,254 $ (29,596) $ 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 RITESsm. 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 agreements, notional amount represents total amount
of the Company's interest rate swap contracts ($680,335 and $650,335 as of
June 30, 2002 and December 31, 2001, respectively) less the total amount of
the Company's reverse interest rate swap contracts ($261,105 and $228,105
as of June 30, 2002 and December 31, 2001, respectively). 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 June 30, 2002
and December 31, 2001:
(in thousands) June 30, 2002 December 31, 2001
-------------------- ----------------------
Loan Type:
Taxable construction loans $ 268,147 $ 271,383
Taxable permanent loans 41,330 86,182
Taxable loans 31,214 30,959
Other loans 61,654 52,282
-------------------- ----------------------
402,345 440,806
Allowance for loan losses (775) (775)
-------------------- ----------------------
Total $ 401,570 $ 440,031
==================== ======================
NOTE 7 - INVESTMENT IN PARTNERSHIPS
At June 30, 2002 and December 31, 2001, the Company's investment in
partnerships consisted of equity interests in real estate operating
partnerships. The Company's investments in partnerships are accounted for using
the equity method. The Company uses the equity method of accounting when the
Company owns an interest in a partnership and can exert significant influence
over the partnership's operations but cannot control the partnership's
operations. Under the equity method, the Company's ownership interest in the
partnership's capital is reported as an investment on the consolidated balance
sheets and the Company's allocable share of the income or loss from the
partnership is reported in other income in the consolidated statements of
income. For the three and six months ended June 30, 2002, the Company recorded
$93,600 in equity income and $229,000 in an equity loss, respectively.
During the second quarter of 2002, the Company made a $64.8 million
investment for a 35% interest in 18 operating partnerships and four swap
partnerships as part of an investment venture with CAPREIT, Inc., a national
real estate investment firm, and its affiliates. The Company expects to receive
a preferred return of 10.25% on its investment. The Company has committed to
invest an additional $11 million in similar investments to be made by CAPREIT
over the next six to twelve months.
NOTE 8 - 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 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 June 30, 2002 and December
31, 2001:
(in thousands) June 30, 2002 December 31, 2001
----------------- ------------------
Notes payable $ 197,967 $ 235,420
Group Trust warehouse facility and lines of credit 58,546 65,318
Residential Funding warehouse facility 87,201 98,033
Bank lines of credit 13,756 13,521
Midland Multifamily Equity REIT Credit Line 21,893 7,459
Other - 312
----------------- ------------------
Total $ 379,363 $ 420,063
================= ==================
The Company's short- and long-term debt of $220.3 million and $213.4
million at June 30, 2002 and December 31, 2001, respectively, relates to
securitization transactions that the Company has recorded as secured borrowings
(see Notes 1 and 5 to the Company's 2001 Form 10-K).
NOTE 9 - PREFERRED SHAREHOLDERS' EQUITY IN A SUBSIDIARY COMPANY
The Company's preferred shareholders' equity in a subsidiary represents
four classes of preferred shares issued by MuniMae TE Bond Subsidiary, LLC and
its subsidiaries (collectively, "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, 2002 $ 80,060 $ 15,206 $ 57,595 $ 7,604 $ 160,465
Income allocable to preferred shares 2,888 504 2,325 272 5,989
Distributions (2,888) (504) (2,325) (272) (5,989)
--------------- --------------- -------------- -------------- ---------------
Balance, June 30, 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 $542.6 million and $501.4 million at June 30,
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 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 and six months
ended June 30, 2002 and 2001.
For the three months ended June 30, 2002 For the three months ended June 30, 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 $ 2,920 25,252,124 $ 0.12 $ 11,813 21,524,016 $ 0.55
========== =========
Effect of Dilutive Securities
Options and deferred shares - 450,829 - 490,974
Earnings contingency - 132,855 - -
-------------- ---------------- ------------- ---------------
Diluted EPS
Income allocable to common shares
plus assumed conversions $ 2,920 25,835,808 $ 0.11 $ 11,813 22,014,990 $ 0.54
============== ================ ========== ============= =============== =========
For the six months ended June 30, 2002 For the six months ended June 30, 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 $ 17,813 24,423,091 $ 0.73 $ 2,749 20,747,361 $ 0.13
========== ===========
Effect of Dilutive Securities
Options and deferred shares - 466,685 - 475,529
Earnings contingency - 132,855 - -
-------------- ---------------- -------------- --------------
Diluted EPS
Income allocable to common shares
plus assumed conversions $ 17,813 25,022,631 $ 0.71 $ 2,749 21,222,890 $ 0.13
============== ================ ========== ============== ============== ===========
For the three and six months ended June 30, 2002 and 2001, the effect of all
potentially dilutive securities was included in the calculation.
NOTE 11 - DISTRIBUTIONS
On July 18, 2002 the Board of Directors declared a distribution of $0.4375
for the three months ended June 30, 2002 to common shareholders of record on
July 29, 2002. The payment date was August 9, 2002.
NOTE 12 - BUSINESS SEGMENT REPORTING
The Company has two reportable business segments: (1) an operating segment
consisting of subsidiaries that primarily generate taxable fee income by
providing loan servicing, loan origination and other related services, and
holding investments producing taxable interest income 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 business segments
for the three and six months ended June 30, 2002 and 2001.
Municipal Mortgage & Equity, LLC
Segment Reporting
(in thousands) (unaudited)
For the three months ended June 30, 2002 For the six months ended June 30, 2002
---------------------------------------------- ---------------------------------------------
Investing Operating Total Investing Operating Total
Segment Segment Adjustments Consolidated Segment Segment Adjustments Consolidated
--------- --------- ------------ ------------- ---------- --------- ----------- ------------
INCOME:
Interest on tax-exempt bonds and
other bond-related investments $14,594 $ 1,129 $ - $ 15,723 $ 28,702 $ 2,614 $ - $ 31,316
Interest on loans 832 7,438 - 8,270 1,680 14,589 - 16,269
Loan origination and brokerage fees 750 1,963 (1,500)(1) 1,213 750 3,204 (1,919)(1) 2,035
Syndication fees - 2,672 - 2,672 - 4,557 - 4,557
Loan servicing fees - 1,660 - 1,660 - 3,568 - 3,568
Interest on short-term investments 194 50 - 244 635 96 - 731
Other income 112 2,281 - 2,393 469 3,613 - 4,082
Net gain (loss) on sales (2,691) 3,394 - 703 (1,735) 4,604 - 2,869
--------- --------- ------------ ------------- ---------- --------- ----------- ------------
Total income 13,791 20,587 (1,500) 32,878 30,501 36,845 (1,919) 65,427
--------- --------- ------------ ------------- ---------- --------- ----------- ------------
EXPENSES:
Salaries and benefits 510 5,420 - 5,930 1,618 9,139 - 10,757
Professional Fees 231 1,206 - 1,437 331 1,278 - 1,609
Operating expenses 341 1,886 - 2,227 754 3,664 - 4,418
Amortization of intangible assets - 333 - 333 - 651 - 651
Interest expense 2,125 6,362 - 8,487 4,514 12,945 - 17,459
Other-than-temporary impairments
related to investments in
tax-exempt bonds and other
bond-related investments - - - - 110 - - 110
--------- --------- ------------ ------------- ---------- --------- ----------- ------------
Total expenses 3,207 15,207 - 18,414 7,327 27,677 - 35,004
--------- --------- ------------ ------------- ---------- --------- ----------- ------------
Net holding losses on trading
securities (7,721) - - (7,721) (4,609) - - (4,609)
Net income(loss) before income taxes,
income allocated to preferred
shareholders in a subsidiary
company, and cumulative effect
of accounting change 2,863 5,380 (1,500) 6,743 18,565 9,168 (1,919) 25,814
Income tax expense - 828 - 828 - 1,859 - 1,859
--------- --------- ------------ ------------- ---------- --------- ----------- ------------
Net income (loss) before income
allocated to preferred
shareholders in a subsidiary
company and cumulative
effect of accounting change 2,863 4,552 (1,500) 5,915 18,565 7,309 (1,919) 23,955
Income allocable to preferred
shareholders in a subsidiary
company 2,995 - - 2,995 5,989 - - 5,989
--------- --------- ------------ ------------- ---------- --------- ----------- ------------
Net income (loss) before cumulative
effect of accounting change (132) 4,552 (1,500) 2,920 12,576 7,309 (1,919) 17,966
Cumulative effect on prior year
changes in accounting for
derivative financial instruments - - - - - - - -
--------- --------- ------------ ------------- ---------- --------- ----------- ------------
Net income (loss) $ (132) $ 4,552 $ (1,500) $ 2,920 $ 12,576 $ 7,309 $(1,919) $ 17,966
========= ========= ============ ============= ========== ========= =========== ============
Notes:
(1) Adjustments represent origination fees on purchased investments which are
deferred and amortized into income over the life of the investment.
For the three months ended June 30, 2001 For the six months ended June 30, 2001
------------------------------------------------ ----------------------------------------------
Investing Operating Total Investing Operating Total
Segment Segment Adjustments Consolidated Segment Segment Adjustments Consolidated
--------- ---------- ------------ -------------- --------- ----------- ----------- ------------
INCOME:
Interest on tax-exempt bonds and
other bond-related investments $11,400 $ 809 $ - $ 12,209 $ 22,742 $ 1,237 $ - $ 23,979
Interest on loans 645 8,123 - 8,768 1,126 15,823 - 16,949
Loan origination and brokerage fee - 972 (120)(1) 852 - 2,212 (420)(1) 1,792
Syndication fees - 2,511 - 2,511 - 3,635 - 3,635
Loan servicing fees - 1,729 - 1,729 - 3,361 - 3,361
Interest on short-term investments 513 180 - 693 1,254 441 - 1,695
Other income - 1,643 - 1,643 - 6,456 - 6,456
Net gain (loss) on sales - 1,969 - 1,969 - 2,135 - 2,135
--------- ---------- ------------ -------------- --------- ----------- ----------- ------------
Total income 12,558 17,936 (120) 30,374 25,122 35,300 (420) 60,002
--------- ---------- ------------ -------------- --------- ----------- ----------- ------------
EXPENSES:
Salaries and benefits 419 4,611 - 5,030 762 8,713 - 9,475
Professional Fees 281 632 - 913 498 1,106 - 1,604
Operating expenses 256 1,894 - 2,150 462 3,219 - 3,681
Amortization of intangible assets - 628 - 628 - 1,321 - 1,321
Interest expense 1,463 6,306 - 7,769 3,087 12,508 - 15,595
Other-than-temporary impairments
related to investments in
tax-exempt bonds and other
bond-related investments - - - - - 3,256 - 3,256
--------- ---------- ------------ -------------- --------- ----------- ----------- ------------
Total expenses 2,419 14,071 - 16,490 4,809 30,123 - 34,932
--------- ---------- ------------ -------------- --------- ----------- ----------- ------------
Net holding gains (losses) on
trading securities 1,272 - - 1,272 (3,593) - - (3,593)
Net income (loss) before income
taxes, income allocated to
preferred shareholders in a
subsidiary company and cumulative
effect of accounting change 11,411 3,865 (120) 15,156 16,720 5,177 (420) 21,477
Income tax expense - 224 - 224 - 227 - 227
--------- ---------- ------------ -------------- --------- ----------- ----------- ------------
Net income (loss) before income
allocated to preferred
shareholders in a subsidiary
company and cumulative
effect of accounting change 11,411 3,641 (120) 14,932 16,720 4,950 (420) 21,250
Income allocable to preferred
shareholders in a subsidiary
company 2,606 - - 2,606 5,212 - - 5,212
--------- ---------- ------------ -------------- --------- ----------- ----------- ------------
Net income (loss) before cumulative
effect of accounting change 8,805 3,641 (120) 12,326 11,508 4,950 (420) 16,038
Cumulative effect on prior year
changes in accounting for
derivative financial instruments - - - - (12,277) - - (12,277)
--------- ---------- ------------ -------------- --------- ----------- ----------- ------------
Net income (loss) $ 8,805 $ 3,641 $ (120) $ 12,326 $ (769) $ 4,950 $ (420) $ 3,761
========= ========== ============ ============== ========= =========== =========== ============
Notes:
(1) Adjustments represent origination fees on purchased investments which are
deferred and amortized into income over the life of the investment.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
General Business
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 second quarter of 2002 increased $2.5 million over the
same period last year due primarily to the following changes: (1) a $3.0 million
increase in collections of interest on bonds, other bond-related investments,
other notes and loans; (2) a $0.4 million decrease in interest on short-term
investments resulting from the use of equity offering proceeds to repurchase
senior interests in certain securitization trusts and funding of other
operations, as well as a decrease in interest collected on margin call
collateral accounts; (3) a $0.4 million increase in loan origination and
brokerage fees due primarily to an increase in origination fees on taxable
permanent lending; (4) a $0.8 million increase in other income due to an
increase in asset management fees, advisory fees and cancellation fees; and (5)
a $1.3 million decrease in gain on sales as a result of a one-time gain of $1.1
million on a tax credit equity re-syndication in the second quarter of 2001.
Total expenses for the second quarter of 2002 increased $1.9 million over
the same period last year due primarily to the following changes: (1) a $0.9
million increase in salary and related benefits expense associated with 2001 new
hires; (2) a $0.5 million increase in professional fees due to an increase in
consulting and legal expenses related to new information system initiatives and
other corporate initiatives; (3) a $0.3 million decrease in amortization expense
due to changes in accounting guidelines relating to discontinued amortization of
goodwill; and (4) a $0.7 million increase in interest expense primarily
associated with increased construction lending production and an increase in
financing costs associated with on-balance sheet securitizations.
The Company recorded net holding losses for the change in market value of
the Company's derivative financial instruments of $7.7 million for the second
quarter of 2002.
Income tax expense increased $0.6 million for the second quarter of 2002
over the same period last year due to a decrease in the amount of deferred tax
benefit related to tax credits at the Company's subsidiaries.
Year-to-Date Analysis
Total income for the six months ended June 30, 2002 increased $5.4 million
over the same period last year due primarily to the following changes: (1) a
$6.7 million increase in collections of interest on bonds, other bond-related
investments, other notes and loans; (2) a $1.0 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
collateral accounts; (3) a $2.4 million decrease in other income primarily due
to other income associated with income earned on the assumption of a purchase
obligation with respect to the Hunter's Glen and Buchanan Bay bonds in the first
quarter of 2001; (4) a $0.9 million increase in syndication fees due primarily
to an increase in the volume of tax credit and conventional equity transactions;
and (5) a $0.7 million increase in gain on sales associated with the sale of
loans.
Total expenses for the six months ended June 30, 2002 increased $0.1
million over the same period last year due primarily to the following changes:
(1) a $1.3 million increase in salary and related benefits expense associated
with 2001 new hires; (2) a $0.7 million increase in other operating expenses
driven primarily by deployment of accounting information systems and other
upgrades in technology infrastructure; (3) a $0.7 million decrease in
amortization expense due to changes in accounting guidelines relating to
amortization of goodwill; (4) a $1.9 million increase in interest expense
primarily associated with increased construction lending production and an
increase in financing costs associated with on-balance sheet securitizations;
and (5) a $0.1 million impairment recorded in 2002 associated with a subordinate
bond investment compared to a $3.3 million impairment recorded in 2001 on two
investments (Hunter's Glen and Buchanan Bay).
The Company recorded net holding losses for the change in market value of
the Company's derivative financial instruments of $4.6 million for the six
months ended June 30, 2002.
Income tax expense increased $1.6 million for the six months ended June 30,
2002 over the same period last year due primarily to an increase in taxable
income earned by the Company's subsidiaries of $0.8 million and a $0.5 million
decrease in the deferred tax benefit relating to tax credits.
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 were
effective as of 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 were tested for impairment in
accordance with the provision of FAS 142 and the Company found no instances of
impairment.
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 investing segment by acquiring, servicing and managing
diversified portfolios of tax-exempt 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 the Company's management
of capital for others, including Fannie Mae, the Company has expanded its access
to capital.
During the second quarter of 2002, the Company funded $17.8 million in
tax-exempt bonds collateralized by six multifamily apartment communities. Of
this amount, $153,000 was an investment in non-participating bonds; the
approximately $44.0 million balance of these bonds is expected to be funded by
the Company in the third and fourth quarters of 2002. The remaining $17.6
million in funding was attributable to investments in non-participating bonds:
investments in a $4.4 million tax-exempt bond, a $2.6 million tax-exempt bond,
and a $1.0 million tax-exempt bond, all collateralized by two properties known
as Lakeside and Golf Villas; and a $9.6 million tax-exempt bond collateralized
by a property known as Park Center. Of that amount, the $8.0 million investment
in the Lakeside and Golf Villas bonds were sold later in the second quarter for
$8.0 million. Including the construction and permanent components of the
Company's bond investments, the Company's total bond investments held at June
30, 2002 for the second quarter aggregated $103.6 million.
In addition, MuniMae originated $76.9 million of construction loans and
working capital loans which, as the loans are funded over the construction
period, will be reflected on the Company's consolidated balance sheet. The
Company originated $81.7 million of taxable permanent loans, the majority of
which will, the Company expects, be placed with third party investors. The
Company earns origination fees on the taxable permanent loans. The Company
structured equity investments totaling $131.7 million, where the Company earns
syndication fees or origination fees on the placement of equity investments into
tax credit funds or with third party investors.
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.
To date, the Company has reported its leverage ratio based upon
management's assessment of the actual economic risk to the Company of its
financial assets and liabilities. The Company calculates this "economic
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. The Company employs economic leverage as an
internal management tool and attempts to maintain, through the use of
securitizations, overall economic leverage ratios in the 50% to 65% range, with
certain assets at significantly higher ratios, up to approximately 99%, and
other assets not leveraged at all.
The Company's economic leverage ratio was approximately 53% both at June
30, 2002 and at December 31, 2001. By comparison, the Company's leverage ratio
as calculated based on the Company's on-balance sheet debt ("GAAP based
leverage") was 45% and 49% at June 30, 2002 and December 31, 2001, respectively.
This GAAP leverage ratio is based on total debt (notes payable, short- and
long-term debt) divided by the Company's total assets.
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 June 30, 2002 and December 31, 2001, the total
carrying amount of the tax-exempt bonds and taxable loans pledged as collateral
was $414.7 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 factors that could affect the Company's future results. 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 June 30, 2002 the Company had cash and cash equivalents of approximately
$33.2 million.
Cash flow from operating activities was $20.1 million and $24.1 million for
the three months ended June 30, 2002 and 2001, respectively. The decrease in
cash flow for 2002 versus 2001 is due primarily to a 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 (pursuant to 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 June 30, 2002 and 2001,
cash available for distribution to common shares was $12.4 million and $10.3
million, respectively. The Company's distribution per common share for the three
months ended June 30, 2002 of $0.4375 represents a payout ratio of 89% of CAD.
The Company's common share distribution for the three months ended June 30, 2001
of $0.4275 represents a payout ratio of 90% of CAD.
Regular cash distributions to shareholders, for the three months ended June
30, 2002 and 2001, were $11.1 million and $9.2 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.
The Company's 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
adoption of the Company's Second 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 Second Amended and Restated Certificate of Formation and
Operating Agreement of the Company
3.2 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)
99 Officers' Certificate
(b) Reports on Form 8-K:
On July 12, 2002, the Company filed a Form 8-K containing the
supplemental information reported to security analysts for the
three months ended March 31, 2002.
On August 12, 2002, the Company filed a Form 8-K containing the
supplemental information reported to security analysts for the
three months ended June 30, 2002.
On August 12, 2002, the Company filed a Form 8-K containing the
Second Amended and Restated Certificate of Formation and
Operating Agreement of the Company.
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: August 9, 2002
EXHIBIT 99
OFFICERS' CERTIFICATE
The undersigned officers of Municipal Mortgage & Equity, LLC, a Delaware
limited liability company (the "Company"), hereby certify that (i) the Company's
Form 10-Q for the quarter ended June 30, 2002 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and
(ii) the information contained in the Company's Form 10-Q for the quarter ended
June 30, 2002 fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ Mark K. Joseph
Date: August 12, 2002 _________________________________
Name: Mark K. Joseph
Title: Chief Executive Officer
/s/William S. Harrison
_________________________________
Name: William S. Harrison
Title: Chief Financial Officer