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UNITED STATES
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: September 30, 2002
Commission File Number: 001-11981
MUNICIPAL MORTGAGE & EQUITY, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1449733
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
218 North Charles Street,
Suite 500,
Baltimore, Maryland 21201
(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 25,373,098 common shares outstanding as of November 9,
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 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
Item 4. Controls and Procedures 32
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Certifications 35
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 30, 2002 December 31, 2001
-------------------- --------------------
ASSETS
Cash and cash equivalents ............................................................ $ 37,890 $ 97,373
Interest receivable .................................................................. 16,045 15,859
Investment in tax-exempt bonds, net (Note 2) ......................................... 779,893 616,460
Investment in other bond-related investments (Notes 3 and 4) ......................... 12,323 13,295
Investment in derivative financial instruments (Note 5) .............................. 21,085 2,912
Loans receivable, net (Note 6) ....................................................... 433,963 440,031
Restricted assets .................................................................... 27,786 16,710
Investment in partnerships (Note 7) .................................................. 83,841 5,393
Other assets ......................................................................... 40,919 40,356
Mortgage servicing rights, net ....................................................... 10,353 9,161
Property and equipment ............................................................... 2,489 2,721
Goodwill ............................................................................. 30,206 29,005
-------------------- --------------------
Total assets ......................................................................... $ 1,496,793 $ 1,289,276
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable (Note 8) ............................................................... $ 404,589 $ 420,063
Accounts payable, accrued expenses and other liabilities ............................. 25,998 29,014
Investment in other bond-related investments (Notes 3 and 4) ......................... 943 7,979
Investment in derivative financial instruments (Note 5) .............................. 51,349 18,646
Distributions payable ................................................................ 2,994 2,960
Short-term debt (Note 8) ............................................................. 219,945 78,560
Long-term debt (Note 8) .............................................................. 137,945 134,881
-------------------- --------------------
Total liabilities .................................................................... 843,763 692,103
-------------------- --------------------
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 (28,948,483 shares authorized, 25,377,286 shares issued,
and 27,713 deferred shares at September 30, 2002 and 24,594,597 authorized,
21,857,312 shares issued, and 22,254 deferred shares at December 31, 2001 ........ 468,146 406,733
Less common shares held in treasury at cost (55,444 and 59,330 shares, respectively) . (857) (912)
Less unearned compensation (deferred shares) ......................................... (3,682) (4,145)
Accumulated other comprehensive income ............................................... 28,958 22,600
-------------------- --------------------
Total shareholders' equity ........................................................... 492,565 436,708
-------------------- --------------------
Total liabilities and shareholders' equity ........................................... $ 1,496,793 $ 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 nine months ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------- ------------- -------------
INCOME:
Interest on tax-exempt bonds and other bond-related investments .... $ 15,409 $ 12,153 $ 45,970 $ 36,132
Interest on loans .................................................. 8,676 8,461 25,700 25,410
Loan origination and brokerage fees ................................ 2,014 1,200 4,608 2,873
Syndication fees ................................................... 767 1,726 4,765 5,276
Loan servicing fees ................................................ 1,544 1,659 5,112 5,020
Interest on short-term investments ................................. 260 487 991 2,182
Other income ....................................................... 381 1,843 4,463 8,493
Net gain on sales .................................................. 657 4,760 3,526 6,905
------------ ------------- ------------- -------------
Total income ....................................................... 29,708 32,289 95,135 92,291
------------ ------------- ------------- -------------
EXPENSES:
Salaries and benefits .............................................. 5,446 5,527 16,203 15,002
Professional fees .................................................. 467 1,114 2,076 2,718
Operating expenses ................................................. 2,173 1,881 6,591 5,562
Amortization of intangible assets .................................. 334 694 985 2,015
Interest expense ................................................... 8,771 7,873 26,230 23,468
Other-than-temporary impairments related to investments in
tax-exempt bonds and other bond-related investments .......... - - 110 3,256
------------ ------------- ------------- -------------
Total expenses ..................................................... 17,191 17,089 52,195 52,021
Net holding losses on trading securities ........................... (9,921) (4,670) (14,530) (8,263)
------------ ------------- ------------- -------------
Net income before income taxes, income allocated to
preferred shareholders in a subsidiary company,
and cumulative effect of accounting change ................... 2,596 10,530 28,410 32,007
Income tax expense (benefit) ....................................... (635) 805 1,224 1,032
------------ ------------- ------------- -------------
Net income before income allocated to preferred shareholders
in a subsidiary company and cumulative effect of
accounting change ............................................ 3,231 9,725 27,186 30,975
Income allocable to preferred shareholders in a subsidiary company . 2,994 2,606 8,983 7,818
------------ ------------- ------------- -------------
Net income before cumulative effect of accounting change ........... 237 7,119 18,203 23,157
Cumulative effect on prior years of change in
accounting for derivative financial instruments .............. - - - (12,277)
------------ ------------- ------------- -------------
Net income ......................................................... $ 237 $ 7,119 $ 18,203 $ 10,880
============ ============= ============= =============
Net income allocated to:
Preferred shares:
Series I .................................................. $ - $ 255 $ - $ 599
============ ============= ============= =============
Series II ................................................. - 1 - 95
============ ============= ============= =============
Preferred capital distribution shares:
Series I .................................................. $ - $ 132 $ - $ 269
============ ============= ============= =============
Series II ................................................. - 3 - 16
============ ============= ============= =============
Term growth shares ........................................... $ - $ 214 $ 153 $ 638
============ ============= ============= =============
Common shares ................................................ $ 237 $ 6,514 $ 18,050 $ 9,263
============ ============= ============= =============
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 nine months ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------- ------------- -------------
Basic net income per share:
Preferred shares:
Series I .................................................. $ - $ 23.19 $ - $ 45.50
============ ============= ============= =============
Series II ................................................. - 0.04 - 17.47
============ ============= ============= =============
Preferred capital distribution shares:
Series I .................................................. $ - $ 22.91 $ - $ 39.03
============ ============= ============= =============
Series II ................................................. - 2.10 - 6.79
============ ============= ============= =============
Common shares:
Income before cumulative effect of accounting change ......... $ 0.01 $ 0.30 $ 0.73 $ 1.02
Cumulative effect on prior years of change in
accounting for derivative financial instruments ........... - - - (0.58)
------------ ------------- ------------- -------------
Basic net income per common share ............................ $ 0.01 $ 0.30 $ 0.73 $ 0.44
============ ============= ============= =============
Weighted average common shares outstanding ................... 25,329,103 21,590,584 24,728,414 21,034,369
Diluted net income per share:
Common shares:
Income before cumulative effect of accounting change ......... $ 0.01 $ 0.29 $ 0.71 $ 1.00
Cumulative effect on prior years of change in
accounting for derivative financial instruments ........... - - - (0.57)
------------ ------------- ------------- -------------
Diluted net income per common share .......................... $ 0.01 $ 0.29 $ 0.71 $ 0.43
============ ============= ============= =============
Weighted average common shares outstanding ................... 25,916,151 22,397,981 25,323,789 21,620,521
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 nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
--------------- -------------- ---------------- --------------
Net income .................................................... $ 237 $ 7,119 $ 18,203 $ 10,880
--------------- -------------- ---------------- --------------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains arising during the period ........ 8,741 1,046 7,575 6,172
Reclassification adjustment for (gains) losses
included in net income ................................. (221) (2,245) (1,217) 9,982
--------------- -------------- ---------------- --------------
Other comprehensive income (loss) ............................. 8,520 (1,199) 6,358 16,154
--------------- -------------- ---------------- --------------
Comprehensive income .......................................... $ 8,757 $ 5,920 $ 24,561 $ 27,034
=============== ============== ================ ==============
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 nine months ended
September 30,
----------------- ------------------
2002 2001
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................................. $ 18,203 $ 10,880
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to preferred shareholders in a subsidiary company ..................... 8,983 7,818
Cumulative effect of accounting change ................................................ - 12,277
Net holding losses on trading securities ............................................... 14,530 8,263
Other-than-temporary impairments related to investments in
tax-exempt bonds ..................................................................... 110 3,256
Decrease in valuation allowance on parity working capital loans ........................ - (42)
Net gain on sales ...................................................................... (3,553) (4,566)
Loss on disposal of fixed assets ....................................................... 27 4
Loss from investment in partnerships ................................................... 1,717 239
Net amortization of premiums, discounts and fees on investments ........................ (178) 235
Depreciation and amortization .......................................................... 1,378 2,231
Tax benefit from deferred share benefit ................................................ 366 -
Deferred share compensation expense .................................................... 1,293 1,095
Common and deferred shares issued under the Non-Employee Directors' Share Plans ........ 162 111
(Increase) decrease in interest receivable ............................................. (186) 122
Increase in other assets and goodwill .................................................. (596) (6,126)
Increase (decrease) in accounts payable, accrued expenses and other liabilities ........ (3,016) 1,565
----------------- ------------------
Net cash provided by operating activities .................................................. 39,240 37,362
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tax-exempt bonds and other bond-related investments ........................... (175,188) (52,452)
Loan originations .......................................................................... (270,820) (344,316)
Acquistion of an unconsolidated subsidiary ................................................. (1,100) -
Principal payments received ................................................................ 278,013 298,359
Purchases of property and equipment ........................................................ (188) (1,194)
Investment in partnerships ................................................................. (93,144) (5,595)
Return of capital invested in partnerships ................................................. 12,979 11,254
Net proceeds from sales of investments ..................................................... 12,179 5,000
Net (investment) reduction in restricted assets ............................................ (10,855) 5,149
----------------- ------------------
Net cash used in investing activities ...................................................... (248,124) (83,795)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities .......................................................... 499,026 420,898
Repayment of credit facilities ............................................................. (514,500) (418,693)
Proceeds from short-term debt .............................................................. 179,700 29,000
Repayment of short-term debt ............................................................... (38,315) (11,700)
Proceeds from long-term debt ............................................................... 3,538 56,700
Repayment of long-term debt ................................................................ (474) (67,037)
Issuance of common shares .................................................................. 77,821 82,645
Redemption of preferred shares ............................................................. (19,298) (7,168)
Proceeds from stock options exercised ...................................................... 2,932 1,730
Distributions on common shares ............................................................. (32,080) (28,648)
Distributions to preferred shareholders in a subsidiary company ............................ (8,949) (7,818)
----------------- ------------------
Net cash provided by financing activities .................................................. 149,401 49,909
----------------- ------------------
Net (decrease) increase in cash and cash equivalents ....................................... (59,483) 3,476
Cash and cash equivalents at beginning of period ........................................... 97,373 27,504
----------------- ------------------
Cash and cash equivalents at end of period ................................................. $ 37,890 $ 30,980
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .............................................................................. $ 22,684 $ 27,063
================= ==================
Income taxes paid .......................................................................... $ 1,109 $ 640
================= ==================
DISCLOSURE OF NON-CASH ACTIVITIES:
Issuance of common stock in connection with the acquisition of an unconsolidated subsidiary $ 100 $ -
================= ==================
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 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 18,050 - - - 18,203
Unrealized gains on
investments, net
of reclassifications - - - - - - - - 6,358 6,358
Distributions (115) (15) (49) (1) (382) (31,518) - - - (32,080)
Redemption of preferred
shares (6,799) (2,311) (2,503) (410) - (7,275) - - - (19,298)
Options exercised - - - - - 2,932 - - - 2,932
Issuance of common shares - - - - - 77,946 - - - 77,946
Reissuance of treasury
shares - - - - - (55) 55 - - -
Deferred shares issued
under the Non-Employee
Directors' Share Plans - - - - - 137 - - - 137
Deferred share grants - - - - - 830 - (830) - -
Amortization of deferred
compensation - - - - - - - 1,293 - 1,293
Tax benefit from exercise
of options and vesting
of deferred shares - - - - - 366 - - - 366
--------- ---------- -------- ---------- ------- ----------- --------- ------------ -------- ---------
Balance September 30, 2002 $ - $ - $ - $ - $ - $ 468,146 $ (857) $ (3,682) $ 28,958 $492,565
========= ========== ======== ========== ======= =========== ========= ============ ======== =========
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 - - - - - 159,531 -
Issuance of common shares - - - - - 3,300,980 -
Reissuance of treasury
shares - - - - - 3,886 (3,886)
Issuance of common shares
under employee share
incentive plans - - - - - 59,462 -
Deferred shares issued
under the Non-Employee
Directors' Share Plans - - - - - 5,460 -
--------- ---------- -------- ---------- ------- ----------- ---------
Balance, September 30, 2002 - - - - - 25,349,555 55,444
========= ========== ======== ========== ======= =========== =========
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 ("GAAP") 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 approximately $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 September 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 nine months ended September 30, 2002, the Company's carrying value of
goodwill increased by $1.2 million as a result of an acquisition of an
unconsolidated subsidiary. The following table shows the effect of goodwill
amortization on net income and net income per share for the periods presented:
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
--------------------- --------------------- --------------------- ---------------------
Reported net income to common shares $ 237 $ 6,514 $ 18,050 $ 9,263
Add back: goodwill amortization - 357 - 1,200
--------------------- --------------------- --------------------- ---------------------
Adjusted net income to common shares $ 237 $ 6,871 $ 18,050 $ 10,463
===================== ===================== ===================== =====================
Basic net income per share:
Reported net income per share $ 0.01 $ 0.30 $ 0.73 $ 0.44
Goodwill amortization - 0.02 - 0.06
--------------------- --------------------- --------------------- ---------------------
Adjusted net income per share $ 0.01 $ 0.32 $ 0.73 $ 0.50
===================== ===================== ===================== =====================
Diluted net income per share:
Reported net income per share $ 0.01 $ 0.29 $ 0.71 $ 0.43
Goodwill amortization - 0.02 - 0.06
--------------------- --------------------- --------------------- ---------------------
Adjusted net income per share $ 0.01 $ 0.31 $ 0.71 $ 0.49
===================== ===================== ===================== =====================
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 or, in
some cases, community development districts chartered by such 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 third quarter of 2002, the Company did not fund any tax-exempt
bonds.
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 as
collateral for senior interests in certain securitization trusts. At September
30, 2002 and December 31, 2001, the total carrying amount of the tax-exempt
bonds pledged as collateral was $394.8 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 September 30, 2002 and December 31, 2001.
September 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 $ 252 $ 12,814
Cobblestone (9) 1999 7.125 Aug. 2039 6,800 6,732 (136) 6,596
Cool Springs (4),(10) 2000 7.750 Aug. 2030 14,472 14,313 159 14,472
Crossings (4),(19) 1997 8.000 Jul. 2007 6,773 6,680 722 7,402
Jefferson Commons (15) 2000 8.200 Jan. 2031 19,790 19,491 888 20,379
Palisades Park (9) 2001 7.125 Aug. 2028 8,420 8,408 65 8,473
Timber Ridge (4),(10) 2000 7.950 Jan. 2036 5,215 5,119 200 5,319
Villas at LaRiveria (9) 1999 7.125 Jun. 2034 8,833 8,728 194 8,922
---------- ----------- ------------ ------------
Subtotal participating bonds 82,928 82,033 2,344 84,377
---------- ----------- ------------ ------------
Non-Participating bonds:
Alban Place (2),(4),(5) 1986 8.150 Oct. 2008 10,065 10,065 1,251 11,316
Baytown (4),(10) 2000 7.750 Jun. 2030 4,982 4,933 (100) 4,833
Bedford Park (4),(10) 2000 8.000 Nov. 2032 9,325 9,255 (1,049) 8,206
Buchanan Bay (9) 2001 5.830 Dec. 2031 10,725 9,098 1,627 10,725
Canterberry Crossing A (9) 2001 6.700 Dec. 2031 10,430 10,222 208 10,430
Canterberry Crossing B (9) 2001 6.700 Dec. 2021 2,000 1,960 40 2,000
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 9,425 9,352 (870) 8,482
Club West (9) 2001 6.580 (17) 7,960 7,910 (125) 7,785
Coronel Village (10) 2002 7.350 Jul. 2034 51 51 - 51
Country Club (4),(10) 1999 7.250 Aug. 2029 2,461 2,429 (140) 2,289
Creekside Village (2),(4),(6),(8) 1987 7.750 Nov. 2009 11,760 7,396 664 8,060
Delta Village (10) 1999 7.125 Jun. 2035 2,011 1,976 (65) 1,911
Elmbrook-Golden (4),(10) 2000 7.800 May 2035 2,786 2,733 53 2,786
Fort Branch (4),(10) 2000 7.550 Dec 2032 12,318 12,318 493 12,811
Gannon - Cedar Run (9) 1998 7.125 Dec. 2025 13,200 13,238 94 13,332
Gannon - Dade (9) 1998 7.125 Dec. 2029 54,743 55,056 165 55,221
Gannon - Whispering Palms (4),(10) 1998 7.125 Dec. 2029 12,363 12,423 (153) 12,270
Gannon Bond (9) 1998 7.125 Dec. 2029 3,500 3,500 35 3,535
Harmony Hills Series 2000 2001 6.750 May 2003 100 100 (10) 90
Harmony Hills Series 2001 (9) 2001 7.250 May 2032 17,700 17,370 (555) 16,815
Hidden Brooks (4),(10) 2001 6.650 Apr. 2038 20,285 20,342 (1,680) 18,662
Hidden Valley (4),(10) 1996 8.250 Jan. 2026 1,600 1,600 - 1,600
Honey Creek (9) 2000 7.625 Jul. 2035 20,485 20,277 3 20,280
Hunter's Glen (9) 2001 6.350 Dec. 2029 10,740 9,111 1,844 10,955
La Paloma (9) 2001 6.710 May 2030 4,378 4,378 (131) 4,247
Lakeview Garden (2),(4),(6),(8) 1987 7.750 Aug. 2007 9,003 4,918 1,560 6,478
Lake Piedmont (4),(6),(10) 1998 7.725 Apr. 2034 19,118 18,017 (2,340) 15,677
Las Trojas (10) 2002 (21) (21) 51 51 - 51
LeMirador (Coleman) (9) 1999 7.250 May 2030 7,986 7,824 482 8,306
Meridian (4),(10) 1999 7.500 Dec. 2029 14,200 14,229 (171) 14,058
Mountain View (Willowgreen) (2),(9) 2000 8.000 Dec. 2010 9,275 6,769 2,877 9,646
Mountainview Village (10) 2002 (16) (16) 51 51 - 51
North Pointe (2),(4),(6) 1986 7.300 Aug. 2006 25,185 12,739 11,732 24,471
Northridge Park (2),(9) 1987 7.500 Jul. 2012 8,815 8,815 353 9,168
Oakbrook (9) 1996 8.200 Jul. 2026 3,045 3,074 11 3,085
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 (5,888) 13,650
Oakmont/Towne Oaks (9) 1998 7.200 Jan. 2034 11,208 11,186 (130) 11,056
Olde English (4),(10) 1999 7.360 Nov. 2033 7,276 7,294 (163) 7,131
Orangevale (9) 1998 7.000 Oct. 2013 2,161 2,161 (82) 2,079
Paola (4),(10) 1999 7.250 Aug. 2029 1,038 1,025 (39) 986
Park Center (4),(10) 2002 6.375 Apr. 2034 9,600 9,130 182 9,312
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 (153) 4,947
Penn Valley (4),(10) 2001 (13) (13) 2,360 2,338 (2) 2,336
Queen Anne (9) 2001 7.088 Aug. 2013 6,168 6,168 61 6,229
Rancho Mirage (4),(10) 2000 8.500 Jun. 2040 12,780 12,780 (255) 12,525
Rillito (4),(10) 1999 7.360 Dec. 2033 6,275 6,272 (185) 6,087
Riverset Phase II (4) 1999 9.500 Oct. 2019 7,610 7,715 47 7,762
Riverview (4),(10) 2000 7.500 Jul. 2032 10,663 10,663 160 10,823
Sahuarita (4),(10) 1999 7.125 Jun. 2029 2,103 2,091 (93) 1,998
Santa Fe Springs (4),(6) 2000 (14) Jun. 2025 11,700 11,455 (3,265) 8,190
Shadowbrook (4),(10) 1999 6.850 Jun. 2029 5,780 5,767 (161) 5,606
Sienna (Italian Gardens) (9) 1999 7.250 May 2030 7,936 7,775 122 7,897
Silver Spring (9) 2001 7.375 Dec. 2029 10,270 10,298 383 10,681
Sonterra (4),(10) 1998 7.000 Jun. 2035 10,054 10,080 (2,554) 7,526
Southwinds (4),(10) 2000 8.000 Sep. 2030 4,329 4,243 2 4,245
Southwood (4),(10) 1997 7.375 Nov. 2029 25,060 24,974 (3,172) 21,802
Stone Mountain (9) 1997 7.875 Oct. 2027 33,900 34,047 (1,842) 32,205
Sun Valley (4),(10) 2000 7.585 Nov. 2032 14,000 14,000 (560) 13,440
Sycamore Senior Village (10) 2002 (20) (20) 51 51 - 51
Torries Chase (9) 1996 8.150 Jan. 2026 1,970 1,970 34 2,004
University Courtyard (9) 2000 7.250 Mar. 2040 9,850 9,750 (1,870) 7,880
Villa Hialeah (2),(4),(10) 1999 6.000 Aug. 2019 10,250 8,005 1,886 9,891
Village Green (9) 2001 7.625 Feb. 2035 6,398 6,417 (215) 6,202
Walnut Tree (10) 2002 (21) (21) 51 51 - 51
Western Hills (4),(10) 1998 7.000 Dec. 2029 3,010 3,010 (241) 2,769
Willow Key (9) 2001 6.717 (18) 17,440 17,440 - 17,440
Woodmark (9) 1999 7.125 Jun. 2039 10,200 10,072 (178) 9,894
---------- ----------- ------------ ------------
Subtotal non-participating Bonds 654,809 622,831 (1,408) 621,423
---------- ----------- ------------ ------------
Participating Subordinate Bonds(1):
Barkley Place (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,480 2,445 3,452 5,897
Gilman Meadows (3),(4),(6),(10) 1995 3.000 Jan. 2030 2,875 2,530 2,777 5,307
Hamilton Chase (3),(4),(6),(8) 1995 3.000 Jan. 2030 6,250 4,140 (601) 3,539
Mallard Cove I (3),(4),(6),(10) 1995 3.000 Jan. 2030 1,670 798 365 1,163
Mallard Cove II (3),(4),(6),(10) 1995 3.000 Jan. 2030 3,750 2,429 1,015 3,444
Meadows (3),(4),(6),(10) 1995 16.000 Jan. 2030 3,635 3,716 520 4,236
Montclair (3),(4),(6),(10) 1995 3.000 Jan. 2030 6,840 1,691 1,701 3,392
Newport Village (3),(4),(6),(10) 1995 3.000 Jan. 2030 4,175 2,973 3,785 6,758
Nicollet Ridge (3),(4),(6),(10) 1995 3.000 Jan. 2030 12,415 6,075 4,678 10,753
Riverset Phase II (6) 1996 10.000 Oct. 2019 1,489 - 467 467
Steeplechase (3),(4),(6),(10) 1995 16.000 Jan. 2030 5,300 4,223 (641) 3,582
Whispering Lake (3),(4),(6),(10) 1995 3.000 Jan. 2030 8,500 4,779 2,876 7,655
---------- ----------- ------------ ------------
Subtotal participating subordinate bonds 60,379 35,799 20,394 56,193
---------- ----------- ------------ ------------
Non-Participating Subordinate Bonds:
Cinnamon Ridge 1999 5.000 Jan. 2015 1,829 1,215 29 1,244
Farmington Meadows (10) 1999 8.000 Aug. 2039 1,977 1,932 65 1,997
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 (1) 792
Rillito B Bond (6),(7) 2000 10.000 Dec. 2033 1,044 1,241 (248) 993
Winter Oaks B Bond (6),(10) 1999 7.500 Jul. 2022 2,184 2,133 51 2,184
Winter Oaks C Bond (6),(10) 1999 10.000 Jul. 2022 2,141 1,654 401 2,055
---------- ----------- ------------ ------------
Subtotal non-participating subordinate bonds 19,041 17,702 198 17,900
---------- ----------- ------------ ------------
Total investment in tax-exempt bonds $817,157 $758,365 $ 21,528 $ 779,893
========== =========== ============ ============
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 (9) 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 (4),(10) 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 (9) 2001 6.700 Dec. 2031 10,430 10,222 - 10,222
Canterberry Crossing B (9) 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 (4),(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
Fort Branch (4),(10) 2000 7.550 Dec 2032 - - - -
Gannon - Cedar Run (9) 1998 7.125 Dec. 2025 13,200 13,238 94 13,332
Gannon - Dade (9) 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 (9) 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 (9) 2001 7.250 May 2032 17,700 17,346 177 17,523
Hidden Brooks (4),(10) 2001 6.650 Apr. 2038 - - - -
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) - - - -
LeMirador (Coleman) (9) 1999 7.250 May 2030 - - - -
Meridian (4),(10) 1999 7.500 Dec. 2029 - - - -
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),(9) 1987 7.500 Jul. 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
Olde English (4),(10) 1999 7.360 Nov. 2033 - - - -
Orangevale (9) 1998 7.000 Oct. 2013 2,213 2,212 (44) 2,168
Paola (4),(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 (4),(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 - - - -
Rillito (4),(10) 1999 7.360 Dec. 2033 - - - -
Riverset Phase II (4) 1999 9.500 Oct. 2019 110 105 7 112
Riverview (4),(10) 2000 7.500 Jul. 2032 - - - -
Sahuarita (4),(10) 1999 7.125 Jun. 2029 2,114 2,102 (149) 1,953
Santa Fe Springs (4),(6) 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
Sienna (Italian Gardens) (9) 1999 7.250 May 2030 - - - -
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 Sep. 2030 4,344 4,258 - 4,258
Southwood (4),(10) 1997 7.375 Nov. 2029 - - - -
Stone Mountain (9) 1997 7.875 Oct. 2027 33,900 34,061 (839) 33,222
Sun Valley (4),(10) 2000 7.585 Nov. 2032 - - - -
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 (9) 1999 7.125 Jun. 2039 10,200 10,072 26 10,098
---------- ----------- ------------- -----------
Subtotal non-participating bonds 489,081 457,625 2,327 459,952
---------- ----------- ------------- -----------
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 Bond (6),(7) 2000 10.000 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
========== =========== ============= ===========
Non-Participating Subordinate Bonds:
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 September 30, 2002.
(5) TE Bond Sub or its subsidiaries own an 87% interest in these investments.
(6) At September 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 September 30,
2002 the interest 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 September 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 as collateral for senior
interests in certain securitization trusts and credit enhancement facilities. At
September 30, 2002 and December 31, 2001, the total carrying amount of the bonds
and taxable loans pledged as collateral was $398.6 million and $361.8 million,
respectively.
In order to diversify its access to financing through securitization
programs, in September 2002 the Company entered into a new securitization
program with MBIA Insurance Corporation ("MBIA"), as the provider of credit
enhancement; Goldman, Sachs & Co., as remarketing agent; and Bayerische
Landesbank, as liquidity provider. Similar to the Company's other securitization
programs, through this program the Company securitizes assets by depositing
bonds into a trust. The trust issues senior and subordinate certificates and the
Company receives cash proceeds from the sale of the senior certificates and
retains the subordinate certificates. The interest rate on the senior
certificates is reset weekly by the remarketing agent. To increase the
attractiveness of the senior certificates to investors, MBIA provided 7-year
credit enhancement in the form of a surety bond that guarantees all interest and
principal payments on the senior certificates. Goldman, Sachs & Co., acting as
remarketing agent, will sell the senior certificates to investors. A group of
liquidity banks, led by Bayerische Landesbank, provides liquidity to the senior
certificates. Liquidity advances will be used to provide bridge funding for the
redemption of senior certificates tendered upon a failure to remarket senior
certificates or in the event of other mandatory tender events.
The Company accomplished its goal of diversifying its use of securitization
facilities by repurchasing approximately $134.5 million in outstanding Puttable
Floating Option Tax-Exempt Receipts ("P-FLOATssm") issued through the Company's
securitization program with Merrill Lynch Pierce Fenner & Smith Incorporated
("Merrill Lynch"). Merrill Lynch then collapsed the related P-FLOATssm trusts
and returned the underlying bonds to the Company. The Company then deposited a
mix of bonds, including some bonds previously in the P-FLOATssm program, into
the new MBIA-Goldman securitization trusts. The MBIA-Goldman trusts issued
$147.0 million of variable-rate senior trust certificates (known as Tender
Option Certificates, or "TOCs") and $4.2 million of variable-rate subordinated
certificates (known as Trust Inverse Certificates, or "TICs"). The net cash
proceeds to the Company upon completion of this transaction approximated $11.1
million, which represents $147.0 million in proceeds from the sale of the senior
certificates less $134.5 million for the repurchase of senior certificates in
the P-FLOATssm program and $1.4 million in debt issue costs. In addition, the
Company retained an investment in the $4.2 million TICs.
This transaction was accounted for in accordance with Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". As a result of certain
call provisions available to the subordinate certificate holders, the Company
has accounted for this transaction as a secured borrowing. Accordingly, the
Company recorded the senior certificates as short-term debt and the trust assets
are included in investment in tax-exempt bonds. In conjunction with the
recording of the short-term debt, the Company capitalized $1.4 million in debt
issue costs. The Company is amortizing these debt issue costs over the life of
the facility, based on the amount of outstanding debt, using the effective
interest method.
The Company did not securitize any additional assets, other than those
discussed above, for the three months ended September 30, 2002.
NOTE 4 - OTHER BOND-RELATED INVESTMENTS
At September 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. Through this program, Merrill Lynch deposits the bonds into
securitization trusts. Subsequently, these trusts and/or bonds are credit
enhanced by Merrill Lynch or another third party credit enhancement provider.
Two types of securities, P-FLOATssm and RITESsm, are created for each asset
deposited into the trusts. The P-FLOATssm are short-term floating rate interests
in the trusts that have priority on the cash flows of the deposited mortgage
bonds and bear interest at rates that are reset weekly by the remarketing agent,
Merrill Lynch. The P-FLOATssm are sold to qualified third party investors. The
RITESsm are the subordinate security and receive the residual interest on the
bond after the payment of all fees and the P-FLOATssm interest. A detailed
listing of the other bond-related investments owned by the Company at September
30, 2002 and December 31, 2001 appears in a table on page 15.
During the third quarter, the Company purchased two $5,000 (face amount)
RITESSM investments for $0.6 million in the Park at Landmark P-FLOATssm trust.
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 September 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) September 30, 2002 December 31, 2001
------------------ -----------------
Fair value of retained interests $11,380 $5,316
Residual cash flows discount rate (annual rate) 3.7% - 8.1% 4.5% - 12.9%
Impact on fair value of 10% adverse change ($10,110) ($22,821)
Impact on fair value of 20% adverse change ($19,393) ($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.
September 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 $ 545 $ 550 $ -
Briarwood ........................ (1) 1999 135 106 328 434 -
Charter House .................... (1) 1996 80 165 845 1,010 -
Cinnamon Ridge ................... (1) 2000 5 325 2,059 2,384 -
Fort Branch ...................... (1) 2000 - - - - -
Hidden Brooks .................... (1) 2001 - - - - -
Indian Lakes ..................... (1) 2002 5 1,040 (178) 862 -
LeMirador (Coleman Senior) ....... (1) 1999 - - - - -
Lincoln Corner ................... (1) 2001 10 38 (364) - (326)
Meridian at Bridgewater .......... (1) 1999 - - - - -
Museum Towers .................... 2001 5 5 210 215 -
North White Road ................. (1) 2001 5 42 (205) - (163)
Olde English Manor ............... (1) 1999 - - - - -
Park at Landmark ................. (1) 2000 5 6 672 678 -
Park at Landmark ................. (1) 2002 10 582 61 643 -
Park Center ...................... (1) 2001 1,270 164 494 658 -
Rancho Mirage/Castle Hills ....... (1) 2000 - - - - -
Rillito Village .................. (1) 1999 - - - - -
Riverset Phase I ................. (1) 2000 5 1,064 1,981 3,045 -
Riverset Phase II ................ (1) 1996 - - - - -
Riverview ........................ (1) 2000 - - - - -
Sienna (Italian Gardens) ......... (1) 1999 - - - - -
Sonterra ......................... (1) 1998 - - - - -
Southgate Crossings .............. (1) 1997 61 376 1,468 1,844 -
Southwood ........................ (1) 1997 - - - - -
Village at Sun Valley ............ (1) 2000 - - - - -
Woodglen ......................... (1) 1999 5 32 (486) - (454)
----------- ------------- ------------ ---------- --------------
Total other bond-related investments ....................... $ 1,606 $3,950 $ 7,430 $ 12,323 $ (943)
=========== ============= ============ ========== ==============
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 ................. (1) 2000 5 12 330 342 -
Park at Landmark ................. (1) 2002 - - - - -
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 September 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 September 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 September 30, 2002 and December 31, 2001:
September 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) ........... $ 431,560 $ 21,085 $ (51,349) $ 422,230 $ 2,912 $ (18,646)
Put option agreements ...... 107,275 - - 107,275 - -
----------- ------------- -------- -------------
Total investment in
derivative financial
instruments.............. $ 21,085 $ (51,349) $ 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 ($692,665 and $650,335 as of
September 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 September 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 September 30,
2002 and December 31, 2001.
(in thousands) September 30, 2002 December 31, 2001
---------------------- ------------------------
Loan Type:
Taxable construction loans ... $ 277,030 $ 271,383
Taxable permanent loans ...... 63,008 86,182
Taxable loans ................ 31,306 30,959
Other loans .................. 63,394 52,282
---------------------- ------------------------
434,738 440,806
Allowance for loan losses .... (775) (775)
---------------------- ------------------------
Total ........................ $ 433,963 $ 440,031
====================== ========================
NOTE 7 - INVESTMENT IN PARTNERSHIPS
At September 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 nine months ended September 30, 2002, the Company
recorded $1.5 million and $1.7 million in an equity loss, respectively.
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 September 30, 2002 and
December 31, 2001.
(in thousands) September 30, 2002 December 31, 2001
------------------- -----------------
Notes payable ............................. $ 213,716 $ 235,420
Group Trust warehouse facility and
lines of credit ......................... 70,781 65,318
Residential Funding warehouse facility .... 94,499 98,033
Bank lines of credit ...................... 10,000 13,521
Midland Multifamily Equity REIT Credit
Line .................................... 15,593 7,459
Other - 312
------------------- -----------------
Total ..................................... $ 404,589 $ 420,063
=================== =================
The Company's short- and long-term debt of $357.9 million and $213.4
million at September 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 ("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 ... 4,332 756 3,487 408 8,983
Distributions .......................... (4,332) (756) (3,487) (408) (8,983)
--------------- --------------- -------------- -------------- ---------------
Balance, September 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 $678.0 million and $501.4 million at September
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 nine months ended
September 30, 2002 and 2001.
For the three months ended September 30, 2002 For the three months ended September 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 .... $ 237 25,329,103 $ 0.01 $ 6,514 21,590,584 $ 0.30
============ ============
Effect of Dilutive Securities
Options and deferred shares .......... - 454,193 - 526,053
Convertible preferred shares to
the extent dilutive ................ - - 3 137,044
Earnings contingency ................. - 132,855 - 144,300
---------------- --------------- ------------ ----------------
Diluted EPS
Income allocable to common shares
plus assumed conversions .......... $ 237 25,916,151 $ 0.01 $ 6,517 22,397,981 $ 0.29
================ =============== ============ ============ ================ ============
For the nine months ended September 30, 2002 For the nine months ended September 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 .... $ 18,050 24,728,414 $ 0.73 $ 9,263 21,034,369 $ 0.44
============ ============
Effect of Dilutive Securities
Options and deferred shares .......... - 462,520 - 492,371
Convertible preferred shares to
the extent dilutive ................ - - 3 45,681
Earnings contingency ................. - 132,855 - 48,100
---------------- --------------- ------------ ----------------
Diluted EPS
Income allocable to common shares
plus assumed conversions .......... $ 18,050 25,323,789 $ 0.71 $ 9,266 21,620,521 $ 0.43
================ =============== ============ ============ ================ ============
For the three and nine months ended September 30, 2002 and 2001, the effect of
all potentially dilutive securities was included in the calculation.
NOTE 11 - DISTRIBUTIONS
On October 17, 2002 the Board of Directors declared a distribution of
$0.4400 for the three months ended September 30, 2002 to common shareholders of
record on October 28, 2002. The payment date was November 8, 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 nine months ended September 30, 2002 and 2001.
Municipal Mortgage & Equity, LLC
Segment Reporting
(in thousands) (unaudited)
For the three months ended September 30, 2002
---------------------------------------------------------------
Investing Operating Total
Segment Segment Adjustments Consolidated
------------ ------------ ------------- ---------------
INCOME:
Interest on tax-exempt bonds and
other bond-related investments .............................. $ 15,051 $ 358 $ - $ 15,409
Interest on loans ............................................... 837 7,839 - 8,676
Loan origination and brokerage fees ............................. - 2,206 (192)(1) 2,014
Syndication fees ................................................ - 767 - 767
Loan servicing fees ............................................. - 1,544 - 1,544
Interest on short-term investments .............................. 195 65 - 260
Other income .................................................... 265 116 - 381
Net gain (loss) on sales ........................................ 221 436 - 657
------------ ------------ ------------- ---------------
Total income ................................................ 16,569 13,331 (192) 29,708
------------ ------------ ------------- ---------------
EXPENSES:
Salaries and benefits ........................................... 215 5,231 - 5,446
Professional Fees ............................................... 129 338 - 467
Operating expenses .............................................. 356 1,817 - 2,173
Amortization of intangible assets ............................... - 334 - 334
Interest expense ................................................ 1,907 6,864 - 8,771
Other-than-temporary impairments related to investments in
tax-exempt bonds and other bond-related investments ......... - - - -
------------ ------------ ------------- ---------------
Total expenses .............................................. 2,607 14,584 - 17,191
------------ ------------ ------------- ---------------
Net holding gains (losses) on trading securities ................ (9,921) - - (9,921)
Net income (loss) before income taxes, income allocated to
preferred shareholders in a subsidiary company, and
cumulative effect of accounting change ...................... 4,041 (1,253) (192) 2,596
Income tax expense .............................................. - (635) - (635)
------------ ------------ ------------- ---------------
Net income (loss) before income allocated to preferred
shareholders in a subsidiary company and cumulative
effect of accounting change ................................. 4,041 (618) (192) 3,231
Income allocable to preferred shareholders in a subsidiary company 2,994 - - 2,994
------------ ------------ ------------- ---------------
Net income (loss) before cumulative effect of accounting
change ...................................................... 1,047 (618) (192) 237
Cumulative effect on prior year changes in accounting for
derivative financial instruments ............................ - - - -
------------ ------------ ------------- ---------------
Net income (loss) ............................................... $ 1,047 $ (618) $ (192) $ 237
============ ============ ============= ===============
Municipal Mortgage & Equity, LLC
Segment Reporting
(in thousands) (unaudited)
For the nine months ended September 30, 2002
----------------------------------------------------------------
Investing Operating Total
Segment Segment Adjustments Consolidated
------------- ------------ -------------- ---------------
INCOME:
Interest on tax-exempt bonds and
other bond-related investments .............................. $ 43,753 $ 2,217 $ - $ 45,970
Interest on loans ............................................... 2,517 23,183 - 25,700
Loan origination and brokerage fees ............................. 750 5,969 (2,111) (1) 4,608
Syndication fees ................................................ - 4,765 - 4,765
Loan servicing fees ............................................. - 5,112 - 5,112
Interest on short-term investments .............................. 830 161 - 991
Other income .................................................... 734 3,729 - 4,463
Net gain (loss) on sales ........................................ 1,217 2,309 - 3,526
------------- ------------ -------------- ---------------
Total income ................................................ 49,801 47,445 (2,111) 95,135
------------- ------------ -------------- ---------------
EXPENSES:
Salaries and benefits ........................................... 1,833 14,370 - 16,203
Professional Fees ............................................... 460 1,616 - 2,076
Operating expenses .............................................. 1,110 5,481 - 6,591
Amortization of intangible assets ............................... - 985 - 985
Interest expense ................................................ 6,421 19,809 - 26,230
Other-than-temporary impairments related to investments in
tax-exempt bonds and other bond-related investments ......... 110 - - 110
------------- ------------ -------------- ---------------
Total expenses .............................................. 9,934 42,261 - 52,195
------------- ------------ -------------- ---------------
Net holding gains (losses) on trading securities ................ (14,530) - - (14,530)
Net income (loss) before income taxes, income allocated to
preferred shareholders in a subsidiary company, and
cumulative effect of accounting change ...................... 25,337 5,184 (2,111) 28,410
Income tax expense .............................................. - 1,224 - 1,224
------------- ------------ -------------- ---------------
Net income (loss) before income allocated to preferred
shareholders in a subsidiary company and cumulative
effect of accounting change ................................. 25,337 3,960 (2,111) 27,186
Income allocable to preferred shareholders in a subsidiary company 8,983 - - 8,983
------------- ------------ -------------- ---------------
Net income (loss) before cumulative effect of accounting
change ...................................................... 16,354 3,960 (2,111) 18,203
Cumulative effect on prior year changes in accounting for
derivative financial instruments ............................ - - - -
------------- ------------ -------------- ---------------
Net income (loss) ............................................... $ 16,354 $ 3,960 $ (2,111) $ 18,203
============= ============ ============== ===============
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
(in thousands) (unaudited)
For the three months ended September 30, 2001
---------------------------------------------------------------
Investing Operating Total
Segment Segment Adjustments Consolidated
------------ ------------ -------------- ----------------
INCOME:
Interest on tax-exempt bonds and
other bond-related investments .............................. $ 11,393 $ 760 $ - $ 12,153
Interest on loans ............................................... 757 7,704 - 8,461
Loan origination and brokerage fees ............................. - 1,289 (89 (1) 1,200
Syndication fees ................................................ - 1,726 - 1,726
Loan servicing fees ............................................. - 1,659 - 1,659
Interest on short-term investments .............................. 308 179 - 487
Other income .................................................... - 1,843 - 1,843
Net gain (loss) on sales ........................................ 2,227 2,533 - 4,760
------------ ------------ -------------- ----------------
Total income ................................................ 14,685 17,693 (89) 32,289
------------ ------------ -------------- ----------------
EXPENSES:
Salaries and benefits ........................................... 437 5,090 - 5,527
Professional Fees ............................................... 273 841 - 1,114
Operating expenses .............................................. 183 1,698 - 1,881
Amortization of intangible assets ............................... - 694 - 694
Interest expense ................................................ 1,551 6,322 - 7,873
Other-than-temporary impairments related to investments in
tax-exempt bonds and other bond-related investments ......... - - - -
------------ ------------ -------------- ----------------
Total expenses .............................................. 2,444 14,645 - 17,089
------------ ------------ -------------- ----------------
Net holding gains (losses) on trading securities ................ (4,670) - - (4,670)
Net income (loss) before income taxes, income allocated to
preferred shareholders in a subsidiary company, and
cumulative effect of accounting change ...................... 7,571 3,048 (89) 10,530
Income tax expense .............................................. - 805 - 805
------------ ------------ -------------- ----------------
Net income (loss) before income allocated to preferred
shareholders in a subsidiary company and cumulative
effect of accounting change ................................. 7,571 2,243 (89) 9,725
Income allocable to preferred shareholders in a subsidiary company 2,606 - - 2,606
------------ ------------ -------------- ----------------
Net income (loss) before cumulative effect of accounting
change ...................................................... 4,965 2,243 (89) 7,119
Cumulative effect on prior year changes in accounting for
derivative financial instruments ............................ - - - -
------------ ------------ -------------- ----------------
Net income (loss) ............................................... $ 4,965 $ 2,243 $ (89) $ 7,119
============ ============ ============== ================
Municipal Mortgage & Equity, LLC
Segment Reporting
(in thousands) (unaudited)
For the nine months ended September 30, 2001
-------------------------------------------------------------
Investing Operating Total
Segment Segment Adjustments Consolidated
------------ ------------- -------------- --------------
INCOME:
Interest on tax-exempt bonds and
other bond-related investments .............................. $ 34,135 $ 1,997 $ - $ 36,132
Interest on loans ............................................... 1,883 23,527 - 25,410
Loan origination and brokerage fees ............................. - 3,382 (509) (1) 2,873
Syndication fees ................................................ - 5,276 - 5,276
Loan servicing fees ............................................. - 5,020 - 5,020
Interest on short-term investments .............................. 1,562 620 - 2,182
Other income .................................................... - 8,493 - 8,493
Net gain (loss) on sales ........................................ 2,227 4,678 - 6,905
------------ ------------- -------------- --------------
Total income ................................................ 39,807 52,993 (509) 92,291
------------ ------------- -------------- --------------
EXPENSES:
Salaries and benefits ........................................... 1,199 13,803 - 15,002
Professional Fees ............................................... 771 1,947 - 2,718
Operating expenses .............................................. 645 4,917 - 5,562
Amortization of intangible assets ............................... - 2,015 - 2,015
Interest expense ................................................ 4,638 18,830 - 23,468
Other-than-temporary impairments related to investments in
tax-exempt bonds and other bond-related investments ......... - 3,256 - 3,256
------------ ------------- -------------- --------------
Total expenses .............................................. 7,253 44,768 - 52,021
------------ ------------- -------------- --------------
Net holding gains (losses) on trading securities ................ (8,263) - - (8,263)
Net income (loss) before income taxes, income allocated to
preferred shareholders in a subsidiary company, and
cumulative effect of accounting change ...................... 24,291 8,225 (509) 32,007
Income tax expense .............................................. - 1,032 - 1,032
------------ ------------- -------------- --------------
Net income (loss) before income allocated to preferred
shareholders in a subsidiary company and cumulative
effect of accounting change ................................. 24,291 7,193 (509) 30,975
Income allocable to preferred shareholders in a subsidiary company 7,818 - - 7,818
------------ ------------- -------------- --------------
Net income (loss) before cumulative effect of accounting
change ...................................................... 16,473 7,193 (509) 23,157
Cumulative effect on prior year changes in accounting for
derivative financial instruments ............................ (12,277) - - (12,277)
------------ ------------- -------------- --------------
Net income (loss) ............................................... $ 4,196 $ 7,193 $ (509) $ 10,880
============ ============= ============== ==============
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 third quarter of 2002 decreased $2.6 million over the
same period last year due primarily to the following changes: (1) a $3.5 million
increase in collections of interest on bonds, other bond-related investments,
other notes and loans; (2) a $0.2 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 lower investment yields on larger average balances held
in margin collateral accounts; (3) a $1.5 million decrease in other income due
primarily to a $1.2 million increase in losses from the CAPREIT investment and a
decrease in cancellation, late and other fees; and (4) a $4.1 million decrease
in gain on sales due primarily to a $0.8 million decrease in gain related to
capitalized mortgage servicing rights, a $1.2 million gain on a tax credit
equity re-syndication in the third quarter of 2001 and a $2.2 million gain from
the pay-off of the Newport-on-Seven bond in the third quarter of 2001.
Total expenses for the third quarter of 2002 increased $0.1 million over
the same period last year due primarily to the following changes: (1) a $0.6
million decrease in professional fees due primarily to a $0.4 million adjustment
to reflect capitalization of legal expenses related to new securitization
programs and a $0.2 million decrease in fees related to information systems
initiatives, as compared with the prior-year period; (2) a $0.3 million increase
in operating expenses due primarily to software hosting expenses that began in
January 2002; (3) a $0.4 million decrease in amortization expense due to changes
in accounting guidelines relating to amortization of goodwill; and (4) a $0.9
million increase in interest expense primarily associated with 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 $9.9 million for the third
quarter of 2002.
Income tax expense decreased $1.4 million for the third quarter of 2002
over the same period last year due primarily to the tax benefits derived from
the tax deductions generated by the Company's equity investment in the CAPREIT
venture. These deductions result from depreciation expenses generated by the
underlying real estate properties that collateralize the Company's CAPREIT
investment.
Year-to-Date Analysis
Total income for the nine months ended September 30, 2002 increased $2.8
million over the same period last year due primarily to the following changes:
(1) a $10.1 million increase in collections of interest on bonds, other
bond-related investments, other notes and loans; (2) a $1.2 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 lower investment yields on larger
average balances held in margin collateral accounts; (3) a $1.2 million increase
in loan origination and brokerage fees due to a $1.7 million increase in
origination fees offset by a $0.5 million decrease in syndication fees related
to tax credit equity transactions; (4) a $4.0 million decrease in other income
primarily due to a $4.3 million increase in losses from the CAPREIT investment
and a $0.4 million decrease in cancellation, late and other fees offset by an
increase of $0.7 million in asset management and advisory fees; and (5) a $3.4
million decrease in gain on sales due primarily to a $2.3 million gain on tax
credit equity re-syndications in 2001 and a $2.2 million gain from the pay-off
of the Newport-on-Seven bond in 2001 offset by a $1.0 million gain in the first
quarter of 2002 on the sale of an investment in RITES.
Total expenses for the nine months ended September 30, 2002 increased $0.2
million over the same period last year due primarily to the following changes:
(1) a $1.2 million increase in salary and related benefits expense associated
with 2001 new hires; (2) a $0.6 million decrease in professional fees due
primarily to a $0.4 million adjustment to reflect capitalization of legal
expenses related to new securitization programs and a decrease in fees related
to information systems initiatives, as compared with the prior-year period; (3)
a $1.0 million increase in other operating expenses driven primarily by
deployment of accounting information systems and other upgrades in technology
infrastructure; (4) a $1.0 million decrease in amortization expense due to
changes in accounting guidelines relating to amortization of goodwill; (5) a
$2.8 million increase in interest expense primarily associated with an increase
in financing costs associated with on-balance sheet securitizations; and (6) 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 $14.5 million for the nine
months ended September 30, 2002.
Income tax expense increased $0.2 million for the nine months ended
September 30, 2002 over the same period last year due primarily to a decrease
in the deferred tax benefit relating to tax credits partially offset by a
decrease in current tax expense as a result of tax benefits derived from the tax
deductions generated by the Company's equity investment in the CAPREIT venture.
These deductions result from depreciation expenses generated by the underlying
real estate properties that collateralize the Company's CAPREIT investment.
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, and several pension funds, the
Company has expanded its access to capital. Additional capital is necessary for
the Company's continued growth. While the Company is actively seeking to
increase capital commitments from those pension funds and to establish new
pension fund and commercial bank financing relationships, there can be no
assurance that such financing capacity, will be available when needed, nor can
there be any assurance that the Company's current capital providers will renew
their existing financing commitments as they mature, or that the Company will be
able to raise funds through equity offerings.
During the third quarter of 2002, the Company purchased an interest in an
additional $15.8 million tax-exempt issue known as Park at Landmark and
collaborated with Fannie Mae on two rated tax-exempt transactions totaling $12.0
million. The Company retained a $10,000 investment in these transactions.
In addition, the Company originated $113.2 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 $114.7 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 $39.2 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.
New securitization program
In order to diversify its access to financing through securitization
programs, in September 2002 the Company entered into a new securitization
program with MBIA Insurance Corporation ("MBIA"), as the provider of credit
enhancement; Goldman, Sachs & Co., as remarketing agent; and Bayerische
Landesbank, as liquidity provider. Similar to the Company's other securitization
programs, through this program the Company securitizes assets by depositing
bonds into a trust. The trust issues senior and subordinate certificates and the
Company receives cash proceeds from the sale of the senior certificates and
retains the subordinate certificates. The interest rate on the senior
certificates is reset weekly by the remarketing agent. To increase the
attractiveness of the senior certificates to investors, MBIA provided 7-year
credit enhancement in the form of a surety bond that guarantees all interest and
principal payments on the senior certificates. Goldman, Sachs & Co., acting as
remarketing agent, will sell the senior certificates to investors. A group of
liquidity banks, led by Bayerische Landesbank, provides liquidity to the senior
certificates. Liquidity advances will be used to provide bridge funding for the
redemption of senior certificates tendered upon a failure to remarket senior
certificates or in the event of other mandatory tender events.
The Company accomplished its goal of diversifying its use of securitization
facilities by repurchasing approximately $134.5 million in outstanding Puttable
Floating Option Tax-Exempt Receipts ("P-FLOATssm") issued through the Company's
securitization program with Merrill Lynch Pierce Fenner & Smith Incorporated
("Merrill Lynch"). Merrill Lynch then collapsed the related P-FLOATssm trusts
and returned the underlying bonds to the Company. The Company then deposited a
mix of bonds, including some bonds previously in the P-FLOATssm program, into
the new MBIA-Goldman securitization trusts. The MBIA-Goldman trusts issued
$147.0 million of variable-rate senior trust certificates (known as Tender
Option Certificates, or "TOCs") and $4.2 million of variable-rate subordinated
certificates (known as Trust Inverse Certificates, or "TICs"). The net cash
proceeds to the Company upon completion of this transaction approximated $11.1
million, which represents $147.0 million in proceeds from the sale of the senior
certificates less $134.5 million for the repurchase of senior certificates in
the P-FLOATssm program and $1.4 million in debt issue costs. In addition, the
Company retained an investment in the $4.2 million TICs.
This transaction was accounted for in accordance with Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". As a result of certain
call provisions available to the subordinate certificate holders, the Company
has accounted for this transaction as a secured borrowing. Accordingly, the
Company recorded the senior certificates as short-term debt and the trust assets
are included in investment in tax-exempt bonds. In conjunction with the
recording of the short-term debt, the Company capitalized $1.4 million in debt
issue costs. The Company is amortizing these debt issue costs over the life of
the facility, based on the amount of outstanding debt, using the effective
interest method.
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 the total amount of third party owned senior interests 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 54% and 53% at
September 30, 2002 and at December 31, 2001, respectively. By comparison, the
Company's leverage ratio as calculated based on the Company's on-balance sheet
debt was 51% and 49% at September 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 September 30, 2002 and December 31, 2001, the
total carrying amount of the tax-exempt bonds and taxable loans pledged as
collateral was $398.6 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, except as
discussed above under New Securitization Program.
Factors That Could Affect Future Results
The Company's 2001 Form 10-K contains a complete description of the 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 September 30, 2002 the Company had cash and cash equivalents of
approximately $37.9 million.
Cash flow from operating activities was $39.2 million and $37.4 million for
the nine months ended September 30, 2002 and 2001, respectively. The increase in
cash flow from operations is due primarily to a decrease in other receivables
from advances to tax credit equity funds. Other receivables from advances to tax
credit equity funds decreased as a result of the Company beginning to make
direct equity investments in real estate partnerships beginning in the fourth
quarter of 2001, rather than making advances to tax credit equity funds, who in
turn, made investments in real estate operating partnerships.
The Company uses CAD as the primary measure of its ability to pay
distributions. CAD differs from net income because of slight variations between
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% 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 September 30, 2002 and
2001, cash available for distribution to common shares was $12.8 million and
$10.3 million, respectively. The Company's distribution per common share for the
three months ended September 30, 2002 of $0.44 represents a payout ratio of 87%
of CAD. The Company's common share distribution for the three months ended
September 30, 2001 of $0.43 represents a payout ratio of 90% of CAD.
The following table reconciles the Company's GAAP net income to CAD for
three months ended September 30, 2002 and 2001:
For the three months ended For the three months ended
September 30, 2002 September 30, 2001
----------------------- -----------------------
Net income allocated to common shares - GAAP Basis ......... $ 237 $ 6,514
======================= =======================
Conversion to Cash Available for Distribution:
Mark to market adjustments ................................ $ 9,921 $ 4,670
CAPREIT investments ....................................... 3,248 434
Net gain on sales ......................................... (450) (3,258)
Amortization of capitalized mortgage servicing fees ....... 334 336
Amortization of intangibles ............................... - 357
Origination fees and other income, net .................... 53 789
Deferred tax (benefit) expense ............................ (462) 504
----------------------- -----------------------
Cash Available for Distribution (CAD) ...................... $12,881 $ 10,346
======================= =======================
Regular cash distributions to shareholders, for the three months ended
September 30, 2002 and 2001, were $11.2 million and $9.7 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.
Item 4. Controls and Procedures
- -------------------------------
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c)
and 15d-14(c) of the Securities and Exchange Act of 1934 (the "Exchange Act").
These rules refer to the controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized
and reported within required time periods. Our Chief Executive Officer and our
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of a date within 90 days before the filing of this
quarterly report (the "Evaluation Date"), and they have concluded that, as of
the Evaluation Date, such controls and procedures were effective at ensuring
that required information will be disclosed on a timely basis in our reports
filed under the Exchange Act.
(b) Changes in internal controls
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the quarter ended September 30, 2002, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits:
99 Officers' Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
On October 21, 2002, the Company filed a Form 8-K containing the
supplemental information reported to security analysts for the three
months ended September 30, 2002.
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)
DATE: November 13, 2002
CERTIFICATIONS
I, William S. Harrison, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Municipal
Mortgage & Equity, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002
___/s/ William S. Harrison____________
Name: William S. Harrison
Title: Chief Financial Officer
I, Mark K. Joseph, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Municipal
Mortgage & Equity, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002 ___/s/ Mark K. Joseph _______________
Name: Mark K. Joseph
Title: Chief Executive Officer
EXHIBIT 99
Officers' Certificate
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned officers of Municipal Mortgage & Equity, LLC, a
Delaware limited liability company (the "Company"), hereby certifies that (i)
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 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 Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 2002 fairly presents, in all material respects, the financial condition and
results of operations of the Company, at and for the periods indicated.
Date: November 11, 2002 ___/s/ Mark K. Joseph _______________
Name: Mark K. Joseph
Title: Chief Executive Officer and
Chairman of the Board
___/s/ William S. Harrison____________
Name: William S. Harrison
Title: Senior Vice President and
Chief Financial Officer