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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 001-11981
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
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(Exact name of Registrant as specified in its charter)
Delaware 52-1449733
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
218 North Charles Street, Suite 500 Baltimore, Maryland 21201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 962-8044
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Growth Shares American Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: Preferred Shares
Preferred Capital Distribution Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [x]
The aggregate market value of the registrant's Growth Shares held by
non-affiliates of the registrant as of March 18, 1997 (computed by reference
to the closing price of such stock on the American Stock Exchange)
was $176,579,711.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of the Registrant's definitive
Proxy Statement regarding the 1997 Annual
Meeting of Shareholders Part III
Part I
Item 1. Business.
Introduction
Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage
revenue bonds issued by state and local government authorities to finance
multi-family housing developments. The Company, a Delaware limited
liability company, is the successor to the business of SCA Tax Exempt Fund
Limited Partnership (the "Partnership"), a closed-end limited partnership that
was merged into the Company on August 1, 1996. As a limited liability
company, the Company combines the limited liability, governance and
management characteristics of a corporation with the pass-through income
features of a partnership.
The Partnership commenced operations in 1986, when it sold two
series of Beneficial Assignee Certificates ("BACs"), representing the
assignment of its limited partnership interests. The $296 million proceeds
therefrom were invested in 22 mortgage revenue bonds (the "original bonds")
and related working capital loans held in two separate pools, "Series I" and
"Series II," corresponding with the related series of BACs. In a February
1995 financing (the "Financing"), the Partnership raised $67.7 million
through the sale of multifamily revenue bond receipts (the "Receipts")
secured by newly refunded bonds issued in exchange for 11 of the original
bonds and the cash stream from one additional bond. The $67.7 million of
Financing proceeds of which $5.0 million was invested in demand notes and
the remaining proceeds, after expenses and working capital reserves, of $56.8
million are being used for further investment in mortgage revenue bonds.
The refunding of the 11 original bonds (the "Refunding") consisted of the
exchange of $126.6 million aggregate principal amount of the original bonds
for $67.7 million of Series A bonds, which serve as the collateral for the
receipts, and $58.9 million of Series B bonds, which continued to be held by
the Partnership along with the $130.6 million aggregate principal amount of
the remaining 11 original bonds.
In connection with the August 1, 1996 merger of the Partnership into
the Company (the "Merger"), the Partnership's BAC holders were given the
opportunity to elect among three different securities of the Company for
which to exchange their BACs Preferred Shares, Preferred Capital
Distribution Shares, or Growth Shares. The Preferred Shares were
structured to give BAC holders a security substantially the same as their
BACs as if the Financing had not occurred and thus participate in their pro
rata share of income from the 22 original bonds as they existed immediately
after the Refunding and before the Financing. The Preferred Capital
Distribution Shares (the "Preferred CD Shares") were structured to give their
holders the income they would have received from their original BACs, but
provided for a distribution of their pro rata share of the proceeds of the
Financing and thus participate in their share of income from the 22 original
bonds as they existed immediately after the Refunding and Financing. The
Growth Shares, unlike either the Preferred Shares or Preferred CD Shares,
were structured to enable their holders to participate in all of the income from
investment of the proceeds of the Financing, as well as future financings, in
addition to their pro rata share of the income from the original bonds as they
existed immediately after the Financing. As a result of the election process,
the holders of 8.09% of the outstanding BACs received Preferred Shares, the
holders of 4.29% of the outstanding BACs received Preferred CD Shares,
and the holders of 86.62% of the outstanding BACs received Growth Shares
of the Company.
Until the Merger, the bonds held by the Partnership consisted solely
of the 22 original bonds purchased with the proceeds from the Partnership's
1986 BAC offerings, as refunded in connection with the Financing. Since the
Merger, the Company has been investing the proceeds from the Financing in
additional bonds and other bond related investments and had invested $28.8
million of such proceeds as of December 31, 1996. The Company intends,
as market conditions warrant, to seek additional funds for bond investment
through future debt or equity financings. The Company's current policy is
to invest generally in bonds secured by properties having an operating
history, which are available both through purchase from their existing holders
and in connection with refinancings of existing properties.
The Company's business may be affected by changes in the interest
rate environment in a variety of ways. For example, the stock price of the
Company's Growth Shares may be affected by increases and decreases in
interest rates. In addition, the Company's ability to raise and invest capital
in new bond investments may be impacted by volatility in the interest rate
environment.
The Mortgage Revenue Bonds
The proceeds of the mortgage revenue bonds held by the Company
were used to make mortgage loans for the construction, acquisition or
refinancing of multifamily housing developments throughout the United
States. The underlying developments are "qualified residential rental
properties" under section 142(d) of the Internal Revenue Code of 1986, as
amended (the "Code"), which requires that a specified percentage of their
rental units be rented to persons whose incomes do not exceed specified
percentages of local median income levels. Accordingly, the bonds are
"qualified bonds" within the meaning of section 141(e) of the Code, and the
interest paid on the bonds is exempt from federal income taxes.
The Company also holds certain working capital loans and related
demand notes, the interest on which (representing approximately 8.0% of
interest received by the Company in 1996) is not tax-exempt.
Each mortgage revenue bond is secured by an assignment to the
Company of the related mortgage loan, which in turn is secured by a
mortgage on the underlying property and assignment of rents. Although the
bonds are issued by state or local governments or their agencies or
authorities, the bonds are not general obligations of any state or local
government, no government is liable under the bonds, nor is the taxing power
of any government pledged to the payment of principal or interest under the
bonds. In addition, the underlying mortgage loans are nonrecourse, which
means that the owners of the underlying properties, which are also the
borrowers under the mortgage loans, are not liable for the payment of
principal and interest under the loans. Accordingly, the sole source of funds
for payment of principal and interest under the bonds is the revenue derived
from operation of the mortgaged properties and amounts derived from the
sale, refinancing or other disposition of such properties.
The Company's bond portfolio as of December 31, 1996 consisted
of (i) the 11 original bonds that were not refunded in connection with the
1995 Financing, (ii) the 11 Series B bonds resulting from the refunding of the
remaining 11 original bonds, and (iii) one whole bond, four Series A bonds,
three Series B bonds and one bond related investment (the "RITES"),
discussed more fully in Note 5 to the Company's consolidated financial
statements included herein, all acquired with proceeds from the Financing.
The Company's Preferred Shares, Preferred CD Shares, and Growth Shares
all participate in the income from the 11 original bonds and the 11 refunded
Series B bonds. The Preferred Shares, because they have been structured so
that their holders are allocated the income they would have been allocated
had the Financing not occurred, are allocated an additional amount equal to
the income generated by their pro rata portion of the 11 refunded Series A
bonds that serve as the collateral for the Receipts issued in the Financing and
are no longer included in the Company's bond portfolio. Only the Growth
Shares participate in the income from the eight bonds and the RITES
acquired with proceeds from the Financing and will participate in the income
generated by additional bonds acquired by the Company in the future. See
Item 5 of this report for a description of each class of the Company's shares.
The 11 original bonds not refunded in connection with the Financing,
aggregating $130.6 million in principal amount, are "participating" bonds that
provide for the payment of base interest, ranging from 7.5% to 8.125% per
annum, plus annual contingent interest, dependent upon the cash flow of the
mortgaged property, equal to the difference between the base interest rate
and 16%. Such contingent interest, is payable from 100% of "project cash
flow" until the non-compounded interest payable is between 1.5% to 2.5%
greater than the base interest rate. Any remaining project cash flow is
divided equally between the property owner and the Company until the
interest paid to the Company reaches 16%. "Project cash flow" is defined
generally as the annual revenues received by the owner of the related
mortgaged property, less operating expenses paid from such revenues
excluding contingent interest payable. To the extent that the aggregate of all
interest payments, including contingent interest, for any year does not equal
16%, the deficiency is deferred until the mortgaged property is sold or the
mortgage loan repaid. Any deferred contingent interest is payable from
100% of sale or other proceeds remaining after payment of the mortgage loan
principal and other specified payments until the base rate plus 1.5% to 2.5%
has been paid and thereafter from 50% of such proceeds. The 11 original
bonds mature between November 1999 and June 2012.
Of the 11 refunded Series B bonds, eight bonds, aggregating $46.5
million in principal amount, bear annual interest in an amount equal to the
greater of (i) 3% and (ii) available cash flow not exceeding 16%. To the
extent interest paid is less than 16%, the deficiency, defined as the difference
between 16% and the greater of (i) 3% and (ii) interest paid, is payable upon
the earlier of the redemption or maturity of the bond. The remaining three
refunded Series B bonds, aggregating $12.4 million in principal amount, bear
interest at the annual rate of 16%. Each of the refunded Series B bonds is
subordinate in priority and right of payment to the related refunded Series A
bond that serves as collateral for the Receipts issued in the Financing. The
refunded Series A bonds bear interest at annual rates between 7.05% and
7.40% and are secured by the same mortgaged properties as the related
refunded Series B bonds held by the Company. All of the refunded Series B
bonds mature in January 2030.
Of the eight bonds and the RITES acquired with proceeds from the
Financing, aggregating $29.1 million in principal amount, one $1.5 million
bond bears interest to the extent of available cash flow up to 10% per annum,
the remaining bonds are non-participating bonds bearing interest at annual
rates ranging from 7.45% to 12.50% and the RITES in conjunction with a
swap contract are intended to produce a relatively constant yield of
approximately 8.5% over the effective duration of the RITES. The eight
bonds mature between December 2015 and July 2026.
For further information concerning the terms of the individual bonds
and the related working capital loans and demand notes held by the
Company, see Notes 5 and 6 to the Company's consolidated financial
statements included elsewhere herein.
Property Performance
The 22 original bonds held by the Partnership at the time of the 1995
Financing had been acquired by the Partnership in 1986 and 1987. Due to a
variety of factors, including the favorable investment climate for rental real
estate in the early 1980s, the ready availability of financing from thrifts and
institutional lenders, and the decision of many developers to take advantage
of favorable tax treatment for rental properties, unanticipated over building
of apartments occurred during the late 1980s in many localities throughout
the country. This oversupply affected a number of the markets in which the
mortgaged properties collateralizing the original bonds are located. Where
this condition existed, there was, until the early 1990s, an inability to
increase rents as originally anticipated because of the considerable
competition. In addition, the general economic recession that occurred in 1990
and continued into 1992 compounded the problems created by an oversupply of
apartment units in some markets. Consequently, the net cash flow from most of
the properties was insufficient to pay the base interest due, causing the former
managing general partner to draw funds from project level sources such as
reserves and guarantees or to declare monetary defaults and initiate loan
workout discussions in instances where no project level sources existed.
Construction starts for new apartment units declined significantly
throughout the United States since the mid-1980s and fell to a
record low in 1993. This decline in new construction and the economic
recovery brought about tightening markets, stabilized and higher
occupancies, and an ability to realize greater rent increases. Apartment
starts have increased since 1993, but overbuilding is anticipated in only
a handful of markets. Aggregate occupancy for all of the properties
collateralizing the Company's bonds was 94.5% for 1996. The aggregate occupancy
for retirement and elderly properties was 96.8% for 1996, compared with
95.0% for 1995.
The following table provides certain information for the year ended
December 31, 1996 with respect to the properties and the mortgage loans
underlying the bonds held by the Company. The information provided with
respect to the cash flows generated from property operations, as defined, is
not necessarily indicative of the amount of debt service paid to the Company.
Cash flow from property operations as presented is before debt service paid
on the refunded Series A bonds no longer held by the Company and certain
financing costs. Debt service paid to the Company by the borrowers
includes, but is not limited to, swap income, guarantor payments and other
investment sources.
Cash Flow
Carrying from Property Debt
Value at Average Operations (1) Service
# Rental December 31, 1996 Annual (unaudited) Paid (2)
Mortgaged Property/Location units (000s) Occupancy (000s) (000s)
- -------------------------------- --------- --------------- ------------- -------------- --------------
Participating Bonds
Alban Place (3) 194 $9,292 93.4% $889 $793
Frederick, MD
Creekside Village (3) 296 7,516 96.0% 828 788
Sacramento, CA
Emerald Hills (3) 130 7,180 97.4% 632 521
Issaquah, WA
Lakeview Garden (3) 180 5,772 90.5% 457 351
Dade County, FL
Newport-on-Seven (3) 167 8,516 97.0% 738 582
St. Louis Park, MN
North Pointe (3) 540 14,274 90.9% 1,285 1,107
San Bernardino, CA
Northridge Park II (3) 128 5,856 93.9% 573 661
Salinas, CA
Riverset Apartments (3) 352 19,560 97.0% 1,756 1,496
Memphis, TN
Southfork Village (3) 200 11,712 96.9% 1,027 907
Lakeville, MN
Villa Hialeah (3) 245 7,641 92.5% 772 807
Hialeah, FL
Willowgreen (3) 241 6,757 92.6% 601 547
Fife, WA
Non-Participating Bonds
Riverset II 148 8,048 97.1% 817 701 (4)
Memphis, TN
Charter House 280 7,714 90.4% 557 30
Johnson Co., KS
Hidden Valley 82 1,659 93.2% 148 8
Kansas City, MO
Oakbrook 170 3,256 91.5% 470 14
Topeka, KS
Torries Chase 99 2,100 88.2% 273 9
Johnson Co., KS
Cash Flow
Carrying from Property Debt
Value at Average Operations (1) Service
# Rental December 31, 1996 Annual (unaudited) Paid (2)
Mortgaged Property/Location units (000s) Occupancy (000s) (000s)
- -------------------------------- --------- --------------- ------------- -------------- --------------
Participating Subordinate Bonds
Barkley Place (3) 156 2,928 95.7% 922 309
Fort Myers, FL
Gilman Meadows (3) 125 3,494 98.7% 639 222
Issaquah, WA
Hamilton Chase (3) 300 4,918 97.1% 1,184 537
Chattanooga, TN
Mallard Cove I (3) 63 944 97.6% 156 136
Everett, WA
Mallard Cove II (3) 135 2,849 95.7% 455 233
Everett, WA
The Meadows (3) 200 4,435 97.2% 669 406
Memphis, TN
The Montclair (3) 159 4,489 98.5% 1,425 696
Springfield, MO
Newport Village (3) 220 4,874 90.7% 784 235
Thornton, CO
Nicollet Ridge (3) 339 6,648 93.7% 1,218 873
Burnsville, MN
Steeplechase Falls (3) 450 8,213 91.2% 1,561 511
Knoxville, TN
Whispering Lake (3) 384 5,961 94.8% 1,437 662
Kansas City, MO
Riverset II (6) 913 (6) (6) 25 (5)
Memphis, TN
Non-Participating Subordinate Bonds
Independence Ridge 336 1,045 93.8% 944 45
Jackson County, MO
Locarno 110 675 97.6% 551 29
Kansas City, MO
Other Bond Related Investments
Hunters Ridge and South Pointe (the
"RITES" including interest rate swap)
St. Louis Co., MO N/A 4,393 N/A N/A 68
---------------
$183,632
===============
(1) Cash flow from property operations represents revenues less operating expenses and capital expenditures before amounts
paid on all debt service including Series A bonds and certain financing costs.
(2) Represents debt service paid to the Company. Debt service paid by the properties includes amounts from additional sources
including, but is not limited to, swap income, guarantor payments, and other investment sources.
(3) One of the original 22 bonds.
(4) Includes approximately $376,000 of income received by the Company through other investment sources.
(5) Includes approximately $25,000 of income received by the Company through other investment sources.
(6) See description under non-participating bonds described above.
Asset Management
The Company is responsible for a full range of loan
servicing and asset management functions for each mortgaged
property underlying the mortgage revenue bonds held by the
Company. The Company monitors the timely receipt of all debt
service payments and promptly notifies a borrower of any
delinquency, deficiency, or default. Reporting systems are in
place which allow the Company to review and analyze the
revenue, expenses, and leasing activity of each property on a
monthly basis. In addition, the Company inspects each property
and market area at least annually.
The loan servicing and asset management oversight is
designed to enable the Company to track the performance of each
property and to alert management to potential problems. While
actions will vary depending upon the nature of an individual
problem, the Company generally notifies borrowers of any
problems or concerns and recommends corrective action.
The Company responds to defaults on mortgage revenue
bonds on a case-by-case basis. After sending requisite default
notices, Company management typically holds discussions with
the property owner/developer. In the event that management
determines that the owner/developer remains committed to the
project and capable of successful operations, a workout or other
forbearance arrangement may be negotiated. Where management
determines that successful operation by the current
owner/developer is not feasible, negotiations for the transfer of
a deed, in lieu of foreclosure, to an affiliated entity may be
undertaken. In the absence of operating deficit guarantees, the
Company may face additional risk from operations with respect
to properties so transferred, which may require subsidies from
Company reserves to cover potential operating deficits before
debt service. The Company does not currently anticipate that any
such operating deficits before debt service will occur.
Employees
As of December 31, 1996, the Company had 13 employees.
Item 2. Properties.
The registrant has no physical properties, as its assets
consist primarily of the mortgage revenue bonds described under
Item 1 and certain related loans described in Note 6 to the
Company's consolidated financial statements included elsewhere
herein.
Item 3. Legal Proceedings.
On November 8, 1996, the class action entitled Gerald J.
Osher v. SCA Realty, Inc., described in previous reports, was
terminated upon the approval of the final settlement of the action
in which the Partnership agreed to certain modifications to the
terms of the Merger and the disclosures in connection with the
solicitation of consents thereto.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's
shareholders during the three months ended December 31, 1996.
Part II
Item 5. Market for Registrant's Equity Securities and Related
Stockholder Matters
Since August 30, 1996, the Growth Shares have been traded
on the American Stock Exchange under the symbol "MMA." The
following table sets forth the high and low sale prices per share of the
Growth Shares as reported by the American Stock Exchange for each
calendar quarter since the commencement of trading, together with the
distributions declared with respect to such shares allocable to such
period.
Distribution
High Low Declared
-------- -------- ------------
1996
Third Quarter (beginning
August 30) $16 1/8 $13 5/8 $ -
Fourth Quarter 16 3/4 13 7/8 0.6325 *
1997
First Quarter (through
March 18) 18 15 3/8 -
* This amount represents a $0.07 distribution for the one month ended July 31,
1996 from the former Partnership and a $0.5625 distribution for the five
months ended December 31, 1996 from the Company. Also, the affiliates of
the former Managing Partner of the Partnership who received Growth Shares
in the Merger did not receive the July 1996 distribution paid to Growth
Shares since they were not holders in July 1996.
As of March 18, 1997, there were 11,052 holders of record of Growth Shares.
The Preferred Shares and the Preferred CD Shares are not listed for
trading on any national securities exchange, and there is no established public
trading market for those shares. As of March 18, 1997, there were 1,355 and
703 holders of record of Preferred Shares and Preferred CD Shares,
respectively.
Description of Shares
As of December 31, 1996 there were outstanding 23,966 Preferred
Shares (16,329 Series I and 7,637 Series II), 12,718 Preferred CD Shares
(8,909 Series I and 3,809 Series II), 2,000 Term Growth Shares, and
11,092,370 Growth Shares. Shareholder approval may not be required for
the Company to issue additional shares in the future. Although the Company
will not issue additional Preferred Shares or Preferred CD Shares, it may
from time to time issue additional Growth Shares depending upon market
conditions. In addition, the Company is authorized to issue new classes of
shares, which may be senior to the Growth Shares but cannot be senior to the
Preferred Shares or Preferred CD Shares. No shareholders have pre-emptive
rights.
The rights of the holders of each class of shares of the Company,
including the distributions to which each class is entitled, are set forth in
full in the Company's Amended and Restated Certificate of Formation and
Operating Agreement (the "Operating Agreement"), a copy of which is filed
as an exhibit to this report. The following is a summary of the rights,
privileges and preferences of the holders of each class.
Preferred Shares. The performance of, and distributions with respect
to, each series of Preferred Shares is based solely upon the performance of
that portion of the original bonds attributable to such series as they existed
immediately following the Refunding and prior to the Financing.
Accordingly, the holders of the Preferred Shares are entitled to their
proportionate share of distributions with respect to the 11 original bonds and
11 refunded Series B bonds held by the Company, as well as the distributions
they would have received with respect to the 11 refunded Series A bonds had
the Financing not occurred. Distributions to the holders of the Preferred
Shares are satisfied, however, on a basis having priority over all payments
with respect to the Growth Shares, Term Growth Shares and any other
equity class (other than Preferred CD Shares), out of all of the resources of
the Company, including revenue from investment of the proceeds from the
Financing. None of the expenses incurred in connection with the Financing
or any future financings are borne by the holders of the Preferred Shares.
The Preferred Shares must be partially redeemed upon (i) the sale or
repayment of a bond attributable to such shares, (ii) the sale of a related
mortgaged property, or (iii) beginning in the year 2000, an appraisal of a
related mortgaged property indicating that its fair market value exceeds the
sum of (a) the face value of the bond secured by the property and (b) unpaid
accrued interest on such bond. Upon liquidation, the holders of the Preferred
Shares are entitled to receive, after payment of creditors, the appraised value
of the Company's assets attributable to such shares, together with all unpaid
accrued distributions, before any distribution is made to the holders of
Growth Shares or other shares ranking junior to the Preferred Shares.
The holders of the Preferred Shares do not have voting rights with
respect to the election of the Company's directors, but do have voting rights
with respect to any merger or consolidation of the Company in which it is not
the surviving entity or the sale of substantially all of its assets, the removal
of a director, and any alteration of the rights, privileges or preferences of
the Preferred Shares under the Operating Agreement. The voting power of the
Preferred Shares, relative to all of the Company's outstanding shares, is
equivalent to the relative voting power, immediately prior to the Merger, of
the BACs exchanged therefor. Such protection from loss of relative voting
power, however, does not extend to issuances of additional shares of the
Company subsequent to the Merger.
Preferred CD Shares. The performance of, and distributions with
respect to, each series of Preferred CD Shares is based solely upon the
performance of that portion of the original bonds attributable to such series
as they existed immediately following the Financing. Accordingly, the
holders of the Preferred CD Shares are entitled to their proportionate share
of distributions with respect to the 11 original bonds and 11 refunded Series
B bonds held by the Company. Because the holders of the Preferred CD
Shares received a distribution of their pro rata share of the proceeds of the
Financing, however, they, unlike the holders of the Preferred Shares, (i)
receive no distribution relating to the performance of the 11 refunded Series
A bonds the Receipts for which were sold in the Financing and (ii) bear their
pro rata share of the expenses of the Financing and any future financings
utilizing any of the original bonds.
The rights, privileges and preferences of the Preferred CD Shares are
otherwise substantially the same as those of the Preferred Shares.
Term Growth Shares. The holders of the Term Growth Shares are
entitled to distribution of the cash flow attributable to 2% of the Company's
net income. Except with respect to distributions and various redemption
features as defined in the Operating Agreement, the rights and privileges of
the Term Growth Shares are substantially the same as those of the Growth
Shares.
Growth Shares. The holders of the Growth Shares, also referred to
as common shares, are entitled to such distributions as declared by the Board
of Directors out of funds legally available therefor. As of December 31,
1996, the Company's policy is to distribute to the holders of the Growth
Shares 95% of its cash flow from operations (exclusive of capital-related
items and reserves) after payment of distributions to the holders of the
Preferred Shares, Preferred CD Shares and Term Growth Shares. No
distributions may be declared or paid with respect to the Growth Shares,
however, so long there remains unpaid any required distribution or
redemption payment with respect to the Preferred Shares and Preferred CD
Shares.
The Growth Shares are not redeemable (except pursuant to certain
anti-takeover provisions) and upon liquidation share ratably in any assets
remaining after payment of creditors and the liquidation preferences of the
Preferred Shares and Preferred CD Shares. The holders of the Growth
Shares voting as a single class have the right to elect the directors of the
Company and, voting together with the holders of the Preferred Shares and
Preferred CD Shares, have voting rights with respect to a merger or
consolidation of the Company in which it is not the surviving entity or the
sale of substantially all of its assets, the removal of a director, the
dissolution of the Company, and certain anti-takeover provisions. Each Growth
Share entitles its holder to cast one vote on each matter presented for
shareholder vote. Because of provisions providing limited protection against
dilution of the voting rights of the holders of the Preferred Shares and
Preferred CD Shares, each Preferred Share and Preferred CD Share currently
entitles its holder to cast 44 votes on each matter presented for a vote of the
holders of those shares.
ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
As of and for the year ended December 31,
INCOME STATEMENT DATA (000s):
Interest on mortgage revenue bonds and
other bond related investments $13,859 $13,363 $16,894 $7,459 $8,048
Interest on working capital loans and demand notes 1,343 211 486 155 166
Equity investment in MLP II Acquisition LP 2,141 3,150 - - -
Equity investment in real estate partnerships - - - 5,185 4,440
Total revenues 18,670 17,713 17,590 12,996 12,897
Other-than-temporary impairments and valuation
adjustments related to investment in mortgage revenue
bonds and real estate partnerships (3,990) - (2,014) (6,050) (6,800)
Income before cumulative effect of accounting change 10,868 13,204 13,211 5,698 4,801
Cumulative effect of accounting change for mortgage
revenue bonds - - (11,881) - -
Net income $10,868 $13,204 $1,330 $5,698 $4,801
PER SHARE/BAC DATA:
Net income (loss) per BAC prior to August 1, 1996:
Series I:
Income before cumulative effect of accounting change $5.33 $43.74 $41.79 $14.18 $5.16
Cumulative effect of accounting change for mortgage
revenue bonds - - ($47.40) - -
Net income (loss) $5.33 $43.74 ($5.61) $14.18 $5.16
Series II:
Income before cumulative effect of accounting change $26.05 $44.91 $49.04 $29.15 $38.66
Cumulative effect of accounting change for mortgage
revenue bonds - - (23.71) - -
Net income $26.05 $44.91 $25.33 $29.15 $38.66
Net income per share subsequent to July 31, 1996:
Preferred shares
Series I $22.84 - - - -
Series II $27.24 - - - -
Preferred capital distribution shares
Series I $18.86 - - - -
Series II $21.53 - - - -
Growth shares (11,122,705 weighted average
shares outstanding $0.56 - - - -
BALANCE SHEET DATA (000s):
Investment in mortgage revenue bonds and other
bond related investments $183,632 $146,142 $213,842 $74,233 $97,383
Investment in MLP II Acquisition LP - 65,299 - - -
Investments in real estate partnerships - - - 157,389 143,601
Total assets $230,277 $224,815 $230,282 $242,210 $252,410
ITEM 6. SELECTED FINANCIAL DATA (continued)
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
CASH DISTRIBUTIONS PER BAC DISTRIBUTED
EACH YEAR AS FOLLOWS:
Distributions per BAC prior to August 1, 1996:
Series I BACS:
For the six months ended June 30, paid in August $26.25 $26.25 $25.00 $25.00 $26.25
For the six months ended December 31, paid in February - $26.25 $25.00 $25.00 $25.00
Series II BACS:
For the six months ended June 30, paid in August $27.50 $27.50 $27.50 $30.00 $32.50
For the six months ended December 30, paid in February - $27.50 $27.50 $30.00 $30.00
Distributions per share subsequent to July 31, 1996:
Preferred shares:
Series I:
For the six months ended December 31, paid in February $26.25 - - - -
Series II:
Special distribution - August $6.84 - - - -
For the six months ended December 31, paid in February $30.64 - - - -
Preferred capital distribution shares:
Series I:
Special distribution/return of capital - August $177.59 - - - -
For the six months ended December 31, paid in February $21.57 - - - -
Series II:
Special distribution/return of capital - August $252.03 - - - -
For the six months ended December 31, paid in February $25.00 - - - -
Growth shares (11,122,705 weighted average shares outstanding)
For the six months ended December 31, paid in February* $0.6325 - - - -
* This amount represents a $0.07 distribution for the one month ended July 31, 1996 from the former Partnership
and a $0.5625 distribution for the five months ended December 31, 1996 from the Company. Also, the affiliates
of the former Managing General Partner of the Partnership who received Growth Shares in the Merger did not receive
the July 1996 distribution paid to Growth Shareholders since they were not holders in July 1996.
ITEM 6. SELECTED FINANCIAL DATA (continued)
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
SHARES/BACs OUTSTANDING AND NUMBER OF HOLDERS
AS FOLLOWS:
BACS as of December 31,
Series I:
BACs outstanding - 200,000 200,000 200,000 200,000
Number of BAC holders - 9,607 9,739 10,491 9,935
Series II:
BACs outstanding - 96,256 96,256 96,256 96,256
Number of BAC holders - 4,172 4,226 4,569 4,299
Shares as of December 31,
Preferred shares:
Series I
Shares outstanding 16,329 - - - -
Number of shareholders 952 - - - -
Series II
Shares outstanding 7,637 - - - -
Number of shareholders 403 - - - -
Preferred capital distribution shares:
Series I
Shares outstanding 8,909 - - - -
Number of shareholders 481 - - - -
Series II
Shares outstanding 3,809 - - - -
Number of shareholders 222 - - - -
Growth shares
Shares outstanding 11,092,370 - - - -
Number of shareholders 11,052 - - - -
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Business
Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage
revenue bonds issued by state and local government authorities to finance
multifamily housing developments. The Company is a limited liability
company that, as a result of a merger effective August 1, 1996 (the
"Merger"), is the successor to the business of SCA Tax Exempt Fund Limited
Partnership (the "Partnership"). Accordingly, the financial statements
included herein present the financial position of the Partnership at December
31, 1995 and that of the Company at December 31, 1996; results of
operations include the operations of the Partnership through July 31, 1996 and
those of the Company from August 1 through December 31, 1996.
The Partnership was a closed-end limited partnership whose assets,
until 1995, consisted principally of 22 mortgage revenue bonds and related
working capital loans acquired with the $296 million proceeds from two 1986
offerings of Beneficial Assignee Certificates ("BACs") representing the
assignment of its limited partnership interests. In 1995, the Partnership, in a
financing transaction described more fully in Note 4 to the Company's
consolidated financial statements (the "Financing") included herein, raised
$67.7 million of Financing proceeds of which $5.0 million was invested in
demand notes and the remaining proceeds, after expenses and working capital
reserves, of $56.8 million are being used for further investment in mortgage
revenue bonds.
As a result of elections made by the Partnership's BAC holders in
connection with the Merger, the outstanding BACs were exchanged for either
Preferred Shares, Preferred Capital Distribution Shares ("Preferred CD
Shares"), or Growth Shares (including a limited number of Term Growth
Shares) of the Company. As more fully explained in Note 8 to the Company's
consolidated financial statements included herein, all of these shares
participate, to varying degrees, in the investment results of the bonds and
related loans held by the Partnership at the time of the Merger, and the
Growth Shares alone participate in the investment results of the bonds
purchased with the proceeds from the Financing and any future financing.
The Company is required to distribute to the holders of Preferred
Shares and Preferred CD Shares cash flow attributable to such shares (as
defined in the Company's Amended and Restated Certification of Formation
and Operating Agreement). The Company is required to distribute 2.0% of
the net cash flow to the holders of Term Growth Shares. The balance of the
Company's net income is allocated to the Growth Shares and the Company's
current policy is to distribute to Growth Shareholders 95% of the cash flow
associated with this income.
Certain of the bonds held by the Company are participating bonds that
provide for payment of contingent interest, based upon the performance of the
underlying properties, in addition to base interest at a fixed rate. Because
the mortgage loans underlying all of the bonds held by the Company are
nonrecourse, all debt service on the bonds, and therefore cash flow available
for distribution to all shareholders, is dependent upon the performance of the
underlying properties.
Results of Operations
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Interest on mortgage revenue bonds for the year ended December 31,
1996 increased by approximately $496,000 over the prior year due primarily
to (1) increased cash generated by property operations of $1.3 million which
led to an increase in debt service paid of $950,000 with the difference being
used to establish property level reserves, (2) $508,000 of increased earnings
under an interest rate swap agreement entered into by the operating
partnerships in connection with the Financing, and (3) $478,000 of interest
earned on new investments. These increases were partially offset by a one-time
change in the timing of scheduled interest payments on certain bonds in
1995 and the one-time payment in 1995 of excess reserve funds, which
increased 1995 interest revenue by approximately $710,000 and $482,000,
respectively.
In 1996, interest on parity working capital loans and demand notes and
interest on short-term investments increased while equity in MLP II
decreased, as a result of the July 31, 1996 dissolution of MLP II and the
recording in subsequent periods as interest that income previously recorded
as equity in MLP II. For 1995, equity in MLP II includes income from
February 15, 1995 (the date of the Financing) through December 31, 1995
while for 1996 equity in MLP II includes income only from January 1 through
July 31.
Other income consisted of $206,000 of mortgage servicing fees
collected on the bonds controlled by non-affiliates of the Company and
$25,000 of guarantee and origination fees.
Operating expenses for the year ended December 31, 1996 decreased
by approximately $692,000 from the prior year due primarily to a decrease in
merger-related expenses of approximately $725,000.
For the year ended December 31, 1996, the net adjustment to
unrealized gains and losses on mortgage revenue bonds and other bond related
investments available for sale increased shareholders' equity by approximately
$9.4 million. Although the Company recorded other-than-temporary
impairments aggregating $3,990,000 on five bonds in the second quarter of
1996, these impairments do not affect the cash flow generated from the
operation of the underlying properties, distributions to shareholders, the
tax-exempt status of the income stream, or the financial obligations under the
bonds.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
The approximately $3.5 million decrease in interest income on
mortgage revenue bonds for the year ended December 31, 1995 from the prior
year was due primarily to the Financing, in which the Partnership sold receipts
for $67.7 million aggregate principal amount of its bonds and thus no longer
received the related interest income. This reduction is substantially offset by
short-term investment income of approximately $3.2 million generated by the
temporary investment of the Financing proceeds at MLP II.
The increase in operating expenses of approximately $2.1 million in
1995 compared with 1994 resulted primarily from $250,000 of increased
expenses related to the Financing, $1.5 million of expenses related to the
Merger, and $200,000 of litigation expenses.
Liquidity and Capital Resources
At December 31, 1996, the Company had cash and cash equivalents,
net of distributions payable, of approximately $26.7 million available for
investment. In January 1997, $7.6 million of these funds were utilized to
purchase an additional bond and related loan.
The Company (including the predecessor Partnership) has financed its
operations with the proceeds from the Partnership's 1986 BAC offerings, the
proceeds from the 1995 Financing and cash provided by debt service and fees
relating to the bonds and related loans and notes acquired with such proceeds.
Cash flow from operating activities was $12.8 million, $7.4 million and $15.2
million for the years ended December 31, 1996, 1995 and 1994, respectively.
The decline in 1996 and 1995 was due primarily to the fact that from February
1995 through July 1996 the income from the temporary investment of the
Financing proceeds, as well as the debt service on certain notes both of which
were held by MLP II, were classified as cash flow from investing activities.
Had they been classified as cash flow from operating activities during this
period, cash flow from operating activities would have been $15.6 million and
$10.9 million during the years ended December 31, 1996 and 1995,
respectively.
Regular cash distributions to shareholders were $16.1 million, $15.9
million and $15.4 million for the years ended December 31, 1996, 1995 and
1994, respectively. In addition, during the year ended December 31, 1996,
the Company, in accordance with the terms of the Merger, made a one-time
distribution of an aggregate of $2.5 million to the holders of the Preferred CD
Shares, consisting of their allocable share of the proceeds from the 1995
Financing and related expenses.
The Company expects to meet its cash needs in the short-term from
operating cash flow. In addition, the Company's business plan includes making
additional investments of approximately $75 million to $100 million of
additional mortgage revenue bonds during 1997 (assuming the commitment
to purchase a $33.9 million bond closes in 1998). In order to achieve its plan,
the Company will be required to obtain additional debt or equity financing of
approximately $50 million to $75 million during 1997. The Company
currently has no commitments or understandings with respect to such
financings, and there can be no assurance that any such financings will be
available when needed.
Item 8. Consolidated Financial Statements.
The consolidated financial statements of the Company, together with
the report thereon of Price Waterhouse LLP dated February 19, 1997, are
listed in Item 14(a)(1) and included at the end of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is contained in the Company's
proxy statement for its 1997 annual shareholders meeting under the captions
"Election of Directors" and "Identification of Executive Officers" and is
incorporated herein by reference.
Item 11. Executive Compensation.
The information required by Item 11 is contained in the Company's
proxy statement for its 1997 annual shareholders meeting under the same
caption and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is contained in the Company's
proxy statement for its 1997 annual shareholders meeting under the same
caption and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is contained in the Company's
proxy statement for its 1997 annual shareholders meeting under the caption
"Certain Transactions" and is incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) List of Financial Statements. The following is a list of the
consolidated financial statements included at the end of this report:
Report of Independent Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Income for the Years Ended December 31, 1996, 1995 and 1994
Statement of Shareholders' Equity for the Period January 1, 1994
through December 31, 1996
Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedules.
All schedules prescribed by Regulation S-X have been
omitted as the required information is inapplicable or the
information is presented elsewhere in the consolidated
financial statements or related notes.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1996.
(c) List of Exhibits. The following is a list of exhibits furnished.
3.1 Amended and Restated Certificate of Formation and Operating
Agreement of the Company (filed as Exhibit 3.4 to the Company's
Registration Statement on Form S-4, File No. 33-99088, and
incorporated by reference herein).
3.2 By-laws of the Company (filed as Exhibit 3.5 to the Company's
Registration Statement on Form S-4, File No. 33-99088, and
incorporated by reference herein).
24 Consent of Price Waterhouse LLP
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Municipal Mortgage and Equity, L.L.C.
By: /s/ Mark K. Joseph
------------------
Mark K. Joseph
Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons, in the capacities and on
the dates indicated.
Signature Title Date
- ------------------- --------------------------------- ----------------
/s/ Mark K. Joseph Chairman of the Board, Chief March 25, 1997
- ------------------- Executive Officer (Principal
Mark K. Joseph Executive Officer), Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer), and Director
/s/ Charles Baum Director March 25, 1997
- ----------------
Charles Baum
/s/ Richard O. Berndt Director March 25, 1997
- ---------------------
Richard O. Berndt
/s/ Robert S. Hillman Director March 25, 1997
- ---------------------
Robert S. Hillman
/s/ Carl W. Stearn Director March 25, 1997
- ------------------
Carl W. Stearn
/s/ William L. Jews Director March 25, 1997
- -------------------
William L. Jews
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Directors of
Municipal Mortgage and Equity, L.L.C.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the consolidated
financial position of Municipal Mortgage and Equity, L.L.C. (successor to
the business of SCA Tax Exempt Fund Limited Partnership) and
consolidated entities as described in Note 1 at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
As discussed in Note 12, the accounting for the Company's investment in
mortgage revenue bonds was changed effective January 1, 1994 to adopt
the provisions of Statement of Financial Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
As explained in Note 2, the financial statements include mortgage revenue
bonds and other bond related investments valued at $183,632,000 (80% of
total assets) and $146,142,000 (65% of total assets) at December 31, 1996
and 1995, respectively, whose values have been estimated by the
Company's management in the absence of readily ascertainable market
values. Those estimated values may differ significantly from the values that
would have been used had a ready market for the mortgage revenue bonds
existed, and the differences could be material.
/s/ PRICE WATERHOUSE LLP
Baltimore, Maryland
February 19, 1997
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and BAC data)
December 31, December 31,
1996 1995
--------------- ---------------
ASSETS
Cash and cash equivalents $34,817 $9,810
Interest receivable 1,352 434
Investment in mortgage revenue bonds and other bond
related investments, net (Notes 2, 4 and 5) 183,632 146,142
Investment in parity working capital loans and
demand notes, net (Notes 2, 4 and 6) 10,158 2,890
Investment in MLP II (Note 4) - 65,299
Other assets 318 240
--------------- ---------------
TOTAL ASSETS $230,277 $224,815
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $1,199 $544
Distributions payable 8,095 7,977
Due to affiliates (Note 7) - 9
--------------- ---------------
TOTAL LIABILITIES 9,294 8,530
--------------- ---------------
Minority interest - 3
--------------- ---------------
Commitments and contingencies
(Notes 2, 5, 6, 7, 11 and 13) - -
Shareholders' equity:
Unrealized gain (loss) on mortgage revenue bonds and other
bond related investments available for sale, net (Note 5) 12,423 (981)
General partners - (477)
Limited partners:
Series I (beneficial assignee certificates, issued
and outstanding 200,000 certificates) - 141,111
Series II (beneficial assignee certificates, issued
and outstanding 96,256 certificates) - 76,629
Preferred shares:
Series I ( 16,329 shares issued and outstanding) 11,254 -
Series II ( 7,637 shares issued and outstanding) 6,086 -
Preferred capital distribution shares:
Series I (8,909 shares issued and outstanding) 4,559 -
Series II (3,809 shares issued and outstanding) 2,080 -
Term growth shares (2,000 shares issued and outstanding) - -
Growth shares (11,153,168 shares issued and outstanding
including shares in treasury) 185,514 -
--------------- ---------------
221,916 216,282
Less growth shares held in treasury
at cost ( 60,798 shares) (Note 9) (933) -
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 220,983 216,282
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $230,277 $224,815
=============== ===============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share and per BAC data)
Year ended December 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
INCOME
Interest on mortgage revenue bonds and
other bond related investments $13,859 $13,363 $16,894
Interest on parity working capital loans and
demand notes 1,343 211 486
Interest on short-term investments 1,096 366 210
Net gain on sale of A bond receipts (Note 4) - 623 -
Equity in MLP II (Note 4) 2,141 3,150 -
Other income 231 - -
--------------- --------------- ---------------
TOTAL INCOME 18,670 17,713 17,590
--------------- --------------- ---------------
EXPENSES
Operating expenses 3,799 4,491 2,365
Minority interest 13 18 -
Other-than-temporary impairments related to investments
in mortgage revenue bonds (Note 5) 3,990 - 2,014
--------------- --------------- ---------------
TOTAL EXPENSES 7,802 4,509 4,379
--------------- --------------- ---------------
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 10,868 13,204 13,211
CUMULATIVE EFFECT ON PRIOR YEARS (to January 1, 1994)
OF CHANGE IN ACCOUNTING FOR MORTGAGE
REVENUE BONDS (NOTE 12) - - (11,881)
--------------- --------------- ---------------
NET INCOME $10,868 $13,204 $1,330
=============== =============== ===============
NET INCOME PRIOR TO AUGUST 1, 1996 $3,609 $13,204 $1,330
=============== =============== ===============
NET INCOME SUBSEQUENT TO JULY 31, 1996 $7,259 $0 $0
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
Year ended December 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
NET INCOME (LOSS) PRIOR TO AUGUST 1, 1996 ALLOCATED TO:
General Partners $36 $132 $14
=============== =============== ===============
Limited Partners:
Series I $1,065 $8,749 ($1,122)
=============== =============== ===============
Series II $2,508 $4,323 $2,438
=============== =============== ===============
NET INCOME SUBSEQUENT TO JULY 31, 1996 ALLOCATED TO:
Preferred Shares:
Series I $373
===============
Series II $208
===============
Preferred Capital Distribution Shares:
Series I $168
===============
Series II $82
===============
Term Growth Shares $153
===============
Growth Shares $6,275
===============
NET INCOME (LOSS) PER BAC:
PRIOR TO AUGUST 1, 1996
Series I:
Income before cumulative effect of accounting change $5.33 $43.74 $41.79
Cumulative effect on prior years (to January 1, 1994) of
change in accounting for mortgage revenue bonds - - (47.40)
--------------- --------------- ---------------
Net income (loss) allocated to Series I BACs $5.33 $43.74 ($5.61)
=============== =============== ===============
Series II:
Income before cumulative effect of accounting change $26.05 $44.91 $49.04
Cumulative effect on prior years (to January 1, 1994) of
change in accounting for mortgage revenue bonds - - (23.71)
--------------- --------------- ---------------
Net income allocated to Series II BACs $26.05 $44.91 $25.33
=============== =============== ===============
NET INCOME PER SHARE SUBSEQUENT TO JULY 31, 1996:
Preferred Shares:
Series I $22.84
===============
Series II $27.24
===============
Preferred Capital Distribution Shares:
Series I $18.86
===============
Series II $21.53
===============
Growth Shares (11,122,705 weighted average
shares oustanding) $0.56
===============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended December 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,868 $13,204 $1,330
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in MLP II net income (2,141) (3,150) -
Income allocated to minority interest 13 18 -
Other-than-temporary impairments related to
investment in mortgage revenue bonds 3,990 - 2,014
Cumulative effect of accounting change - - 11,881
Increase (decrease) in valuation allowance on
parity working capital loans 113 - (46)
Net realized gain on sale of A bond receipts - (2,347) -
Net amortization of discounts and premiums on bonds 10 - -
(Increase) decrease in interest receivable (468) 336 84
(Increase) decrease in other assets (78) 38 (1,100)
Increase (decrease) in accounts payable
and accrued expenses 525 (566) 996
Increase (decrease) in due to affiliates (9) (86) 71
--------------- --------------- ---------------
Net cash provided by operating activities 12,823 7,447 15,230
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage revenue bonds and
other bond related investments (20,867) - -
Principal payments received 107 - -
Investment in MLP II - (61,000) -
Distributions from MLP II (Including $49,628 upon dissolution) 52,466 3,499 -
Proceeds from sale of A bond receipts - 67,700 -
--------------- --------------- ---------------
Net cash provided by investing activities 31,706 10,199 -
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (933) - -
Distributions (18,589) (15,691) (15,692)
--------------- --------------- ---------------
Net cash used in financing activities (19,522) (15,691) (15,692)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 25,007 1,955 (462)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 9,810 7,855 8,317
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $34,817 $9,810 $7,855
=============== =============== ===============
DISCLOSURE OF NON-CASH ACTIVITIES:
Net assets received upon dissolution of MLP II $14,974 - -
=============== =============== ===============
Contribution of parity working capital loans and
other assets to MLP II - $4,647 -
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1994 THROUGH DECEMBER 31, 1996
(In thousands, except share data)
Limited Partners
Beneficial Assignee
Cerificates
------------------------- General Preferred Shares
Series I Series II Partners Series I Series II
------------ ------------ ---------- ---------- ----------
Balance, January 1, 1994 $153,984 $80,456 ($334) $- $-
Cumulative effect on prior years (to January 1,
1994) of change in accounting ( Note 12) - - - - -
Net income (1,122) 2,438 14 - -
Distributions (10,000) (5,294) (144) - -
Change in market value of mortgage
revenue bonds, available for sale, net - - - - -
Realization of other-than-temporary
impairment on mortgage revenue
bonds available for sale - - - - -
------------ ------------ ---------- ---------- ----------
Balance, December 31, 1994 142,862 77,600 (464) - -
Net income 8,749 4,323 132 - -
Distributions (10,500) (5,294) (145) - -
Net realized gain on sale of A bond receipts - - - - -
------------ ------------ ---------- ---------- ----------
Balance, December 31, 1995 141,111 76,629 (477) - -
Net income 1,065 2,508 36 373 208
Distributions (5,250) (2,647) (83) (429) (286)
Merger of SCA Tax Exempt Fund into
Municipal Mortgage and Equity, LLC (Note 3) (136,926) (76,490) 524 11,310 6,164
Purchase of treasury stock - - - - -
Change in market value of mortgage
revenue bonds and other bond related
investments available for sale, net - - - - -
Realization of other-than-temporary
impairment on mortgage revenue
bonds available for sale - - - - -
------------ ------------ ---------- ---------- ----------
Balance, December 31, 1996 $0 $0 $0 $11,254 $6,086
============ ============ ========== ========== ==========
SHARE ACTIVITY:
Issuance of shares in Merger, August 1, 1996 16,329 7,637
Purchase of treasury shares - -
---------- ----------
Balance, December 31, 1996 16,329 7,637
========== ==========
The accompanying notes are an integral part of these financial statements.
Unrealized
Gain(loss) on
mortgage revenue
bonds and other
bond related
Preferred Capital investments
Distribution Shares Term Growth Growth Treasury available
Series I Series II Shares Shares Shares for sale, net Total
------------ ------------ ---------- ---------- ---------- -------------- ---------
Balance, January 1, 1994 $0 $0 $0 $0 $0 $0 $234,106
Cumulative effect on prior years (to January 1,
1994) of change in accounting ( Note 12) - - - - - (8,028) (8,028)
Net income - - - - - - 1,330
Distributions - - - - - - (15,438)
Change in market value of mortgage
revenue bonds, available for sale, net - - - - - 7,380 7,380
Realization of other-than-temporary
impairment on mortgage revenue
bonds available for sale - - - - - 2,014 2,014
------------ ------------ ---------- ---------- ---------- -------------- ---------
Balance, December 31, 1994 - - - - - 1,366 221,364
Net income - - - - - - 13,204
Distributions - - - - - - (15,939)
Net realized gain on sale of A bond receipts - - - - - (2,347) (2,347)
------------ ------------ ---------- ---------- ---------- -------------- ---------
Balance, December 31, 1995 - - - - - (981) 216,282
Net income 168 82 153 6,275 - - 10,868
Distributions (1,774) (1,054) (153) (6,962) - - (18,638)
Merger of SCA Tax Exempt Fund into
Municipal Mortgage and Equity, LLC (Note 3) 6,165 3,052 - 186,201 - - -
Purchase of treasury stock - - - - (933) - (933)
Change in market value of mortgage
revenue bonds and other bond related
investments available for sale, net - - - - - 9,414 9,414
Realization of other-than-temporary
impairment on mortgage revenue
bonds available for sale - - - - - 3,990 3,990
------------ ------------ ---------- ---------- ---------- -------------- ---------
Balance, December 31, 1996 $4,559 $2,080 $0 $185,514 ($933) $12,423 $220,983
============ ============ ========== ========== ========== ============== =========
SHARE ACTIVITY:
Issuance of shares in Merger, August 1, 1996 8,909 3,809 2,000 11,153,168 -
Purchase of treasury shares - - - (60,798) 60,798
------------ ------------ ---------- ---------- ----------
Balance, December 31, 1996 8,909 3,809 2,000 11,092,370 60,798
============ ============ ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Company
Municipal Mortgage and Equity, L.L.C. (the "Company" or the "LLC")
is in the business of originating, investing in and servicing tax-exempt
mortgage revenue bonds issued by state and local government authorities
to finance multifamily housing developments and secured by nonrecourse
mortgage loans on the underlying properties. The Company, organized in
July 1995 as a limited liability company under Delaware law, is the successor
to the business of the SCA Tax Exempt Fund Limited Partnership (the
"Partnership"), which was merged into the Company effective August 1, 1996
(the "Merger"). Accordingly, the accompanying consolidated financial
statements present the financial position of the Partnership at December 31,
1995 and that of the Company at December 31, 1996; results of operations
include those of the Partnership through July 31, 1996 and those of the
Company from August 1 through December 31, 1996.
The Partnership, organized in 1986, consummated public offerings
of two series of Beneficial Assignee Certificates ("BACs") representing the
assignment of its limited partnership interests. The $296,256,000 of
aggregate BAC proceeds, which were used to acquire 22 mortgage revenue
bonds, and to advance certain related parity working capital loans, were
held in two distinct pools, "Series I" and "Series II." The general partners
of the Partnership were SCA Realty I, Inc. (the "Managing General Partner")
and SCA Associates 86 Limited Partnership (the "Associate General Partner,"
and together with the Managing General Partner, the "General Partners").
Basis of Presentation
The consolidated financial statements of the Company are prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Prior to the Merger, the consolidated financial
statements of the Partnership included the Partnership, The SCA Tax
Exempt Trust (the "Trust"), which holds the Series B Bonds resulting from
the Refunding (defined in Note 4) and received the proceeds from the
Financing (defined in Note 4), and MLP III Investment Limited Partnership
("MLP III"), a limited partnership owned by the Partnership into which such
proceeds were invested. MLP III reinvested such proceeds in MLP II
Acquisition Limited Partnership ("MLP II"), a limited partnership, which was
accounted for under the equity method and financial information with
respect to which is set forth in Note 4. Immediately prior to the Merger,
MLP III and MLP II were dissolved, and the Partnership became the owner
of all of their net assets. Subsequent to the Merger on August 1, 1996,
the consolidated financial statements of the Company include the
Company, the Trust, and the former Associate General Partner of the
Partnership, which is 99% owned by the Company. All significant
intercompany transactions are eliminated. Certain 1995 and 1994 amounts
have been reclassified to conform to the 1996 presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Set forth below are the more significant accounting policies followed
by the Company in its consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of investments in
money market mutual funds and short-term marketable securities with
original maturities of 90 days or less, both of which are readily convertible
to known amounts of cash in seven days or less. Cash equivalents are
carried at cost which approximates fair value.
Short-Term Investments
The Company places short-term investments in highly rated
commercial paper and limits the amount of credit exposure with any one
issuer. The Company actively evaluates the creditworthiness of the issuers
in which it invests. Short-term investments are carried at amortized cost
which approximates fair value.
Investment in Mortgage Revenue Bonds and Other Bond Related Investments
Mortgage Revenue Bonds
Mortgage revenue bonds are accounted for under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," ("FAS 115"). All
investments in mortgage revenue bonds, regardless of their status, are
classified and accounted for as available-for-sale debt securities and
carried at fair value; unrealized holding gains or losses are included as
a separate component of shareholders' equity and other-than-temporary
impairments are recorded through operations.
The fair value of participating bonds (i.e., bonds that participate
in the net cash flow and net capital appreciation of the underlying
properties) that are wholly collateral dependent and for which only a
limited active market exists is determined by discounting the underlying
collateral's expected future cash flows using current estimates of discount
rates and capitalization rates. Annually, the Company engages an
independent real estate valuation firm, Robert A. Stanger & Co., Inc.
("Stanger") to assist the Company in reviewing the reasonableness of the
estimates of discount rates and capitalization rates used to estimate the
fair value of these bonds.
The fair value of non-participating bonds is based on values from
external sources, such as brokers, for these or similar bonds.
When the estimated fair value of a bond has declined to an amount
below amortized cost, the Company considers the following in determining
whether the indicated decline is other-than-temporary. With respect to
bonds that are not performing in accordance with their contractual terms,
the Company considers declines in fair value, if any, to be
other-than-temporary. In the absence of evidence to the contrary, indicated
impairments of performing bonds are generally considered to be temporary.
The Company evaluates the need for other-than-temporary impairments
on an on-going basis.
Base interest on the bonds is recognized as revenue as it accrues;
contingent interest is recognized when received. Delinquent bonds are
placed on non-accrual status for financial reporting purposes when
collection of interest is in doubt. Interest payments on non-accrual bonds
are applied first to previously recorded accrued interest and, once
previously accrued interest is satisfied, is then recognized as income when
received. The accrual of interest income is reinstated once a bond's ability
to perform is adequately demonstrated. For tax purposes, the Company
recognizes interest income on the bonds at rates negotiated at the time
such investments were made. Interest recognized on the bonds is exempt
for federal income tax purposes to the shareholders.
Other Bond Related Investments
The Company purchased Residual Interest Tax-Exempt Securities
Receipts, Series PA-120 ("RITES"), a security offered by Merrill Lynch
through its RITES/Puttable Floating Option Tax-Exempt Receipts (the
"P-FLOATs") program discussed more fully in Note 5. The RITES are carried
at fair value with unrealized gains or losses included as a separate
component of shareholders' equity. The fair value of the RITES is
determined based on values from external sources, such as brokers, for
these or similar investments. Interest income is recognized as revenue
as it accrues. Interest recognized on the RITES is exempt for federal
income tax purposes to the shareholders.
The Company entered into an interest rate swap contract to hedge
against interest rate exposure on the Company's investment in the RITES
discussed more fully in Note 5. The interest rate swap is carried at fair
value with unrealized gains or losses included as a separate component
of shareholders' equity. The fair value of the interest rate swap agreement
is determined based on values from external sources, such as brokers, for
these or similar investments. The differential to be paid or received under
this agreement is recognized as an adjustment to interest income related
to the RITES. Income received under this interest rate swap agreement
is taxable to the shareholders.
Purchase Commitments
Purchase commitments on bonds and bond related investments are
not recorded on the financial statements of the Company. However,
purchase commitments are marked to market with unrealized gains or
losses included as a separate component of shareholders' equity. The fair
value of the purchase commitment is based on the fair value of the
underlying security, the mortgage revenue bond. The fair value of the
mortgage revenue bond is estimated in accordance with the Company's
valuation policy discussed above.
Investment in Parity Working Capital Loans and Demand Notes
Parity working capital loans and demand notes are accounted for
under the provisions of Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"). FAS
114 requires a creditor to base its measure of loan impairment on the
present value of expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral if the loan is
collateral dependent. A valuation allowance is provided to record the loan
impairment with a corresponding charge to net income.
Base interest on the parity working capital loans is recognized as
revenue as it accrues; contingent interest is recognized when received.
Delinquent parity working capital loans are placed on non-accrual status
for financial reporting purposes when collection of interest is in doubt.
Interest payments on non-accrual parity working capital loans are applied
first to previously recorded accrued interest and, once previously accrued
interest has been satisfied, is recognized as income when received. The
accrual of interest income is reinstated once a loan's ability to perform
is adequately demonstrated. For tax purposes, the Company recognizes
interest income on the loans at rates negotiated at the time such
investments were made. Interest recognized on the parity working capital
loans is taxable to the shareholders.
Interest on demand notes is recognized as revenue as it accrues.
Interest income is also recognized for the portion of the principal payments
received that represents payment for previously unaccrued interest.
Interest recognized on the demand notes is taxable to the shareholders.
Loan Origination and Guarantee Fee Revenue
Loan origination fees are deferred and are amortized into income
to approximate a level yield over the estimated lives of the related
investments. Loan guarantee fees are recognized over the term of the
guarantee period.
Premiums and Discounts on Purchased Investments
Premiums and discounts on purchased investments are amortized
into income over the term of the related investment to approximate a level
yield over the life of the investment.
Earnings per Share/BAC
Earnings per BAC (for periods prior to August 1, 1996) are
calculated on a Series basis using the income or loss attributable to Series
I and Series II and the average number of BACs of each Series outstanding.
Earnings per share for Preferred Shares and Preferred Capital Distribution
Shares ("Preferred CD Shares"), are calculated by dividing net income
allocable to the shares by the average number of shares outstanding.
Earnings per share for Growth Shares is calculated by dividing net
income allocable to Growth Shares by the weighted average number of
Growth Shares outstanding plus the weighted average of common stock
equivalents. Common stock equivalents consist of stock options and
shares potentially issuable under the non-employee director share plan
and the employee incentive plan. The weighted average number of shares
outstanding for the five months ended December 31, 1996 was 11,122,705.
Income Taxes
No recognition has been given to income taxes in the accompanying
financial statements as the distributive share of the Company's income,
deductions and credits is included in each shareholder's income tax
returns. Management believes that the Company is not subject to income
taxes. The tax basis of the Company's net assets exceeds the carrying
value for book purposes by approximately $82 million.
Significant Risks and Uncertainties
Because the Company's assets consist primarily of bonds and other
bond related investments secured by non-recourse mortgage loans on real
estate projects, the value of the Company's assets is subject to all of the
factors affecting bond and real estate values, including interest rate
changes, demographics, local real estate markets, and individual property
performance.
The use of estimates is inherent in the preparation of all financial
statements, but is especially important in the case of the Company, which
is required under FAS 115 to carry a substantial portion of its assets at
fair value, even though only a limited market exists for them. Because
only a limited market exists for most of the Company's bonds and other
bond related investments, fair value is estimated by management in
accordance with the Company's valuation procedures discussed above.
These estimates involve uncertainties and matters of judgment and
therefore cannot be determined with precision. The assumptions and
methodologies selected by management were intended to estimate the
amounts at which the bonds could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Changes
in assumptions could significantly affect estimates. These estimated values
may differ significantly from the values that would have been used had
a ready market for the bonds existed, and the differences could be
material.
NOTE 3 - THE MERGER
Effective August 1, 1996, the Partnership merged into the Company
following the approval of the Merger by the holders of a majority of the
outstanding Series I BACs and Series II BACs. The Merger preserved the
pass-through tax status of the primarily tax-exempt income generated
by the Company's bonds and resulted in self-management through a Board
of Directors elected by the shareholders and the alignment of the financial
interests of the former General Partners with those of the shareholders.
In connection with their approval of the Merger, the Partnership's BAC
holders were provided with the opportunity to elect to exchange their BACs
for Preferred Shares, Preferred CD Shares, or Growth Shares, depending
upon their individual investment objectives.
In connection with the Merger, the Company authorized the
issuance of up to 200,000 Series I and 96,256 Series II Preferred Shares,
up to 200,000 Series I and 96,256 Series II Preferred CD Shares and up to
11,770,000 Growth Shares as merger consideration to the Partnership's BAC
holders in exchange for their BAC's. Specifically, the 296,256 outstanding
BACs (200,000 Series I and 96,256 Series II) outstanding immediately prior
to the Merger were exchanged for 23,966 Preferred Shares (16,329 Series
I and 7,637 Series II), 12,718 Preferred CD Shares (8,909 Series I and 3,809
Series II) and 10,270,127 Growth Shares. The Company also authorized the
issuance of merger consideration in the form of 1,000 shares of a special
class of Growth Shares ("Term Growth Shares") to the former General
Partners, in exchange for the relinquishment of their general partnership
interests in the Partnership, and 1,000 Term Growth Shares to a Merrill
Lynch affiliate in exchange for their subordinated BACs. Term Growth
Shares are entitled to an aggregate 2% interest in cash distributions from
the Company (subordinated to the rights of the Preferred and Preferred
CD Shares, and before distributions to Growth Shareholders).
In anticipation of the Merger and in order to reduce administrative
burden and complexity, effective July 31, 1996, the partners of MLP II
elected to dissolve MLP II and to terminate MLP II effective immediately.
Upon dissolution, all of the assets of MLP II were distributed to its
partners in accordance with their capital accounts. Also on July 31, 1996,
the partners of MLP III elected to dissolve and immediately terminate MLP
III and distribute all the assets of MLP III to its partners in accordance with
their capital accounts.
As a result of the above transactions, at the close of business on
July 31, 1996, the Partnership was the owner of substantially all of the net
assets of MLP II and MLP III. Accordingly, MLP II's assets, liabilities and
results of operations are included directly in the financial statements of
the Company rather than being accounted for on the equity method as they
were in the Partnership's financial statements. On a pro forma basis, these
MLP transactions had an insignificant impact on the net assets of the
Partnership as of July 31, 1996 and on net income of the Partnership for
the seven months ended July 31, 1996 and the year ended December 31,
1995. The primary pro forma income statement impact would be the
following approximate reclassifications (millions):
Seven months
ended Year ended
July 31, December 31,
1996 1995
------------ ------------
Interest on mortgage revenue bonds ($1.4) ($2.3)
Equity in income of MLP II ( 2.1) ( 3.2)
Interest on short-term investments
and demand notes 3.5 5.5
Upon the consummation of the Merger, the General Partners and
their affiliates contributed their mortgage acquisition and servicing
activities in exchange for 883,033 Growth Shares. The Partnership retained
Stanger, an independent third party, to render an opinion regarding the
fairness, from a financial point of view, of the allocation of Growth Shares
and Term Growth Shares to the Series I and Series II BAC holders. As a
result of the contribution of the acquisition and servicing activities by the
General Partners and their affiliates, the Company, and more specifically,
the Growth Shareholders, will receive additional income which is primarily
tax-exempt.
The capitalization of the Company in accordance with the terms of the
Merger is reflected in the accompanying financial statements. Because the
interests of a significant majority of the former Series I and Series II BAC
holders have now been merged as a result of their election to receive Growth
Shares, separate financial statements for Series I and Series II are no longer
presented as supplementary information. Results of operations continue to
be maintained by Series, however, as required for those former Series I and
Series II BAC holders electing either Preferred Shares or Preferred CD Shares,
and appropriate allocations of net income are reflected in the accompanying
financial statements.
NOTE 4 - THE FINANCING
On February 14, 1995, the Financing was consummated, resulting in
the receipt of gross proceeds of $67,700,000 from the sale of the same
aggregate principal amount of Multifamily Mortgage Revenue Bond Receipts
(the "Receipts"). The Receipts are collateralized by a pool of newly refunded
bonds issued in exchange for 11 of the Partnership's original bonds
secured, respectively, by Barkley Place, Montclair, Newport Village, Nicollet
Ridge, Steeplechase Falls, Gilman Meadows, Mallard Cove I, Mallard Cove
II, The Meadows, Hamilton Chase and Whispering Lake properties, all of
which had defaulted on their original debt obligations. The cash stream from
one additional bond, Creekside Village, which also had defaulted on its original
debt obligation, was pledged as further security for the Receipts.
Prior to the Financing, the 11 original bonds, in the aggregate principal
amount of $126,590,000, were refunded (the "Refunding") into a Series A
Bond and a Series B Bond (the aggregate principal amount of which equals
that of the original bond), each with an extended maturity date of January
2030. The aggregate principal amount of the Series A Bonds and Series B
Bonds is $67,700,000 and $58,890,000, respectively. Each Series B Bond
is subordinate to the related Series A Bond. The Series A Bonds bear interest
at various fixed annual rates, ranging from 7.05% to 7.40%, payable monthly,
and are subject to mandatory sinking fund redemptions beginning January 1,
2001.
The Partnership deposited the Series A Bonds and Series B Bonds with
the Trust, which was created to hold these assets, and the Trust issued a
certificate of participation in the corpus and the income of the Trust to the
Partnership. The Trust then deposited the Series A Bonds with a custodian,
and the Receipts, collateralized by the Series A Bonds, were sold. As a result
of the sale of the Receipts, the Company no longer has any interest in the
Series A Bonds. The Series B Bonds and their general terms are discussed
in Note 5.
As a result of the sale of the Receipts, the Company recognized a gain
of approximately $623,000. Included in this amount is a portion of the net
unrealized gain associated with the refunded bonds of approximately $2.3
million, net of selling expenses of approximately $1.7 million. The portion
of the unrealized gain (loss) recognized for each bond was determined by
allocating the net carrying amount at the time of sale to its corresponding
Series A Bond and Series B Bond based upon their relative fair values, using
the concepts outlined in the Financial Accounting Standard Board's Emerging
Issues Task Force Issue No. 88-11.
The Receipts are credit-enhanced by Financial Security Assurance Inc.
("FSA") and are rated AAA and Aaa by Standard and Poors and Moody's,
respectively. In order to obtain such credit enhancement and investment grade
rating, the cash stream from the properties collateralizing the 11 bonds, as
well as the Creekside Village bond, was pledged to FSA.
Through the Series A Bonds held by the custodian, the Receipts have
a fixed interest rate and preferred return position, resulting in a guaranteed,
preferred, fixed-rate tax-exempt return paid by the operating partnerships.
The operating partnerships entered into an interest rate swap agreement
whereby a portion of the fixed interest rate under the Series A Bonds was
swapped for a floating tax-exempt interest rate through 2004. This mechanism
is intended to allow the Company to realize the potential benefit of
traditionally lower floating tax-exempt interest rates by lowering the effective
cost of the Series A Bonds to the operating partnerships which, for 1996 and
1995, enabled the operating Partnerships to pay an additional $1.8 million and
$1.3 million, respectively, in Series B Bond interest payments to the Company.
Under this interest rate swap, the operating partnerships are obligated to pay
a floating rate equivalent to the PSA Municipal Swap Index. Also, an interest
rate cap was purchased for approximately $4.2 million by the operating
partnerships to limit their exposure (and ultimately the Company's) resulting
from the floating tax-exempt interest rate obligation. The purchase price of
the interest rate cap and approximately $800,000 of transaction expenses
incurred on behalf of the operating partnerships were financed by a loan of
approximately $5 million from the Financing proceeds to the operating
partnerships, evidenced by demand notes (the "Load Loan Demand Notes").
The sale of the Receipts resulted in gross proceeds of $67,700,000
and net proceeds of $56,831,000 available for further investment after
deduction of the $4.2 million cost of the interest rate cap and payment of $6.7
million of transaction costs and provision for additional working capital
reserves. Management believes that the transaction costs, all of which were
paid to third parties, were appropriate and consistent with transactions of
similar size and characteristics.
The Trust and, prior to its dissolution, MLP III are included in the
consolidated financial statements of the Company. Financial information for
MLP II, which was accounted for under the equity method, is set forth below.
MLP II followed the same accounting policies followed by the Company.
MLP II ACQUISITION LIMITED PARTNERSHIP
BALANCE SHEETS
(In thousands)
August 1, December 31,
1996 1995
---------------- ----------------
ASSETS
Cash and cash equivalents $0 $348
Short-term investments - 57,236
Notes receivable from operating partnerships - 7,250
Due from operating partnerships - 755
Other assets - 216
---------------- ----------------
Total assets $- $65,805
================ ================
LIABILITIES AND PARTNERS' CAPITAL
Due to affiliates $0 $120
Distributions payable - 20
---------------- ----------------
Total liabilities - 140
---------------- ----------------
Partners' capital
General partner - 366
Limited partners - 65,299
---------------- ----------------
Total partners' capital - 65,665
---------------- ----------------
Commitments and contingencies - 0
Total liabilities and partners' capital $0 $65,805
================ ================
STATEMENTS OF INCOME
(In thousands)
For the period
---------------------------------
January 1 to February 15 to
July 31, 1996 December 31, 1995
---------------- ----------------
Interest income and other $3,825 $5,850
Operating expenses 182 18
---------------- ----------------
Net income $3,643 $5,832
================ ================
Net income allocated to general partner $1,502 $2,681
================ ================
Net income allocated to limited partners $2,141 $3,151
================ ================
MLP II ACQUISITION LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(In thousands)
For the period
---------------------------------
January 1 to February 15 to
July 31, 1996 December 31, 1995
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,643 $5,832
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 2 17
(Increase) decrease in interest receivable 111 (343)
(Increase) decrease in other assets 206 (140)
Increase (decrease) in due to affiliates (15) 120
---------------- ----------------
Net cash provided by operating activities 3,947 5,486
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in short-term investments 56,893 (56,893)
Issuance of load loans to operating partnerships - (4,233)
Purchases of mortgage revenue bonds (7,455) -
Principal payments on notes receivable from operating 547 782
---------------- ----------------
Net cash provided by (used in) investing activities 49,985 (60,344)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from partners - 61,001
Distribution to partners (including $49,698 upon
dissolution) (54,280) (5,795)
---------------- ----------------
Net cash provided by (used in) financing activities (54,280) 55,206
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (348) 348
Cash and cash equivalents at beginning of period 348 -
---------------- ----------------
Cash and cash equivalents at end of period $0 $348
================ ================
DISCLOSURE OF NON-CASH ACTIVITIES:
Contribution of working capital loans and other assets
(to) from MLP III Investment Limited Partnership ($14,974) $4,647
================ ================
Transfer of other assets to operating partnerships $0 $755
================ ================
MLP II ACQUISITION LIMITED PARNTERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIOD JANUARY 1, 1995 THROUGH AUGUST 1, 1996
(In thousands)
Limited General
Partners Partner Total
---------------- ---------------- ----------------
Balance, January 1, 1995 $0 $0 $0
Net contributions 65,647 1 65,648
Net income 3,151 2,681 5,832
Distribution to partners (3,499) (2,316) (5,815)
---------------- ---------------- ----------------
Balance, December 31, 1995 65,299 366 65,665
Net income 2,141 1,502 3,643
Distribution to partners (2,768) (1,796) (4,564)
Distribution upon dissolution of partnership (64,672) (72) (64,744)
---------------- ---------------- ----------------
Balance, August 1, 1996 $0 $0 $0
================ ================ ================
NOTE 5 - INVESTMENT IN MORTGAGE REVENUE BONDS AND OTHER BOND
RELATED INVESTMENTS
Of the 22 original bonds acquired by the Partnership, 16 were
unable to support their entire debt service obligation, after other sources
of debt service other than property operations. In lieu of foreclosure, the
deeds to the properties collateralizing these bonds were transferred to
partnerships affiliated with the former Managing General Partner of the
Partnership ("New Borrowers") or an affiliate of the former Managing
General Partner was designated as the general partner of the original
borrowing entity. Although the Company has not waived the defaults under
these bonds, it does not intend to accelerate their maturity. In addition,
the Company is responsible for the post-transfer operating deficits of New
Borrowers. No operating deficits were funded for the three years ended
December 31, 1996.
As of December 31, 1996, the Company held 30 bonds (11
participating original bonds, five non-participating bonds, 12 participating
subordinate bonds and two non-participating subordinate bonds) and one
bond related investment, which are collateralized by 31 individual
properties. The following table provides certain information with respect
to each of the bonds and bond related investments.
December 31, 1996 December 31, 1995
-------------------------------- --------------------------------
Base Face Amortized Unrealized Fair Amortized Unrealized Fair
Investment in Mortgage Interest Maturity Amount Cost Gain (Loss) Value Cost Gain (Loss) Value
Revenue Bonds (Note 5) Rate Date (000s) (000s) (000s) (000s) (000s) (000s) (000s)
- ----------------------------- ---------- --------- -------- ---------- ---------- -------- ---------- ---------- --------
Participating Bonds (1):
Alban Place (2) 7.875 Oct. 2008 $10,065 $10,065 ($773) $9,292 $10,065 ($336) $9,729
Creekside Village (2) 7.500 Nov. 2009 11,760 7,396 120 7,516 8,635 - 8,635
Emerald Hills (2) 7.750 Apr. 2008 6,725 6,725 455 7,180 6,725 626 7,351
Lakeview Garden (2) 7.750 Aug. 2007 9,003 5,674 98 5,772 6,988 - 6,988
Newport-on-Seven (2) 8.125 Aug. 2008 10,125 7,898 618 8,516 7,898 - 7,898
North Pointe (2) 7.875 Aug. 2006 25,185 12,738 1,536 14,274 12,739 1,170 13,909
Northridge Park (2) 7.500 June 2012 8,815 8,815 (2,959) 5,856 8,815 (1,625) 7,190
Riverset (2) 7.875 Nov. 1999 19,000 19,000 560 19,560 19,000 (2,255) 16,745
Southfork Village (2) 7.875 Jan. 2009 10,375 10,375 1,337 11,712 10,375 492 10,867
Villa Hialeah (2) 7.875 Oct. 2009 10,250 10,250 (2,609) 7,641 10,250 (725) 9,525
Willowgreen (2) 8.000 Dec. 2010 9,275 6,770 (13) 6,757 7,901 - 7,901
---------- ---------- -------- ---------- ---------- --------
Subtotal participating bonds 105,706 (1,630) 104,076 109,391 (2,653) 106,738
---------- ---------- -------- ---------- ---------- --------
Non-Participating Bonds:
Riverset II (4) 9.500 Oct. 2019 7,610 7,222 826 8,048 - - -
Charter House (4) 7.450 July 2026 7,675 7,752 (38) 7,714 - - -
Hidden Valley (4) 8.250 Jan. 2026 1,705 1,705 (46) 1,659 - - -
Oakbrook (4) 8.200 July 2026 3,210 3,242 14 3,256 - - -
Torries Chase (4) 8.150 Jan. 2026 2,080 2,080 20 2,100 - - -
---------- ---------- -------- ---------- ---------- --------
Subtotal non-participating bonds 22,001 776 22,777 - - -
---------- ---------- -------- ---------- ---------- --------
Participating Subordinate Bonds (1):
Barkley Place (3) 16.000 Jan. 2030 3,480 2,445 483 2,928 2,445 - 2,445
Gilman Meadows (3) 3.000 Jan. 2030 2,875 2,530 964 3,494 2,530 176 2,706
Hamilton Chase (3) 3.000 Jan. 2030 6,250 4,140 778 4,918 4,140 - 4,140
Mallard Cove I (3) 3.000 Jan. 2030 1,670 798 146 944 942 80 1,022
Mallard Cove II (3) 3.000 Jan. 2030 3,750 2,429 420 2,849 2,590 284 2,874
Meadows (3) 16.000 Jan. 2030 3,635 3,716 719 4,435 3,716 103 3,819
Montclair (3) 3.000 Jan. 2030 6,840 1,691 2,798 4,489 1,691 - 1,691
Newport Village (3) 3.000 Jan. 2030 4,175 2,973 1,901 4,874 2,973 287 3,260
Nicollet Ridge (3) 3.000 Jan. 2030 12,415 6,075 573 6,648 6,075 475 6,550
Steeplechase Falls (3) 16.000 Jan. 2030 5,300 5,852 2,361 8,213 5,851 267 6,118
Whispering Lake (3) 3.000 Jan. 2030 8,500 4,779 1,182 5,961 4,779 - 4,779
Riverset II (4) 10.000 Oct. 2019 1,489 - 913 913 - - -
---------- ---------- -------- ---------- ---------- --------
Subtotal participating subordinate bonds 37,428 13,238 50,666 37,732 1,672 39,404
---------- ---------- -------- ---------- ---------- --------
Non-Participating Subordinate Bonds:
Independence Ridge (4) 12.500 Dec. 2015 1,045 1,045 - 1,045 - - -
Locarno (4) 12.500 Dec. 2015 675 675 - 675 - - -
---------- ---------- -------- ---------- ---------- --------
Subtotal non-participating subordinate bonds 1,720 - 1,720 - - -
---------- ---------- -------- ---------- ---------- --------
Other Bond Related Investments:
RITES (4) 3,600 4,354 299 4,653 - - -
Interest rate swap (5) 7,200 - (260) (260) - - -
Purchase commitment (6) 33,900 - - - - - -
---------- ---------- -------- ---------- ---------- --------
Subtotal other bond related investments 4,354 39 4,393 - - -
---------- ---------- -------- ---------- ---------- --------
Total investment in mortgage
revenue bonds and other bond related investments $171,209 $12,423 $183,632 $147,123 ($981) $146,142
========== ========== ======== ========== ========== ========
(1) These bonds also contain additional interest features contingent on available cash flow, except for Barkley Place, Meadows,
and Steeplechase Falls.
(2) One of the original 22 bonds.
(3) Series B Bonds derived from original 22 bonds.
(4) 1996 Acquisitions.
(5) Amount represents notional amount of interest rate swap agreement. See discussion below for further explanation.
(6) On November 12, 1996, the Company agreed to purchase a bond with a face amount of $33,900,000. For further discussion
see Note 11.
General Mortgage Loan Terms
The Company's rights under all of the bonds held by it are defined
by the terms of the related mortgage loans, which are assigned to the
Company to secure the payment of principal and interest under the bonds.
These assignments include assignments of mortgages on the underlying
properties and of rents.
Participating Bonds
The proceeds from the 22 original bonds were used to make
nonrecourse participating first mortgage loans on multifamily housing
developments. Additional collateral was provided in the form of property
level operating reserves funded from construction period cash flow and
by operating deficit guarantees. Of the additional collateral originally
provided, the property level operating reserves have been exhausted on
all but three of the loans, and all but one of the operating deficit
guarantees have expired.
Of the 22 original bonds, the 11 bonds not refunded in the Financing
transaction (and the 11 refunded bonds for the period prior to the
Financing) provide for the payment of base interest and additional
contingent interest. Principal on the mortgage loans will not be amortized
while held by the Company, but will be required to be repaid or refinanced
in a lump sum payment at the end of the holding period or at such earlier
time as the Company may require. The mortgage loans are non-assumable
except with the consent of the Company. Prepayment is prohibited during
the first seven years of the mortgage loan. Between years eight and
eleven, the mortgage loan may be prepaid at the option of the borrower
subject to a declining penalty. Prepayments after the twelfth year, subject
to par value appraisals, are allowed without regard to whether the
mortgaged property is sold or refinanced. The Company may also require
prepayment of the mortgage loan upon the occurrence of an event which
would cause significant risk that the interest on the bonds would be subject
to federal income taxation.
The mortgage loans bear interest at base rates determined by arms
length negotiations that reflected market conditions existing at the time
the original bonds were purchased by the Company. Each loan provides
for contingent interest in an amount equal to the difference between the
stated base interest rate and 16%. During the construction period, each
original bond bore interest at base rates that were separately negotiated,
and payment of any construction period contingent interest was deferred
until the project was sold or refinanced. Contingent interest (other than
contingent interest during the construction period) is payable during the
year from 100% of the project cash flow until the Company's aggregate
non-compounded interest rate equals the base interest rate plus 1.5% to
2.5% (first tier contingent interest), as the case may be, on each mortgage
loan. Any remaining cash flow is divided equally with the property owner
until the Company reaches its 16% annual limit. To the extent that the
aggregate of all interest payments, including contingent interest, for any
year does not equal 16%, the difference is deferred until the mortgaged
property is sold or the mortgage loan repaid. Sale or repayment proceeds
remaining after the repayment of principal and other specified payments
are all paid to the Company to the extent necessary for the Company to
recover the base rate plus first tier contingent interest previously deferred;
thereafter, 50% of any excess sale or repayment proceeds is paid to the
Company until it reaches its 16% per annum limit. Accordingly, the ability
of the Company to collect contingent interest on the original bonds is
dependent upon the level of project cash flow and sale or repayment
proceeds.
With respect to the 22 original bonds held by the Company prior
to the Refunding, 14 had been placed on non-accrual status as of
December 31, 1994. On February 14, 1995, 11 of these 14 were refunded
in connection with the Financing. During 1995, two additional bonds
(Lakeview and Willowgreen) were placed on non-accrual status. No
additional bonds were placed on non-accrual status during 1996. Thus
as of December 31, 1996 and 1995, five original bonds were on non-accrual
status. Additional interest income that would have been recognized
had these original bonds not been placed on non-accrual status was
approximately $1.8 million, $2.2 million and $3.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
Non-Participating Bonds
On January 19, 1996, the Partnership acquired through MLP II a
Series A Bond collateralized by Riverset II, a multifamily property located in
Memphis, Tennessee for $7,208,000. The bond was purchased at a discount
of $402,000, which is being amortized into income to approximate a level
yield over the life of the bond. The bond bears interest at the stated
annual rate of 9.50%. Principal payments begin in 2013 until maturity in
2019.
On December 12, 1996, the Company purchased for approximately
$7.7 million a mortgage revenue bond collateralized by Charter House, a
multifamily property located in Lenexa, Kansas. The bond provides for
interest at the stated annual rate of 7.45%. Principal amortization on the
mortgage began in January 1997 and continues through the initial
remarketing date in July 2006. At the remarketing date the remarketing
agent is required to adjust the interest rate to enable the bonds to be
remarketed at par but in no event shall the interest rate be greater than
12%. Principal amortization will also be adjusted accordingly. The bond
matures in July 2026. The bond was purchased at a premium of $76,750
which is being amortized into income to approximate a level yield over
the life of the bond. The Company may require mandatory redemption
upon the occurrence of an event which would cause significant risk that
the interest on the bond would be subject to federal income taxation.
Also, on December 12, 1996, the Company purchased the following
three Series A Bonds with stated annual interest rates ranging from 8.15%
to 8.25%: (1) a bond collateralized by Torries Chase, a multifamily property
located in Olathe, Kansas, for approximately $2.1 million; (2) a bond
collateralized by Oakbrook, a multifamily property located in Topeka,
Kansas, for approximately $3.2 million; and (3) a bond collateralized by
Hidden Valley, a multifamily property located in Kansas City, Missouri, for
approximately $1.7 million. The Oakbrook bond was purchased at a
premium of $32,100 which is being amortized into income to approximate
a level yield over the life of the bond. Principal amortization for Hidden
Valley and Torries Chase began in July 1996 and continues through
maturity, January 2026. Principal amortization for Oakbrook began January
1997 and continues through maturity, July 2026. Between years ten and
twelve, the bonds are subject to optional redemption at the option of the
borrowers subject to a declining penalty. The Company may require
mandatory redemption upon the occurrence of an event which would cause
significant risk that the interest on the bonds would be subject to federal
income taxation.
As of December 31, 1996, there were no non-participating bonds
on non-accrual status.
Subordinate Participating Bonds
The Series B Bonds resulting from the Refunding, except for
Steeplechase Falls, Barkley Place and The Meadows, bear annual interest equal
to the greater of (i) three percent (3%) per annum ("base interest") and (ii)
the amount of available cash flow not exceeding 16%. To the extent annual
interest paid on these Series B Bonds for the period is less than 16%, the
difference between 16% and the greater of (i) actual interest collected and
(ii) base interest payable on the earlier of the maturity date or the
redemption date. The Series B Bonds relating to Steeplechase Falls, Barkley
Place and The Meadows bear interest at the annual rate of 16%. Principal
amortization on these Series B Bonds prior to their maturity in January 2030 is
permitted but not required. To the extent the operating partnerships have
available cash flow, as defined, interest is payable monthly.
The Series B Bonds resulting from the Refunding are subordinate in
priority and right of payment to the related Series A Bonds and Demand Notes
(discussed in Note 6) and are payable only to the extent of available cash flow.
For the years ended December 31, 1996 and 1995, interest payments of
approximately $4.8 million and $3.4 million, respectively, were received on
these Series B Bonds. All 11 of the bonds were on non-accrual status. As
of December 31, 1996 and 1995, the three Series B Bonds that bear interest
at 16% were unable to pay full base interest. Additional interest income that
would have been recognized by the Company had these bonds not been placed
on non-accrual status was approximately $760,000 and $802,000 for the years
ended December 31, 1996 and 1995, respectively.
In connection with the purchase of the Riverset II Series A Bond, the
Company also acquired the related Series B mortgage revenue bond, with a
face value of $1,519,000, which was allocated $30,000 of the total purchase
price. The bond, which matures in 2019, bears interest equal to the extent
of available cash flow not to exceed the annual rate of 10%. Principal
amortization is required to the extent cash is available in accordance with
the bond terms. For the year ended December 31, 1996, the interest and
principal payments received on the bond were approximately $25,000 and
$30,000, respectively.
All of the participating subordinate bonds are on non-accrual status
as of December 31, 1996.
Non-Participating Subordinate Bonds
On August 30, 1996, the Company purchased the following two non-participating
Series B Bonds providing for interest at the stated annual
rate of 12.5%: (1) a bond collateralized by Locarno, a multifamily property
located in Kansas City, Missouri for $675,000 and (2) a bond collateralized
by Independence Ridge, a multifamily property located in Jackson County,
Missouri for $1,045,000. Both bonds were purchased at face value.
Principal may be repaid in a lump sum payment any time after the initial
remarketing date but is required no later than the maturity date in 2015.
As of December 31, 1996, there were no non-participating subordinate
bonds on non-accrual status.
Bond Related Investments
On October 15, 1996, the Company purchased $3.6 million (par
value) in RITES, a security offered by Merrill Lynch through its P-FLOATs
Program for approximately $4.4 million. The RITES are part of a program
under which a bond is placed into a trust and two types of securities are
sold by the trust, P-FLOATs and RITES. For the Series PA-120 P-FLOATs
and RITES, Merrill placed into a trust $10.8 million in multifamily revenue
bonds with a coupon of 7.875% collateralized by South Pointe Apartments
and Hunters Ridge Apartments, two properties located in St. Louis, Missouri.
The trust was securitized into $7.2 million in P-FLOATs and $3.6 million
in RITES. The P-FLOATs are the senior security and bear interest at a rate
that is reset weekly by the Remarketing Agent, Merrill Lynch, to result in
the sale of the P-FLOATs at par. The RITES are the subordinate security
and receive the residual interest. The residual interest is the remaining
interest on the $10.8 million bond after payment of all fees and the P-FLOATs
interest. The $800,000 premium paid for the RITES is being amortized into
income to approximate a level yield over the term of the RITES. The RITES
are subject to mandatory semi-annual call provisions.
The Company entered into an interest rate swap contract to hedge
against interest rate exposure on the Company's investment in the RITES.
Under the interest rate swap agreement, the Company is obligated to pay
Merrill Lynch Capital Services, Inc. (the "Counterparty") a fixed rate equal
to 5.22%. In return, the Counterparty will pay the Company a floating rate
equivalent to the PSA Municipal Swap Index, an index of weekly tax-exempt
variable rate issues. The average PSA rate for the period covered was
approximately 3.54%. The interest rate swap agreement matures on July
1, 2005. The swap contract in conjunction with the RITES is intended to
produce a relatively constant yield of approximately 8.5% over the effective
duration of the RITES. Risks arise from the possible inability of the
Counterparty to meet the terms of the contract with the Company.
However, there is no current indication of such inability. The fair value
of the interest rate swap agreement at December 31, 1996 is ($260,000).
For the period ended December 31, 1996, the net amount due and payable
under the interest rate swap agreement is approximately $32,000. To the
extent the Company receives net income under the interest rate swap
agreement, taxable income will result.
Valuation Adjustments
For the year ended December 31, 1996, the net adjustment to
unrealized gains and losses on mortgage revenue bonds and other bond
related investments available for sale increased shareholders' equity by
approximately $9.4 million. The Company recorded other-than-temporary
impairments totaling $3,990,000 on five bonds: Creekside ($1,239,000),
Lakeview ($1,315,000), Willowgreen ($1,131,000), Mallard I ($143,000) and
Mallard II ($162,000) in the second quarter of 1996. For 1995, there were
no other-than-temporary impairments. During 1994, the Company
recorded an other-than-temporary impairment of $2,014,000 on the
Lakeview bond.
The other-than-temporary impairments (and the unrealized gains
and losses) discussed above do not affect the cash flow generated from
property operations, distributions to shareholders, the characterization of
the tax-exempt income stream nor the financial obligations under the
bonds. The Company will continue to evaluate the need for
other-than-temporary impairments in the future as circumstances dictate.
NOTE 6 - PARITY WORKING CAPITAL LOANS AND DEMAND NOTES
Parity Working Capital Loans
As of December 31, 1996 and 1995, the Company held 10 parity
working capital loans, all relating to the remaining original bonds and
having terms similar to those of the bonds to which they relate . The
carrying value of the Company's investment in parity working capital loans
is believed by management to approximate fair value, in the absence of
a readily available market, and reflects valuation allowances of $713,000
and $600,000 at December 31, 1996 and 1995, respectively.
At December 31, 1994, there were 13 parity working capital loans
on non-accrual status. On February 14, 1995, ten of the loans placed on
non-accrual status were converted into working capital demand notes,
discussed below. During 1995, two additional loans were placed on
non-accrual status. No additional loans were placed on non-accrual status
during 1996. Thus as of December 31, 1996 and 1995, five loans were on
non-accrual status. Additional interest income that would have been
recognized had these loans not been placed on non-accrual status was
approximately $56,000, $68,000 and $71,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
Demand Notes
As part of the Financing, ten parity working capital loans, and
unpaid and accrued interest thereon, aggregating approximately $4.8
million, were converted to Working Capital Demand Notes, and unpaid and
unaccrued base interest receivable of approximately $15.5 million on the
eleven refunded original bonds were converted to Accrued Interest Demand
Notes. In addition, as discussed in Note 4, the approximately $5.0 million loan
to the operating partnerships in connection with the Financing is a demand
loan represented by the Load Loan Demand Notes.
The Working Capital, Accrued Interest and Load Loan Demand Notes
(collectively the "Demand Notes"), in the aggregate original principal face
amount of approximately $25.3 million, are due on demand, but in any case
not later than January 2030. The Demand Notes bear interest at a compound
annual rate equal to the Blended Annual Rate in effect for that calendar year
as published by the Internal Revenue Service. For 1996 and 1995, the Blended
Annual Rate approximated 5.77% and 6.6%, respectively. To the extent the
operating partnerships have available cash flow, interest on the principal
amount and scheduled principal payments are payable monthly. Beginning
on September 1, 1996, the principal payments on the Working Capital Demand
Notes and the Load Loan Demand Notes were suspended and deferred until
further notice.
For financial reporting purposes, interest income is recognized for the
portion of principal payments received that represents payment for previously
unaccrued interest. For the period August 1, 1996 to December 31, 1996,
approximately $722,000 was received by the Company for principal payments
on the Demand Notes, of which approximately $645,000 was recorded as
income. For the periods ended July 31, 1996 and December 31, 1995,
approximately $1.5 million and $2.2 million, respectively, was received for
principal payments on the Demand Notes, of which approximately $943,000
and $1.4 million, respectively, was recorded as income in the financial
statements of MLP II.
For disclosure purposes, the fair value of the parity working capital
loans is determined in conjunction with the valuation of the bonds to which
they relate and is believed by management to approximate carrying value. The
Demand Notes, together with the Series B Bonds, primarily represent the
residual interest (after the Series A Bonds that were sold) in the cash flows
of the underlying property collateral. Only a limited active market exists for
both Demand Notes and the Series B Bonds. Also, as illustrated above, as
long as the Company is entitled to the residual cash flow, to the extent
permitted under the terms of the Demand Notes and the Series B Bonds, the
specific cash flows applicable to each of the residual interests may be altered
from time-to-time. Accordingly, it is difficult and, in the opinion of
management, not meaningful to estimate a separate fair value for the Demand
Notes. However, under the assumption that the fair value of the parity
working capital loans approximates their carrying value, and using discounted
cash flow analyses for the Demand Notes based on their terms as they existed
at December 31, 1996 and 1995, an aggregate fair value for the Company's
direct and indirect investment in parity working capital loans and Demand
Notes could be estimated to be $19.3 million and $21.3 million at December
31, 1996 and 1995, respectively.
NOTE 7 - RELATED PARTY TRANSACTIONS
Upon consummation of the Merger (see Note 3), all employees of an
affiliate of the former Managing General Partner of the Partnership who
were necessary for the prudent operations of the Company became
employees of the Company, which now incurs their salary expenses directly.
Certain administrative services, including services performed by shared
personnel, continue to be performed by an affiliate that receives direct
reimbursement from the Company on a monthly basis. The expense
associated with the shared personnel was previously charged to salaries
as shown in the following table.
For the year ended December 31,
---------------------------------------------------------
1996 1995 1994
(000's) (000's) (000's)
----------------- ----------------- -----------------
Charged to Series I:
Salaries of noncontrolling persons &
related expenses $321 $458 $439
Other administrative expenses 51 95 109
----------------- ----------------- -----------------
Expenses reimbursed $372 $553 $548
================= ================= =================
Charged to Series II:
Salaries of noncontrolling persons &
related expenses $154 $220 $212
Other administrative expenses 25 46 52
----------------- ----------------- -----------------
Expenses reimbursed $179 $266 $264
================= ================= =================
Charged to Company subsequent
to July 31, 1996:
Other adminstrative expenses $56 - -
================= ================= =================
Total:
Salaries of noncontrolling persons &
related expenses $475 $678 $651
Other administrative expenses 132 141 161
----------------- ----------------- -----------------
Expenses reimbursed $607 $819 $812
================= ================= =================
Included in the amounts Due to Affiliates in the accompanying balance
sheets are amounts payable to the former Managing General Partner and
its affiliates related to such costs. At December 31, 1996 and 1995, the
amounts due approximated $-0- and $7,000, respectively.
Affiliates of certain directors and officers of the Company are also
responsible for a full range of property management functions for certain
properties which collateralize the Company's investments in mortgage
revenue bonds. For these services the affiliates receive property
management fees pursuant to management fee contracts. Consistent with
the Company's Restated Certificate of Formation and Operating Agreement
(the "Operating Agreement"), each affiliate property management contract
is presented to the independent members of the Board of Directors for
approval with information documenting the comparability of the proposed
fees to those in the market area of the property. During the years ended
December 31, 1996, 1995 and 1994, these fees approximated $1,026,000,
$950,000, and $707,000, respectively.
Certain entities which control certain operating partnerships, whose
property is the underlying collateral for the Company's bond investments,
are controlled by Mark K. Joseph, the Chairman of the Board and Chief
Executive Officer of the Company. These operating partnerships were
created as successors to the original borrowers. The loan obligations
preserve the participation in cash flow for the bond holder and assure
thereby that the Company will realize the primary economic benefit from
the transactions. However, such entities could have interests which do not
fully coincide with, or even are adverse to, the interests of the Company.
Such entities could choose to act in accordance with their own interests,
which could adversely affect the Company. Among the actions such entities
could desire to take might be selling a property, and thereby causing a
redemption event, at a time and under circumstances which would not be
advantageous to the Company.
On September 1, 1996, the eleven operating partnerships included in
the Financing entered into an agreement with the Company whereby the
principal amortization on the Working Capital and Load Loan Demand Notes
were suspended. The managing general partner of these operating
partnerships is an entity controlled by an affiliate of certain directors and
officers. This action did not change the total cash payments received from
the operating partnerships, but did result in additional interest income of
$313,000.
Shelter Development Holdings, Inc. the "Special Shareholder" is
personally liable for the obligations and liabilities of the Company. Mr.
Joseph has an ownership interest in the Special Shareholder. In the event
that a business combination or change in control occurs, and the Special
Shareholder does not approve of such transaction, then the Special
Shareholder has the right to terminate its status as the Special Shareholder.
In the event of such termination, the Company would be obligated to pay
the Special Shareholder $1,000,000.
Prior to the Merger, the former Associate General Partner received fees
for mortgage servicing from the operating partnerships owning the mortgaged
properties. The fees paid by all operating partnerships to the former Associate
General Partner approximated $1.2 million for the period January 1 through
July 31, 1996 and approximately $2 million for each of the years ended
December 31, 1995 and 1994, respectively. As discussed in Note 3, on August
1, 1996, the former General Partners and their affiliates contributed to the
Company their mortgage servicing activities in exchange for Growth Shares,
and the Company now receives the cash flow associated with these fees. Upon
receipt of the mortgage servicing activities, the Company terminated the
mortgage servicing fees paid on bonds collateralized by properties controlled
by affiliates of the Company. As a result, the Company now receives these fees
in two forms, (1) as mortgage servicing fees from the bonds collateralized by
properties controlled by non-affiliates and paid to the former Associate
General Partner which is now substantially owned by the Company , and (2)
as additional bond interest for bonds collateralized by properties controlled
by affiliates of the Company. For the five months ended December 31, 1996,
the cash flow associated with these fees paid to the Company approximated
$206,000 in mortgage servicing fees and $616,000 in additional bond interest.
An affiliate of the former Managing General Partner was engaged as MLP
II's exclusive project acquisition and servicing agent. The affiliate received
as compensation, project selection and acquisition fees (one percent of the
gross proceeds) and annual mortgage servicing fees to the extent the net
proceeds raised by the Financing are permanently invested. On August 1,
1996, the rights to these fees were exchanged for Growth Shares in
connection with the Merger transaction. Prior to the Merger, $97,000 was
earned by the affiliate related to such fees.
In addition, 177061 Canada Ltd. (formerly Shelter Corporation of Canada
Limited), a general partner of the former Associate General Partner, is
contractually obligated to the nonaffiliated borrowers of North Pointe and
Whispering Lake to fund operating deficits. The unaccrued and unpaid
balances due under the limited operating deficit guarantees, including
interest as of December 31, 1996, totaled $86,000 and $117,000 for North
Pointe and Whispering Lake, respectively. Scheduled payments totaling
$98,000, $116,000 and $ 119,000 were received on the North Pointe
obligation and recorded as income during 1996, 1995 and 1994, respectively.
Under the Whispering Lake obligation, $139,000, $165,000 and $168,000 were
received and recorded as income during 1996, 1995 and 1994, respectively.
The borrower of the funds to be provided by the $33.9 million mortgage
revenue bond described in Note 11 will be the Shelter Foundation, a public
non-profit foundation that provides housing and related services to families
of low and moderate income. Mark K. Joseph, the Company's Chairman
and Chief Executive Officer, is the President and one of five directors of
the Shelter Foundation. In addition, companies of which Mr. Joseph owns
an indirect minority interest will receive a consulting fee of 1.0% of the loan
amount and will serve as property manager of the related apartment project
for a fee anticipated to be 3.0% of annual gross property receipts.
NOTE 8 - SHAREHOLDERS' EQUITY
The Company's Preferred Shares, Preferred CD Shares, Term Growth
Shares and Growth Shares differ principally with respect to allocation of
income and cash distributions, as provided by the terms of the Operating
Agreement and is summarized below. In addition, the Preferred Shares
and Preferred CD Shares, which retain their BAC series distinctions, have
priority over the Growth Shares and Term Growth Shares with respect to
distributions and redemptions.
Preferred Shares
Taking into account their respective series distinctions, the Preferred
Shares are allocated their proportionate share of the income generated by
the 22 original bonds and related parity working capital loans held by the
Partnership immediately prior to the Financing (collectively the "original
bonds") including income attributable to the refunded Series A Bonds no
longer held by the Company. While the Preferred Shares bore their
proportionate share of the expenses of the Refunding and will bear their
share of the expenses of any future refundings of the original bonds, the
Preferred Shares are not allocated any income or expense related to the
Financing and the investment of the proceeds therefrom or from any future
financings. The Company is required to distribute to the holders of the
Preferred Shares cash flow attributable to such shares, as defined by the
Operating Agreement. The Preferred Shares must be partially redeemed
when any bond attributable to the shares is sold or beginning in the year
2000 when any bond attributable to the shares reaches par value (which
includes accrued but unpaid base interest under the original bond terms
and accrued but unpaid interest under the then-current bond terms) based
on receipt of an appraisal of the property securing the bond. Additionally,
beginning in the year 2004, and every second year thereafter, Preferred
Shareholders may exchange their remaining Preferred Shares, at the then
current value of the remaining attributable assets for either Growth Shares
or cash, as determined by the Company's Board of Directors.
Preferred CD Shares
The Preferred CD Shares are allocated their proportionate share of
income on the same basis as the Preferred Shares, except that in addition
the Preferred CD Shares received a one-time special distribution of their
proportionate share of the net proceeds from the Financing, will receive
a similar distribution with respect to any future financings of the original
bonds, are not allocated any income attributable to the refunded Series A
Bonds and are allocated their proportionate share of the annual costs of
the Financing (and any such future financings utilizing any of the original
bonds). The Company is required to distribute to the holders of the
Preferred CD Shares cash flow attributable to such shares, as defined by
the Operating Agreement. The Preferred CD Shares must be partially
redeemed when any bond attributable to the shares is sold or beginning
in the year 2000 when any bond attributable to the shares reaches par
value (which includes accrued but unpaid base interest under the original
bond terms and accrued but unpaid interest under the then-current bond
terms) based on receipt of an appraisal of the property securing the bond.
Additionally, beginning in the year 2004, and every second year thereafter,
Preferred CD Shareholders, may exchange their remaining Preferred CD
Shares, at the then current value of the remaining attributable assets for
either Growth Shares or cash, as determined by the Company's Board of
Directors.
Term Growth Shares
The Term Growth Shares are allocated an aggregate of 2% of the
Company's net income after allocation to the Preferred Shares and
Preferred CD Shares, and the holders of the Term Growth Shares are
entitled to distribution of the cash flow attributable to such allocable
income before any distributions to the holders of the Growth Shares. Term
Growth Shares will be redeemed when Preferred and Preferred CD Shares
are fully redeemed or converted (subject to certain conditions defined in
the Operating Agreement).
Growth Shares
The Growth Shares are allocated the balance of the Company's income
after allocation to the Preferred Shares, Preferred CD Shares, and Term
Growth Shares. Consequently, the Growth Shares are allocated their
proportionate share of the income generated by the original bonds
(excluding the income generated by the Series A Bonds that serve as
collateral for the Receipts) and all of the income generated by bonds
acquired with the proceeds from the Financing and any future financings.
As of December 31, 1996, it is the Company's policy to distribute to the
holders of the Growth Shares 95% of cash flow from operations after
distributions to the holders of the Preferred Shares, Preferred CD Shares,
and Term Growth Shares.
During 1996 the following distributions were declared and paid:
Preferred Capital
BACs Preferred Shares Distribution Shares
------------------------ Growth ------------------------ ------------------------
Series I Series II Shares Series I Series II Series I Series II
----------- ----------- ----------- ----------- ----------- ----------- -----------
Distributions paid on July 31, 1996
to holders of record on June 30, 1996:
For the six months ended
June 30, 1996 from the Partnership
(prior to the Merger) $26.25 $27.50 N/A N/A N/A N/A N/A
Distributions paid on August 15, 1996
to holders of record on August 1, 1996:
Special distribution/return of capital
in accordance with the Prospectus N/A N/A N/A - $6.84 $177.59 $252.03
Distributions paid on February 14, 1997
to holders of record on December 31, 1996:
For the one month ended
July 31, 1996 from the Partnership
(prior to the Merger)* N/A N/A $0.0700 $3.75 3.74 2.92 3.65
For the five months ended
December 31, 1996 from the
Company (subsequent to the Merger) N/A N/A 0.5625 22.50 26.90 18.65 21.35
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $26.25 $27.50 $0.6325 $26.25 $37.48 $199.16 $277.03
=========== =========== =========== =========== =========== =========== ===========
* While the distribution for July 1996 is reported on the basis of the dividend payment per Growth Share,
prior to the August 1, 1996 Merger, investors held limited partnership interest in the form of BACs. For
July, the distribution per BAC can be calculated by multiplying $0.07 by the applicable conversion ratio
(38.10 for Series I and 43.95 for Series II). Also, the affiliates of the former Managing General Partner
of the Partnership who received Growth Shares in the Merger did not receive the July 1996 distribution
paid to Growth Shareholders since they were not holders in July 1996.
NOTE 9 - SHARE REPURCHASE PROGRAM
On August 28, 1996, the board of directors approved a Growth Share
repurchase program under which the Company is authorized to repurchase up
to 700,000 Growth Shares from time to time through February 28, 1997, the
expiration date, in the open market and in privately negotiated transactions.
As of December 31, 1996, the Company had purchased 60,798 shares at an
average price of $15.34 per share.
NOTE 10 - NON-EMPLOYEE DIRECTORS' SHARE PLAN AND
EMPLOYEE INCENTIVE PLAN
Non-Employee Directors' Share Plan
On July 31, 1996, the Company adopted the Non-Employee Directors'
Share Plan (the "Directors' Plan") for the purpose of providing a means to
attract and retain highly qualified persons to serve as non-employee directors
of the Company. Under the plan, an option to purchase 2,500 Growth Shares
will be granted to each director when first elected or appointed to the Board
of Directors and each year thereafter on the date of the annual meeting of
shareholders. The exercise price of such options will be equal to 100% of the
fair market value of the Growth Shares on the date of grant. Options expire
at the earlier of ten years after the date of grant or one year after the date a
director ceases to serve as such. The options become exercisable in full on the
first anniversary of the date of grant. There are 50,000 Growth Shares reserved
for issuance under the plan. As of December 31, 1996, options to purchase
12,500 Growth Shares were outstanding under the plan at an exercise price
of $14.75 per share, the fair value at date of grant, August 1 and August 28,
1996.
The Directors' Plan also entitles each director to elect to receive payment
of directors' fees in the form of Growth Shares, based on their fair market
value on the date of payment, in lieu of cash payment of such fees. Such shares
may also be paid on a deferred basis, whereby the shares payable (the "Deferred
Shares") are credited to the account of the director, and future dividends
payable with respect thereto are paid in the form of additional share credits
based upon the fair market value of the Growth Shares on the record date of
the dividend payment. As of December 31, 1996, no Growth Shares and 925
Deferred Shares had been issued to directors in lieu of cash payments for
director fees.
1996 Share Incentive Plan
On July 31, 1996, the Company adopted an Employee Incentive Plan (the
"Plan") to retain and reward executive officers and other key employees of the
Company. The Plan authorizes grants of a broad variety of awards, including
non-qualified stock options, stock appreciation rights, restricted shares,
deferred shares and shares granted as a bonus or in lieu of other awards.
Initially, 883,033 Growth Shares are reserved for issuance under the Plan,
except that shares issued as restricted shares and as awards, other than options
(including restricted shares), may not exceed 20% and 40% of the total
reserved under the Plan, respectively. The exercise price of options granted
under the Plan will be equal to 100% of the fair market value of the Growth
Shares on the date of grant. As of December 31, 1996, there were no awards
granted under the Plan.
Compensation Expense
The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock issued to Employees," in accounting for these plans.
Accordingly, no compensation expense has been recognized under either plan
during 1996. Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation ("FAS 123")," requires the Company to make certain
disclosures as if the compensation expense for the Company's plans had been
determined based on the fair value at date of grant for awards under those
plans. Accordingly, the Company estimated the fair value at the date of grant
of each option awarded to be less than $1.00 per share using the Black-Scholes
option pricing model. On a proforma basis under FAS 123, net income
allocable to Growth Shares and earnings per Growth Share would have
remained unchanged. These proforma effects are not indicative of future years
since the options granted were the first options granted by the Company since
its shares began trading on August 30, 1996.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
On November 12, 1996, the Company committed to purchase a
$33,900,000 mortgage revenue bond to be issued by the DeKalb County
Housing Authority for a 722-unit multifamily apartment project known as
the Village of Stone Mountain located in suburban Atlanta, Georgia. The
bonds will provide for annual interest payments of 8.75% (of which 8% will
be required to be paid on a current basis, with the remaining .75% payable
from available net cash flow) plus contingent interest equal to the lesser
of (i) 7.25% or (ii) one-third of the property's net cash flow. Pending the
issuance of the bond, which is anticipated to occur in late 1997 or early
1998, the Company on December 17, 1996 guaranteed bridge financing
provided by NationsBank for a fee of 1.0% of the loan amount and an annual
guarantee fee of 1.0% until bond issuance.
The Company's exposure (in the event of the borrower's non-performance) for
the guarantee of the bridge financing is equal to the contractual amount of
the purchase commitment. The Company does not believe exposure to loss is
likely.
NOTE 12 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 1994, the Partnership adopted the provisions of FAS 115.
The cumulative effect of adopting this accounting change was to decrease
Partners' Capital by approximately $19.9 million as of January 1, 1994.
Of such amount, approximately $11.9 million was attributable to operations
prior to January 1, 1994 and is reflected in the income statement as a
cumulative effect of the accounting change, and approximately $8.0 million
was attributable to an unrealized holding loss as of such date. The
cumulative effect adjustment did not affect the cash flow generated from
property operations, distributions to BAC holders, the characterization of
the tax-exempt income stream, or the financial obligations under the
bonds.
NOTE 13 - SUBSEQUENT EVENT
On January 27, 1997, the Company acquired a $7.1 million tax-exempt
mortgage revenue bond at a stated annual interest rate of 5.5%
collateralized by a 200-unit multifamily apartment project known as The
Crossings, located in DeKalb County, Georgia. The Company also made a
taxable second loan on the property in an amount not to exceed $844,000
of which approximately $562,000 has been drawn by the borrower. The bond
is to be refunded within six months of the acquisition and as a result, the
stated annual interest rate will be changed to 8.0% and the maturity date
will be extended to a 30-year term with a prepayment option in the twelfth
year. Once refunded, the Company will participate in the growth in the value
of the underlying property collateral through contingent interest payments
from the property's cash flow. In the interim, under the terms of the
transaction, the Company will receive an effective interest rate of 8.81%
on the combined investment as a result of a yield maintenance agreement
entered into between the borrower and the Company. Approximately 90%
of the interest collected will be tax-exempt.
NOTE 14 - QUARTERLY RESULTS (Unaudited):
(in thousands, except per share and per BAC data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ------------ ------------ ------------
Year ended December 31, 1996:
Total income $4,069 $4,526 $5,179 $4,896
Net income (loss) 3,222 (420) 3,987 4,079
Net income (loss) per BAC prior to August 1, 1996:
Series I $10.35 ($7.49) $2.47 N/A
Series II 11.63 11.24 3.18 N/A
Net income per share subsequent to July 31, 1996:
Preferred shares:
Series I N/A N/A $10.19 $12.65
Series II N/A N/A 11.14 16.10
Preferred capital distribution shares:
Series I N/A N/A $8.70 $10.16
Series II N/A N/A 8.92 12.61
Growth shares N/A N/A $0.25 $0.31
Growth share Market Price Data*:
High N/A N/A $16 1/8 $16 3/4
Low N/A N/A 13 5/8 13 7/8
Year Ended December 31, 1995:
Total income $5,710 $3,556 $3,709 $4,738
Net income 4,344 2,761 2,327 3,772
Net income per BAC:
Series I $16.46 $8.38 $7.18 $11.72
Series II 10.47 10.99 9.01 14.44
* Since August 30, 1996 the Company's Growth Shares have been traded on the American Stock Exchange (the
"AMEX") under the symbol "MMA." Set forth above are the high and low sale prices for the Growth Shares for
each calendar quarter (since trading began) in 1996 as reported by the AMEX. Amounts shown represent actual
sales transactions as reported by the AMEX.
EXHIBIT 24
Consent of Price Waterhouse LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-17427) of Municipal Mortgage and Equity, L.L.C.
of our report dated February 19, 1997 appearing at the end of the issuer's
Annual Report on Form 10-K for the year ended December 31, 1996.
/s/ PRICE WATERHOUSE
Baltimore, Maryland
March 24, 1997