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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
---------------------------------------------
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
- ------------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
- -------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
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
--- ---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
============ ============
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Revenue Bonds-at fair value $ 1,402,979 $ 1,137,715
Investment in ARCap 19,054 18,950
Guaranteed investment contracts 23,669 18,406
Mortgage servicing rights - net 35,665 33,708
Cash and cash equivalents 69,537 105,364
Cash and cash equivalents-restricted 4,868 4,670
Interest receivable - net 7,649 6,458
Promissory notes and mortgages receivable 29,330 45,022
Deferred costs - net 43,531 34,666
Goodwill 4,186 9,842
Other intangible assets - net 11,437 3,154
Other assets 3,167 3,104
----------- -----------
Total assets $ 1,655,072 $ 1,421,059
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 529,014 $ 541,796
Notes payable 46,024 56,586
Interest rate derivatives 5,953 2,958
Accounts payable, accrued expenses and
other liabilities 10,302 13,820
Deferred income 7,679 2,870
Due to Manager and affiliates 2,658 2,266
Due to FNMA 23,669 18,406
Distributions payable to preferred shareholders
of subsidiary 4,724 3,693
Deferred tax liability 10,394 10,251
Distributions payable to convertible CRA shareholders 968 565
Distributions payable to common shareholders 13,171 10,448
----------- -----------
Total liabilities 654,556 663,659
----------- -----------
Preferred shares of subsidiary (subject to mandatory
repurchase) 273,500 218,500
----------- -----------
Minority interest in consolidated subsidiary 4,527 3,652
----------- -----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity - convertible CRA share-
holders (3,259,297 and 1,882,364 shares, issued and
outstanding in 2002 and 2001, respectively) 48,630 25,522
Beneficial owner's equity-manager 1,499 1,069
Beneficial owners' equity-other common shareholders
(100,000,000 shares authorized; 41,168,618 issued
and 41,160,218 outstanding and 34,834,308
shares issued and 34,825,908 outstanding in
2002 and 2001, respectively) 605,418 511,456
Treasury shares of beneficial interest (8,400 shares) (103) (103)
Accumulated other comprehensive income (loss) 67,045 (2,696)
----------- -----------
Total shareholders' equity 722,489 535,248
----------- -----------
Total liabilities and shareholders' equity $ 1,655,072 $ 1,421,059
=========== ===========
See accompanying notes to consolidated financial statements
2
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
============================ ============================
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
---------------------------- ----------------------------
Revenues:
Interest income:
Revenue bonds $ 22,819 $ 18,819 $ 67,764 $ 51,520
Temporary investments 303 270 1,098 886
Promissory notes 166 168 489 658
Equity in earnings of ARCap 555 -- 1,664 --
Mortgage banking fees 594 -- 3,644 --
Mortgage servicing fees 2,050 -- 5,912 --
Other income 2,152 50 6,040 590
------------ ------------ ------------ ------------
Total revenues 28,639 19,307 86,611 53,654
------------ ------------ ------------ ------------
Expenses:
Interest expense 3,850 3,010 11,634 10,313
Recurring fees relating to the Private Label
Tender Option Program 811 623 2,289 1,758
Bond servicing 875 618 2,519 1,755
General and administrative 4,166 523 14,939 1,995
Amortization 2,024 222 6,024 623
Income allocated to minority interest 124 -- 377 --
Provision for loss under FNMA
DUS product line 68 -- 596 --
Loss on impairment of
revenue bonds 532 -- 532 400
------------ ------------ ------------ ------------
Total expenses 12,450 4,996 38,910 16,844
------------ ------------ ------------ ------------
Income before gain on repayments
of revenue bonds and sales of loans 16,189 14,311 47,701 36,810
Gain on sales of loans 1,533 -- 8,467 --
Gain on repayments of revenue bonds -- -- 3,979 103
------------ ------------ ------------ ------------
Income before allocation to preferred
shareholders of subsidiary 17,722 14,311 60,147 36,913
Income allocated to preferred
shareholders of subsidiary (4,724) (2,962) (12,541) (8,885)
------------ ------------ ------------ ------------
Income before provision (benefit) for
income taxes 12,998 11,349 47,606 28,028
(Provision) benefit for income taxes 656 -- (983) --
------------ ------------ ------------ ------------
Net Income $ 13,654 $ 11,349 $ 46,623 $ 28,028
============ ============ ============ ============
Allocation of net income to:
Special distribution to Manager $ 1,294 $ 899 $ 3,622 $ 2,593
============ ============ ============ ============
Manager $ 124 $ 104 $ 430 $ 255
============ ============ ============ ============
Common shareholders $ 11,327 $ 10,166 $ 40,266 $ 23,564
Convertible CRA shareholders 909 180 2,305 1,616
------------ ------------ ------------ ------------
Total for shareholders $ 12,236 $ 10,346 $ 42,571 $ 25,180
============ ============ ============ ============
Net income per share
Basic $ 0.28 $ .31 $ 1.01 $ .86
============ ============ ============ ============
Diluted $ 0.28 $ .31 $ 1.01 $ .86
============ ============ ============ ============
Weighted average shares
outstanding :
Basic 44,209,982 32,986,483 42,030,318 29,322,639
============ ============ ============ ============
Diluted 44,282,733 33,038,075 42,099,407 29,380,465
============ ============ ============ ============
See accompanying notes to consolidated financial statements
3
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Beneficial Beneficial
Owners' Owners' Accumulated
Equity - Beneficial Equity- Treasury Other
Convertible Owner's Other Shares of Compre-
CRA Equity - Common Beneficial Comprehensive hensive
Shareholders Manager Shareholders Interest Income (Loss)Income Total
------------ -------- ------------ ---------- ------------- ------------ -----
Balance at January 1, 2002 $25,522 $ 1,069 $511,456 $(103) $ (2,696) $535,248
Comprehensive income:
Net income 2,305 4,052 40,266 $ 46,623 46,623
--------
Other comprehensive gain (loss):
Net unrealized loss on (3,095)
interest rate derivatives
Net unrealized gain on revenue bonds:
Unrealized holding gain arising 76,815
during the period
Less:Reclassification adjustment for (3,979)
net gain included in net income --------
Other comprehensive gain: 69,741 69,741 69,741
--------
Comprehensive income $116,364
========
Issuance of convertible CRA shares 22,938 22,938
Issuance of common shares 92,383 92,383
Distributions (2,135) (3,622) (38,687) (44,444)
------- -------- -------- ----- -------- --------
Balance at September 30, 2002 $48,630 $ 1,499 $605,418 $(103) $ 67,045 $722,489
======= ======== ======== ===== ======== ========
See accompanying notes to consolidated financial statements
4
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
======================
Nine Months Ended
September 30,
----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 46,623 $ 28,028
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on repayment of revenue bonds (3,979) (103)
Loss on impairment of revenue bonds 532 400
Other amortization 823 623
Amortization of other intangible assets 357 355
Amortization of bond selection costs 1,354 2,031
Amortization of mortgage servicing rights 4,944 --
Accretion of deferred income and purchase
accounting adjustment (8) (93)
Income allocated to preferred shareholders
of subsidiary 12,541 8,885
Equity in earnings of ARCap in excess of
distributions received (104) --
Increase in mortgage servicing rights (7,498) --
Increase in provision for loss under FNMA DUS product line 596 --
Income allocated to minority interest 377 --
Issuance of shares of subsidiary - compensation expense 498 --
Changes in operating assets and liabilities:
Interest receivable (1,191) (2,258)
Other assets (64) (263)
Increase in goodwill (2,983) --
Increase in due to FNMA 5,263 --
Increase in guaranteed investment contracts (5,263) --
Increase in deferred income 4,809 --
Accounts payable, accrued expenses and
other liabilities (3,489) 677
Deferred tax liability 143 --
Due to Manager and affiliates 156 316
--------- ---------
Net cash provided by operating activities 54,437 38,598
--------- ---------
Cash flows from investing activities:
Proceeds from repayment of revenue bonds 86,130 21,611
Periodic principal payments of revenue bonds 4,179 1,092
Proceeds from repayment of note 6,600 5
Purchase of revenue bonds (279,018) (123,487)
Increase in deferred bond selection costs (6,629) (3,365)
Increase in promissory notes (3,409) (5,565)
Increase in cash and cash equivalents - restricted (198) --
Decrease in notes receivable 10,562 --
Principal payments received from loans
made to properties 1,939 151
--------- ---------
Net cash used in investing activities (179,844) (109,558)
--------- ---------
Continued
5
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
=========================
Nine Months Ended
September 30,
-------------------------
2002 2001
------------ ----------
Cash flows from financing activities:
Distributions paid to the Manager and Common
shareholders (39,319) (23,527)
Distributions paid to preferred shareholders
of subsidiary (11,510) (8,885)
Distributions paid to Convertible CRA
shareholders (1,732) (1,788)
Proceeds from financing arrangements 54,500 171,500
Principal repayments of financing arrangements (67,282) (96,767)
Decrease in notes payable - warehouse lines (10,562) --
Increase in deferred costs relating to the
Private Label Tender Option Program (636) (568)
Issuance of common shares 92,353 116,331
Issuance of convertible preferred shares of subsidiary 22,938 --
Retirement of Convertible CRA Shares -- (8,987)
Increase in fair value of interest rate cap (100) --
Issuance of preferred stock of subsidiary 55,000 --
Increase in deferred costs relating to
the preferred shares offering (2,068) --
Increase in other deferred costs (2,002) --
----------- ---------
Net cash provided by financing activities 89,580 147,309
----------- ---------
Net (decrease) increase in cash and cash equivalents (35,827) 76,349
Cash and cash equivalents at the
beginning of the period 105,364 36,116
----------- ---------
Cash and cash equivalents at the
end of the period $ 69,537 $ 112,465
=========== =========
Supplemental information:
Interest paid $ 10,247 $ 10,302
=========== =========
Taxes paid $ 582
===========
Reclassification of goodwill to intangible assets:
Decrease in goodwill $ (8,639)
Increase in intangible assets 8,639
-----------
$ --
-----------
See accompanying notes to consolidated financial statements
6
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 1 - General
Charter Municipal Mortgage Acceptance Company ("CharterMac"), along with its
consolidated subsidiaries (the "Company"), is a Delaware business trust
principally engaged in the acquisition and ownership (directly or indirectly) of
tax-exempt multi-family housing revenue bonds ("Revenue Bonds") and other
investments that produce tax-exempt income, issued by various state or local
governments, agencies, or authorities. Revenue Bonds are primarily secured by
participating and non-participating first mortgage loans on underlying
properties ("Underlying Properties").
The Company is governed by a board of trustees comprised of three independent
managing trustees and five managing trustees who are affiliated with Related
Capital Company ("Related"), a nationwide, fully integrated real estate services
firm. CharterMac, through CharterMac Corporation, a wholly-owned subsidiary, has
engaged Related Charter L.P. (the "Manager"), an affiliate of Related, to manage
its day-to-day affairs. CharterMac has also directly engaged the Manager to
provide additional management services.
The consolidated financial statements include the accounts of CharterMac and
four subsidiary business trusts which it controls: CM Holding Trust, CharterMac
Equity Issuer Trust, CharterMac Origination Trust I and CharterMac Owner Trust
I, and one wholly-owned corporation, CharterMac Corporation. CharterMac
Corporation owns 80% of PW Funding Inc. ("PWF"), which is also included in the
consolidated financial statements. All intercompany accounts and transactions
have been eliminated in consolidation. Unless otherwise indicated, the
"Company", as hereinafter used, refers to Charter Municipal Mortgage Acceptance
Company and its consolidated subsidiaries.
The accompanying interim financial statements have been prepared without audit.
In the opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial statements of the interim periods. However, the operating results
for the interim periods may not be indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. It is suggested that these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2001.
The consolidated financial statements of the Company are prepared using the
accrual method of accounting in conformity with GAAP, which requires the Manager
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates in the financial statements include the
valuation of the Company's investments in Revenue Bonds, mortgage servicing
rights and interest rate derivatives.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
New Pronouncements
- ------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142). These statements establish new standards
for accounting and reporting for business combinations and for goodwill and
intangible assets resulting from business combinations. SFAS 141 applies to all
business combinations initiated after June 30, 2001. The Company implemented
SFAS 142 on January 1, 2002. Implementation of these statements did not have a
material impact on the Company's financial statements (see Note 4).
7
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the fair value of a liability or an asset
retirement obligation be recorded in the period in which it is incurred. SFAS
No. 143 does not become effective until January 1, 2003. Management believes the
implementation of SFAS No. 143 will not have a material impact on the Company's
financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supercedes existing accounting
literature dealing with impairment and disposal of long-lived assets, including
discontinued operations. It addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of, and
expands current reporting for discontinued operations to include disposals of a
"component" of an entity that has been disposed of or is classified as held for
sale. The Company implemented SFAS No. 144 on January 1, 2002. Implementation of
this statement did not have a material impact on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145, among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains or
losses from the early extinguishments of debt as extraordinary items will only
be required if they meet the specific criteria of extraordinary items included
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations". The revision of SFAS No. 4 is effective January 2003. Management
believes the implementation of SFAS No. 145 will not have a material impact on
the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 does not become effective
until January 1, 2003. Management believes the implementation of SFAS No. 146
will not have a material impact on the Company's financial statements.
NOTE 2 - Revenue Bonds
The Company accounts for its investments in Revenue Bonds as available-for-sale
debt securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Accordingly, the Revenue Bonds are carried at their estimated fair
values, with unrealized gains and losses reported in other comprehensive income.
The weighted average interest rate on the outstanding face amount of the Revenue
Bond portfolio, for both the nine months ended September 30, 2002 and 2001, was
7.35% based on face amounts of approximately $1,341,178,000 and $994,771,000,
respectively.
The amortized cost basis of the Company's portfolio of Revenue Bonds at
September 30, 2002 and December 31, 2001 was $1,329,880,638 and $1,137,453,098,
respectively. The net unrealized gain on Revenue Bonds in the amount of
$73,098,362 at September 30, 2002 consisted of gross unrealized gains and losses
of $79,335,084 and $6,236,722, respectively. The net unrealized loss on Revenue
Bonds of $261,902 at December 31, 2001 consisted of gross unrealized gains and
losses of $20,202,713 and $19,940,811, respectively.
8
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
2002 Transactions
- -----------------
The following table summarizes the Company's acquisition activity for the nine
months ended September 30, 2002.
Weighted Weighted
Aggregate Average Average Number of
Purchase Construction Permanent Revenue
Face Amount Price Interest Rate Interest Rate Bonds
- ---------------------------------------------------------------------------------------------
Non-participating Revenue (Dollars in
Bonds Thousands)
Stabilized properties $ 8,000 $ 8,160 N/A 7.11% 3
Construction/rehabilitation
properties 271,018 276,595 7.23% 7.08% 43
During the nine months ended September 30, 2002, nine Revenue Bonds were sold or
repaid. These Revenue Bonds had an aggregate face amount of approximately $95.5
million and a carrying value of $95.9 million. Additionally, two notes were
repaid at par in the amount of $7.1 million.
During the three months ended September 30, 2002, the Company took an additional
write down of approximately $532,000, on the Lexington Trails Revenue Bond. This
Revenue Bond initially became impaired in the second quarter of 2001, at which
time the Company took a write down of $400,000. Subsequently, the Company caused
the trustee, for the benefit of the Company, to foreclose on the underlying
property. Since the date of the foreclosure, the Company has attempted to find a
buyer for the underlying property. Management believes it is likely that in
connection with a sale of the underlying property, the terms of this Revenue
Bond may need to be modified. The Company has therefore decided to write down
the carrying value to the face amount of the bond of $4.9 million.
NOTE 3 - Deferred Costs
The components of deferred costs are as follows:
(Dollars in Thousands)
September 30, December 31,
2002 2001
------------ -----------
Deferred bond selection costs $ 30,964 $ 25,120
Deferred costs relating to the Private Label
Tender Option Program 7,424 6,788
Deferred costs relating to the issuance of preferred
shares of subsidiary 10,445 8,377
Other deferred costs 2,570 568
-------- --------
51,403 40,853
Less: Accumulated amortization (7,872) (6,187)
-------- --------
$ 43,531 $ 34,666
======== ========
NOTE 4 - Goodwill and Intangible Assets
The Company adopted SFAS 141 on July 1, 2001 and SFAS 142, on January 1, 2002.
The Company has determined that the amounts previously capitalized as goodwill
relating to the initial formation of the Company and to the merger of ATEBT meet
the criteria in SFAS 141 for recognition as intangible assets apart from
goodwill, and accordingly will continue to be amortized over their remaining
useful lives, subject to impairment testing.
During the quarter ended June 30, 2002, PWF engaged a third party valuation firm
to evaluate PWF's licenses with Fannie Mae, Freddie Mac, FHA, GNMA and various
9
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
private investors. As a result of this process approximately $8.6 million has
been reclassified from goodwill to intangible assets, representing the estimated
market value of PWF's licenses. These licenses have an indefinite life and, as a
result, are not being amortized.
During July of 2002, CM Corp. made an additional payment to the original
shareholders of PWF of approximately $3 million ("the True-Up payment") pursuant
to the original acquisition agreement. The True-Up payment was based on i) the
increase in value of servicing rights due to certain loans closing, ii) positive
changes in the audited balance sheets used for the initial purchase price and
the audited balance sheet at December 31, 2001, iii) payments of certain
servicing fees, iv) forward conversions of loans previously committed, and v) a
payment to one shareholder for PWF stock to be used as employee compensation.
The following table provides further information regarding the Company's
intangible assets:
(Dollars in Thousands)
Initial ATEBT Merger PWF Total
Formation Licenses
----------- ------------ -------- -----------
Balance at September 30, 2002 $3,107 $1,320 $8,639 $13,066
Accumulated Amortization (1,381) (248) -- (1,629)
------ ------ ------ -------
Net balance at September 30, $1,726 $1,072 $8,639 $11,437
2002 ====== ====== ====== =======
Amortization Expense for the
nine months ended September $ 258 $ 99 $ -- $ 357
30, 2002 ====== ====== ====== =======
Estimated amortization expense
per year for next five years $ 345 $ 132 $ -- $ 477
====== ====== ====== =======
The amortization is included as a reduction to Revenue Bond interest income.
The amount indicated as goodwill in the accompanying financial statements as of
September 30, 2002 is related to the acquisition, on December 31, 2001 of PWF.
This amount represents goodwill under SFAS 142, and therefore, is not being
amortized. In accordance with SFAS 142, the Company will be testing this
goodwill for impairment during the fourth quarter of 2002.
NOTE 5 - Related Party Transactions
Pursuant to the management agreement and other servicing agreements with
subsidiaries, the Manager receives (inclusive of fees paid directly to the
Manager by subsidiaries of the Company) certain fees for its ongoing management
and operations of the Company and subsidiaries as follows:
Fees/Compensation Amount
----------------- ------
I. Bond selection fees 2.0% of the face amount of each asset invested
in or acquired by the Company.
II. Special distribution .375% per annum of the total invested assets of
the Company.
III. Bond servicing fees .25% per annum of the outstanding face amount
of Revenue Bonds or other investments owned by
the Company.
IV. Liquidation fees 1.5% based on the gross sales price of assets
sold by the Company.
V. Expense reimbursement in an amount not to exceed $741,932 per annum
(subject to increases based on increases in the
Company's assets and to annual increases based
upon increases in the Consumer Price Index).
10
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
VI. Incentive share options The Manager may receive options to acquire
additional shares of the Company pursuant to
the incentive share option plan to the extent
distributions in any year exceed $0.9517 per
common share, and the compensation committee
of the Company's board of trustees determines
to grant such options.
Fees payable to the Manager which are based on Revenue Bonds or assets of the
Company include such Revenue Bonds or assets which are held either directly by
the Company or held by other entities to which the Company has transferred such
Revenue Bonds or assets to facilitate financing. In addition, the Manager
receives bond placement fees directly from the borrower in an amount ranging
from 1.0% to 2.0% of the principal amount of each Revenue Bond or other
investment. In addition, affiliates of the Manager are part of a joint venture
that has development services agreements with the owners of certain underlying
properties.
The term of each of CharterMac's management agreements is one year. The term of
each of CharterMac's subsidiaries' management agreements is five years; provided
that if CharterMac's management agreement with Related Charter LP is terminated
or not renewed, each of the management agreements with such subsidiaries would
terminate as of such date. Each of the management agreements may be renewed,
subject to evaluation of the performance of the manager by the relevant entity's
board of trustees. Each management agreement may be terminated (i) without cause
by the manager, or (ii) for cause by a majority of the applicable entity's
independent trustees, in each case without penalty and upon 60 days prior
written notice to the non-terminating party. CharterMac's management agreements
were renewed effective October 1, 2002 for a period of one year.
The costs, expenses and the special distributions incurred to the Manager and
its affiliates for the three and nine months ended September 30, 2002 and 2001
were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) (Dollars in Thousands)
---------------------- -----------------------
2002 2001 2002 2001
---------------------- -----------------------
Bond selection fees $ 1,681 $ 839 $ 5,662 $ 2,470
Expense reimbursement 242 161 672 489
Bond servicing fees 875 618 2,519 1,755
Special distribution 1,294 899 3,622 2,593
--------- ---------- ---------- ----------
$ 4,092 $ 2,517 $ 12,475 $ 7,307
========= ========== ========== ==========
Certain of the Revenue Bonds held by the Company are supported by various
guarantees including, but not limited to, construction and operating guarantees
from affiliates of the Manager.
During the period ended September 30, 2002, the Company agreed to back up a
primary guarantor's obligation to guarantee an agreed-upon internal rate of
return to the investor in Related Capital Guaranteed Corporate Partners II, L.P.
("RCGCP"). RCGCP is a fund sponsored by Related, who is an affiliate of the
Manager. The fee for the first of two guarantees of approximately $3.6 million
was received in July 2002. This fee was deferred and is being amortized on a
straight-line basis over the life of the guarantee. For the quarter ended
September 30, 2002, approximately $680,000 was included in other income (see
Note 7).
During the quarter ended June 30, 2002, River Run, a Revenue Bond held by the
Company, was refinanced with a third party lender. The general partner of the
owner of the underlying property was comprised of affiliates of the Manager.
River Run was repaid at par of $7.2 million. The Company has recognized a loss
of approximately $38,000 due to the write-off of unamortized acquisition costs
associated with River Run, included in Gain on repayment of Revenue Bonds, and
11
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
received approximately $767,000 in contingent interest, included in Revenue Bond
interest income.
In connection with the refinancing of River Run, the Company has entered into an
agreement which allows the Revenue Bond to be put to the Company should the
owner of the underlying property default on the bond. The Company, in turn, has
entered into agreements which allow the Company to put the bond to the general
partners of the owner. This right is secured by collateral assignments of the
general partners' partnership interests in the limited partnership which owns
the underlying property.
The Company has entered into a credit enhancement transaction (the "CMC
transaction") with Merrill Lynch Capital Services ("MLCS") pursuant to which the
Company receives a fee for assuming MLCS's $46.9 million first loss position on
a $351.9 million pool of tax-exempt weekly variable rate multi-family mortgage
loans. The Related Companies, L.P. ("TRCLP"), an affiliate of Related, has
provided the Company with an indemnity covering 50% of any losses incurred by
the Company. The Company monitors the portfolio on an ongoing basis and at
September 30, 2002 does not anticipate any losses to be incurred.
Fees related to the credit enhancement transaction for the three and nine months
ended September 30, 2002, included in other income, were approximately $312,000
and $939,000, respectively. Income is recognized monthly as the fees are
received.
NOTE 6 - Earnings Per Share
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic income per share is
calculated by dividing income allocated to common and convertible CRA
shareholders ("shareholders") by the weighted average number of common and
convertible CRA shares outstanding during the period. The convertible CRA shares
are included in both the basic and dilutive calculation of shares because they
are entitled to the same economic benefits as common shareholders, including
receipt of the same dividends per share pari passu with common shareholders.
Diluted income per share is calculated using the weighted average number of
shares outstanding during the period plus the additional dilutive effect of
common share equivalents. The dilutive effect of outstanding share options is
calculated using the treasury stock method. Because each convertible CRA share
is convertible into not more than one common share, the potential conversion of
the convertible CRA shares would be antidilutive.
Pursuant to the Company's trust agreement and the management agreement, the
Manager is entitled, pursuant to the terms of the Trust Agreement, to a special
distribution equal to .375% per annum of the Company's total invested assets
(which equals the face amount of the Revenue Bonds and other investments),
payable quarterly. After allocation of the special distributions, the net
remaining profits or losses, after a special allocation of 1.0% to the Manager,
are then allocated to shareholders in accordance with their percentage
interests.
During the quarter ended September 30, 2002, the Company issued 40,000 options
at a strike price of $17.56. These options vest equally, in thirds, in September
2003, 2004 and 2005 and expire in 10 years. These options were antidilutive for
the three and nine months ended September 30, 2002, so were not taken into
account in the calculation of diluted shares.
12
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
(Dollars in Thousands, except per Share Amounts)
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ---------- --------- ----------- ----------
Net income allocable to share-
Holders (Basic EPS) $12,236 44,209,982 $ .28 $42,571 42,030,318 $ 1.01
======= ==========
Effect of dilutive securities
223,509 stock options -- 72,751 -- 69,089
------- ---------- ------- ----------
Diluted net income allocable to
shareholders (Diluted EPS) $12,236 44,282,733 $ .28 $42,571 42,099,407 $ 1.01
======= ========== ======= ======= ========== ==========
Three Months Ended September 30, 2001 Nine Months Ended September 30, 2001
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ---------- --------- ----------- ----------
Net income allocable to share-
Holders (Basic EPS) $10,346 32,986,483 $ .31 $25,180 29,322,639 $ .86
======= ==========
Effect of dilutive securities
241,596 stock options -- 51,592 -- 57,826
------- ---------- ------- ----------
Diluted net income allocable to
shareholders (Diluted EPS) $10,346 33,038,075 $ .31 $25,180 29,380,465 $ .86
======= ========== ======= ======= ========== ==========
13
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 7 - Commitments and Contingencies
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a materially adverse impact on the Company's financial
position, results of operations or cash flows.
The Company, through PWF, originates and services multi-family mortgage loans
for Fannie Mae, Freddie Mac and FHA. Under the Fannie Mae DUS program, the
Company retains responsibility for a portion of any loss that may result from
borrower defaults, based on the Fannie Mae loss sharing formula. The Company
maintains a loan loss allowance, which was approximately $4.1 million at
September 30, 2002, for loans originated under this program which management
believes is adequate to provide for estimated losses.
The Company has entered into the CMC transaction with MLCS pursuant to which the
Company receives a fee for assuming MLCS's $46.9 million first loss position on
a $351.9 million pool of tax-exempt weekly variable rate multi-family mortgage
loans. TRCLP, an affiliate of Related, has provided the Company with an
indemnity covering 50% of any losses incurred by the Company. The Company
monitors the portfolio on an ongoing basis and at September 30, 2002, does not
anticipate any losses to be incurred. Should the Company's analysis of risk of
loss change in the future, a provision for possible losses might be required;
such provision could be material.
Fees related to the credit enhancement transaction for the three and nine months
ended September 30, 2002, included in other income, were approximately $312,000
and $939,000, respectively. Income is recognized monthly as the fees are
received.
On July 18, 2002, the Company entered into two agreements with Merrill Lynch
(the "Primary Guarantor") to guarantee an agreed-upon internal rate of return
("IRR") for a pool of 11 multi-family properties being developed by RCGCP for
which the Company will receive two guarantee fees totaling approximately $5.9
million.
The transaction was structured as two separate guarantees, one primarily
guaranteeing the IRR through the lease-up phase of the properties and the other
guaranteeing the IRR through the operating phase of the properties. The fee for
the first guarantee, in the amount of approximately $3.6 million, was paid in
July 2002 at closing. The fee for the second guarantee will be paid in two
installments. The first installment, in the amount of approximately $1.7
million, will be paid in October 2003, and the final installment, in the amount
of approximately $566,000, will be paid in February 2004. These fees will be
recognized in income on a straight line basis over the period of the respective
guarantees. The total potential liability to the Company pursuant to these
guarantees is approximately $44 million. The Company has analyzed the expected
operations of the underlying properties and believes there is no risk of loss at
this time. Should the Company's analysis of risk of loss change in the future, a
provision for possible losses might be required; such provision could be
material.
RCGCP is a fund sponsored by Related, an affiliate of the Manager. The 11
properties were financed, in part, with $125.3 million of tax-exempt and taxable
debt, $70.3 million of which are revenue bonds that have been acquired by the
Company.
In connection with the transaction, the Company posted $12.1 million of Revenue
Bonds as collateral to the Primary Guarantor, which will be reduced to $1.1
million over a 12-year period as the properties reach certain operating
benchmarks. In addition, the Company agreed to subordinate 25% of each of the
bonds it acquired that are secured by the properties and to not use the
subordinated portion of such bonds as collateral in connection with any
borrowings.
To mitigate risk, the Company is the beneficiary of a guarantee against losses
associated with construction and operating stabilization for each of the
properties in RCGCP, which is capped at $15 million. The guarantee has been
14
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
provided by TRCLP. As of December 31, 2001, TRCLP had a GAAP net worth of
approximately $179.3 million with liquid assets of approximately $54.9 million.
In addition, the developers of each of the properties have also been required to
give recourse completion, stabilization and operating deficit guarantees. TRCLP
has also agreed, if needed, after construction completion and property
stabilization, to fund up to the first $2.5 million of operating deficits of the
underlying properties or any amounts required to pay the guaranteed IRR to the
investor.
NOTE 8 - Financial Risk Management and Derivatives
The Company's Revenue Bonds generally bear fixed rates of interest, but the
P-FLOATS and TOP financing programs incur interest expense at variable rates
re-set weekly, so the Company is exposed to interest rate risks. Various
financial vehicles exist which allow the Company's management to hedge against
the impact of interest rate fluctuations on the Company's cash flows and
earnings.
The Company has entered into two interest rate swaps in order to reduce the
Company's growing exposure to increases in the floating interest rate on its TOP
and P-FLOATS programs. Under such interest rate swap agreements, the Company is
required to pay MLCS (the "Counterparty") a fixed rate on a notional amount of
debt. In return, the Counterparty will pay the Company a floating rate
equivalent to The BMA Municipal Swap Index, an index of weekly tax-exempt
variable rate issues on which the Company's variable rate financing programs are
based. On January 5, 2001, the Company entered into a five-year interest rate
swap that fixes the BMA index to 3.98% on a notional amount of $50 million. On
February 5, 2001, the Company entered into a three-year interest rate swap that
fixes the BMA index to 3.64% on an additional notional amount of $100 million.
The average BMA rates for the three and nine months ended September 30, 2002 and
2001, were 1.35% and 2.27%, respectively. Net swap payments received by the
Company, if any, will be taxable income to the Company and, accordingly, to
shareholders. A possible risk of such swap agreements is the possible inability
of the Counterparty to meet the terms of the contracts with the Company;
however, there is no current indication of such an inability.
The Company adopted Statement of Financial Accounting Standards No. 133, as
amended and interpreted, on January 1, 2001. Accordingly, the Company has
documented its established policy for risk management and its objectives and
strategies for the use of derivative instruments to potentially mitigate such
risks. The Company evaluates its interest rate risk on an ongoing basis to
determine whether or not it would be advantageous to engage in any further
hedging transactions. At inception, the Company designated these interest rate
swaps as cash flow hedges on the variable interest payments on its floating rate
financing. Accordingly, the interest rate swaps are recorded at their fair
market values each accounting period, with changes in market values being
recorded in other comprehensive income to the extent that the hedge is effective
in achieving offsetting cash flows. The Company assesses, both at the inception
of the hedge and on an ongoing basis whether the swap agreements are highly
effective in offsetting changes in the cash flows of the hedged financing. Any
ineffectiveness in the hedging relationship is recorded in earnings. There was
no ineffectiveness in the hedging relationship during 2001 or the first three
quarters of 2002, and the Company expects that these hedging relationships will
be highly effective in achieving offsetting changes in cash flow throughout
their terms. Net amounts payable or receivable under the swap agreements are
recorded as adjustments to interest expense.
At September 30, 2002, these two interest rate swaps were recorded as a
liability with a combined fair market value of approximately $6.0 million,
included in interest rate derivatives on the consolidated balance sheets.
Interest paid or payable under the terms of the swaps, of approximately $2.6
million, is included in interest expense.
During January 2002, the Company entered into an interest rate cap agreement
with Fleet Bank, with a cap of 8% on a notional amount of $30 million. Although
15
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
this transaction is designed to mitigate the Company's exposure to rising
interest rates, the Company has not designated this interest rate cap as a
hedging derivative. At September 30, 2002, this interest rate cap was recorded
as an asset with a fair market value of $100,471 included in interest rate
derivatives in the consolidated balance sheets. Because the Company has not
designated this derivative as a hedge, the change in fair market value flows
through the Consolidated Statements of Income, where it is included in interest
income, in the amounts of ($115,029) and $100,471 for the three and nine months
ended September 30, 2002, respectively.
NOTE 9 - Shareholders' Equity
During the first quarter of 2002, the Company sold 6.3 million Common Shares to
the public at a price of $15.47 per share. The net proceeds from this offering,
approximately $92.4 million, have been used to fund additional investments in
Revenue Bonds.
In June 2002, a subsidiary of the Company issued 60 6.80% Series A-3 cumulative
preferred shares and 50 7.20% Series B-2 subordinate cumulative preferred
shares, raising net proceeds of approximately $53 million. Each of preferred
shares is subject to mandatory repurchase in 2052 at a liquidation amount of
$500,000 per share.
In July 2002, the Company issued approximately 1.4 million of its Convertible
CRA Shares, at $17.43 per share, raising net proceeds of approximately $23
million. The Company intends to use the proceeds to invest in additional Revenue
Bonds and for general corporate purposes, including reduction of the Company's
indebtedness.
NOTE 10 - Business Segments
As a result of the December 2001 acquisition of PWF, the Company has two
reportable business segments: an investing segment and an operating segment.
The investing segment consists of subsidiaries holding investments in Revenue
Bonds producing primarily tax-exempt interest income.
The operating segment generates taxable interest and fee income. Taxable
interest income is generated through the ownership of taxable bonds, certain
taxable loans and other investments. Taxable fee income includes loan
origination and loan servicing fees (through PWF) on portfolios for third
parties, fees earned and associated with the acquisition or origination of
Revenue Bonds, and fees for credit enhancement and guaranty services.
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
The reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately. Segment reporting is applicable beginning with the acquisition of
PWF on December 31, 2001; prior to December 31, 2001, all of the Company's
operations were attributable to the investing segment.
The following table provides more information regarding the Company's segments:
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
(Dollars in thousands) (Dollars in Thousands)
------------------------------------- --------------------------------------
Investing Operating Total Investing Operating Total
---------- --------- ---------- ---------- --------- ----------
Revenues $ 24,759 $ 3,880 $ 28,639 $ 73,371 $ 13,240 $ 86,611
Net Income $ 13,035 $ 619 $ 13,654 $ 44,739 $ 1,884 $ 46,623
Identifiable
Assets $1,551,629 $103,443 $1,655,072 $1,551,629 $103,443 $1,655,072
16
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 11 - Subsequent Events
New Acquisitions
- ----------------
On October 8, 2002, the Company acquired one tax-exempt Revenue Bond in the face
amount of $8,700,000, secured by a 192-unit multi-family affordable housing
apartment complex located in Vicksburg, MS, to be known as Magnolia Commons of
Vicksburg. The bond matures September 1, 2032 and has a stated interest rate of
6.75%.
On October 15, 2002, the Company acquired two tax-exempt Revenue Bonds in the
face amounts of $1,160,000 and $100,000, secured by Golf Villas, a 166-unit
multi-family affordable housing apartment complex located in Tamarac, FL, and
Lakeside Villas, a 224-unit multi-family affordable housing apartment complex
located in Miami, FL. The bonds mature in December 1, 2025 and December 1, 2016
respectively and have a stated interest rate of 7.25% and 7.0% respectively.
On October 17, 2002, the Company acquired two tax-exempt Revenue Bonds in the
face amounts of $13,500,000 and $1,500,000, both secured by a 256-unit
multi-family affordable housing apartment complex located in Pflugerville, TX,
to be known as Heatherwilde Villas. The bonds both mature October 1, 2042 with
interest rates of 5.5% until February 2004 and have stated interest rates of
6.75% and 7.0% thereafter, respectively.
On October 24, 2002, the Company acquired one tax-exempt Revenue Bond in the
face amount of $8,300,000, secured by a 220-unit multi-family affordable housing
apartment complex located in Athens, Georgia, to be known as Oak Hill. The bond
matures October 1, 2042 and has a stated interest rate of 6.5%.
On October 25, 2002, the Company acquired one tax-exempt Revenue Bond in the
face amount of $9,925,119, of which $2,102,000 was funded at closing, secured by
a 164-unit multi-family affordable housing apartment complex located in
Loveland, CO, to be known as Waterford Phase II. The bond matures August 1, 2045
and has a stated interest rate of 6.5%.
On November 1, 2002, one tax-exempt Revenue Bond, in the face amount of
$5,500,000, matured, and funds in the full face amount of the Revenue Bond were
returned to the Company.
On November 8, 2002, the Company acquired two tax-exempt Revenue Bonds. The
first, to be known as Allapattah Gardens, is in the face amount of $5,200,000,
of which $4,850,000 was funded at closing, secured by a 128-unit multi-family
affordable housing apartment complex located in Miami, Fl. The bond matures
November 1, 2044 and has a stated interest rate of 7.15%. The second, to be
known as Hickory Trace, is in the face amount of $11,920,000, secured by a
180-unit multi-family affordable housing apartment complex located in Dallas,
TX. The bond matures November 1, 2042 and has a stated interest rate of 7.0%.
On November 12, 2002, the Company acquired one tax-exempt Revenue Bond in the
face amount of $12,500,000, secured by a 192-unit multi-family affordable
housing apartment complex located in Houston, TX, to be known as Green Crest.
The bond matures November 2042 and has a stated interest rate of 7.0%.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
- -------
Charter Municipal Mortgage Acceptance Company ("CharterMac"), along with its
consolidated subsidiaries (the "Company"), is a Delaware business trust
principally engaged in the acquisition and ownership (directly or indirectly) of
tax-exempt multi-family housing revenue bonds ("Revenue Bonds") and other
investments that produce tax-exempt income, issued by various state or local
governments, agencies, or authorities. Revenue Bonds are primarily secured by
participating and non-participating first mortgage loans on underlying
properties ("Underlying Properties").
In order to generate tax-exempt income to pass through to the Company's
shareholders and, as a result, enhance the value of the Company's Common Shares,
the Company primarily invests in or acquires tax-exempt Revenue Bonds secured by
multi-family properties. The Company believes that it can earn above market
rates of interest on its Revenue Bond acquisitions by focusing its efforts
primarily on affordable housing. The Manager estimates that nearly 30% of all
new multi-family development contains an affordable component which produces tax
credits pursuant to Section 42 of the Internal Revenue Code. The traditional
methods of financing affordable housing with tax-exempt Revenue Bonds are
complex and time consuming, and involve the participation of many
intermediaries. Through the Manager, the process has been streamlined with the
"Direct Purchase Program". The Company's Direct Purchase Program removes all
intermediaries from the financing process (except the governmental issuer of the
Revenue Bond) and enables developers to deal directly with one source. Because
the Company purchases its Revenue Bonds directly from the governmental issuer,
the need for underwriters and their counsel, rating agencies and costly
documentation is eliminated. This reduces the financing life cycle, often by
several months, and also reduces the bond issuance costs, usually by 30% or
more. In dealing directly with the Company, developers feel more certain about
the terms and timing of their financing. The Company believes the savings in
time and up-front costs and the certainty of execution that the Direct Purchase
Program offers to developers allows the Company to receive above-market rates of
interest on the Company's Revenue Bonds.
The Company believes that it is well positioned to market its Direct Purchase
Program as a result of the Manager's affiliation with Related Capital Company
("Related"), a nationwide, fully integrated real estate services firm, because
the Manager is able to utilize Related's resources and relationships in the
multi-family affordable housing finance industry to source potential borrowers
of Revenue Bonds. Related and its predecessor companies have specialized in
offering debt and equity products to mid-market multi-family owners and
developers for over 30 years. According to the 2001 National Multi Housing
Council survey, Related is the second largest owner of apartments in the United
States.
The Company, through its wholly-owned subsidiary CharterMac Corporation ("CM
Corp."), acquired 80% of the outstanding capital stock of PW Funding, Inc.
("PWF"). As a result of the acquisition of PWF, the Company has diversified the
range of its investment products and is able to offer developers fixed and
floating rate tax-exempt and taxable financing through Fannie Mae, Freddie Mac
and FHA for affordable and market rate multi-family properties. Combining this
with the Company's core business of investing in Revenue Bonds and its
affiliation with Related, the Company is able to provide developers with
financing for all aspects of their property's capital structure. In addition,
the Company has diversified its revenues with a fee business that will grow in
value over time and will insulate the Company from the vagaries of the capital
markets.
On January 14, 2002, the Company announced that its Board of Trustees had formed
a special committee to explore strategic alternatives for the Company's future
management structure, including internalization of management, and ways to
further diversify the Company's revenue sources. The special committee consists
of the independent members of the Board of Trustees, Peter T. Allen, Arthur P.
Fisch and Charles L. Edson. On April 17, 2002, the special committee retained
Dresdner Kleinwort Wasserstein as their financial advisor. As of the date of
this report, the special committee and its advisors are continuing their
efforts.
Results of Operations
- ---------------------
For the three and nine months ended September 30, 2002 as compared to 2001,
total revenues, total expenses and net income increased due to the net result of
18
the acquisition of 77 Revenue Bonds during 2002 and 2001, and the repayment of
nine Revenue Bonds and two notes. Total revenues and expenses and net income
also increased due to the December 2001 acquisition of PWF, the CMC transaction
and the LIHTC guarantee yield.
The weighted average interest rates recognized on the face amount of the
portfolio of Revenue Bonds for the nine months ended September 30, 2002 and 2001
were 7.48% and 7.37%, respectively, based on weighted average face amounts of
approximately $1,208,528,000 and $929,863,000, respectively.
Interest income from Revenue Bonds increased approximately $4.0 million and
$16.2 million for the three and nine months ended September 30, 2002 as compared
to 2001. This increase was primarily due to an increase in interest income of
approximately $19.7 million on new Revenue Bonds acquired during 2001 and 2002,
partially off-set by a decrease in interest income due to the sale or repayment
of Revenue Bonds of approximately $3.6 million.
Total revenues for the three and nine months ended September 30, 2002, increased
by approximately $9.3 million and $33.0 million, respectively, including the
increases in interest income from Revenue Bonds noted above, and increases of
approximately $.6 million and $1.7 million equity interest in the income of
ARCap, approximately $3.9 million and $13.2 million from PWF, $939,000 in fees
related to the CMC credit enhancement transaction and approximately $680,000 in
fees from the LIHTC yield guarantee.
Interest expense and recurring fees increased approximately $1.0 million and
$1.9 million for the three and nine months ended September 30, 2002,
respectively, as compared to 2001, primarily due to higher interest expense on
the swaps and interest associated with the PWF Acquisition loan.
General and administrative expenses increased approximately $3.6 million and
$12.9 million for the three and nine months ended September 30, 2002 as compared
to 2001 primarily due to the addition of PWF's expenses.
Income allocated to minority interest of approximately $124,000 and $377,000 for
the three and nine months ended September 30, 2002, respectively, represents
PWF's continued 20% ownership.
Amortization increased approximately $1.8 million and $5.4 million for the three
and nine months ended September 30, 2002 primarily due to amortization of
mortgage servicing rights at PWF.
Income allocated to preferred shareholders of subsidiary for the three and nine
months ended September 30, 2002 increased approximately $1.8 million and $3.7
million, respectively, due to the preferred offerings consummated on October 9,
2001 and June 4, 2002.
During the three months ended September 30, 2002, the Company recorded a benefit
for income taxes of approximately $656,000, relating to the activity of PWF and
CM Corp. During the nine months ended September 30, 2002, the Company recorded a
provision for income taxes of approximately $983,000, related to the activity of
PWF and CM Corp.
During the nine months ended September 30, 2002, the Company recognized net
gains on repayments of Revenue Bonds of approximately $4.0 million, versus $.1
million for 2001, due to the number and size of Revenue Bonds repaid or sold.
Additionally, during the three and nine months ended September 30, 2002, the
Company recognized gains on sales of loans of approximately $1.5 million and
$8.5 million due to PWF's activities.
During the nine months ended September 30, 2002, the Company wrote down one
Revenue Bond in the amount of approximately $532,000. During the nine months
ended September 30, 2001, the Company wrote down the same Revenue Bond in the
amount of $400,000.
Liquidity and Capital Resources
- -------------------------------
In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company has primarily used two sources of capital: collateralized
debt securitization and various types of equity offerings.
19
During the first quarter of 2002, the Company issued 6,325,000 common shares of
beneficial interest at $15.47 per share, resulting in net proceeds of
approximately $92.4 million.
During the nine months ended September 30, 2002 cash and cash equivalents of the
Company and its consolidated subsidiaries decreased approximately $35.8 million.
The decrease was primarily due to cash provided by operating activities, $54.4
million, proceeds from the repayment of nine Revenue Bonds and one Note, $92.7
million, the issuance of new common shares, $92.4 million, issuance of preferred
stock, $55.0 million and increased borrowings under finance arrangements, $54.5
million, less funds used to purchase Revenue Bonds, $279.0 million, net
principal payments of secured borrowings, $67.3 million and distributions to
common, convertible CRA and preferred shareholders, $52.6 million.
In October and November 2002, distributions declared in September 2002 were paid
to Preferred Shareholders as shown in the table below:
Liquidation
Value
Series Dividend Rate Distribution per Share Total Distribution per share
- ------ ------------- ---------------------- ------------------ -----------
A 6.625% $33,125 $1,490,625 $2,000,000
A-1 7.100% 8,875 426,000 500,000
A-2 6.300% 7,875 488,250 500,000
A-3 6.800% 8,500 510,000 500,000
B 7.600% 9,500 1,045,000 500,000
B-1 6.800% 8,500 314,500 500,000
B-2 7.200% 9,000 450,000 500,000
Also paid were distributions of $14,139,588 ($.32 per share) to holders of
common and convertible CRA shares. All distributions were paid from cash flow
from operations.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
Critical Accounting Policies
- ----------------------------
The Company's critical accounting policies are described in its Form 10-K for
the year ended December 31, 2001. These critical accounting policies have not
changed during 2002, but the Company has entered into transactions which involve
new critical accounting policies as described in the following paragraphs.
The Company has entered into two transactions in which it has agreed to back up
a primary guarantor's obligation to guarantee an agreed upon internal rate of
return to the investor in Related Capital Guaranteed Corporate Partners II, L.P.
("RCGCP"), an affiliate of the Manager (see Note 7 in the accompanying financial
statements).
The transaction was structured as two separate guarantees, one primarily
guaranteeing the IRR through the lease-up phase of the properties and the other
guaranteeing the IRR through the operating phase of the properties. The fee for
the first guarantee, in the amount of approximately $3.6 million, was paid in
July 2002 at closing. The fee for the second guarantee will be paid in two
installments. The first installment, in the amount of approximately $1.7
million, will be paid in October 2003, and the final installment, in the amount
of approximately $566,000, will be paid in February 2004. These fees will be
recognized in income on a straight line basis over the period of the respective
guarantees. Should the Company's analysis of risk of loss change in the future,
a provision for possible losses might be required; such provision could be
material.
Additionally, the Company entered into the CMC Transaction, assuming a third
party's first loss position of approximately $46.9 million on a $351.9 million
pool of tax-exempt mortgage loans, for a fee. The fee is paid to the Company
monthly, in equal installments, spread over the term of the transaction and is
recognized as income as received. The Company monitors the portfolio on an
ongoing basis and at September 30, 2002, does not anticipate any losses to be
incurred. Should the Company's analysis of risk of loss change in the future, a
provision for possible losses might be required; such provision could be
material.
20
Acquisitions
- ------------
During the period January 1, 2002 through September 30, 2002, the Company
acquired 35 tax-exempt Revenue Bonds, eleven taxable Revenue Bonds and one
bridge loan with an aggregate face amount of approximately $282 million, not
including bond selection fees and expenses of approximately $5.7 million.
Forward-Looking Statements
- --------------------------
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements include statements regarding the intent, belief
or current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the availability and creditworthiness of prospective tenants,
lease rents and the terms and availability of financing for properties financed
by Revenue Bonds owned by the Company; adverse changes in the real estate
markets including, among other things, competition with other companies; risks
of real estate development and acquisition; governmental actions and
initiatives; and environment/safety requirements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
Inflation
- ---------
Inflation did not have a material effect on the Company's results for the
periods presented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The nature of the Company's investments and the instruments used to raise
capital for their acquisition expose the Company to gains and losses due to
fluctuations in market interest rates. Market interest rates are highly
sensitive to many factors, including governmental policies, domestic and
international political considerations and other factors beyond the control of
the Company.
Revenue Bonds generally bear interest at fixed rates, or pay interest according
to the cash flows of the Underlying Properties, which do not fluctuate with
changes in market interest rates. In contrast, payments required under the TOP
program and on the secured borrowings under the P-FLOATS program vary based on
market interest rates based on the Bond Market Association ("BMA") and are
re-set weekly.
Various financial vehicles exist which would allow Company management to
mitigate the impact of interest rate fluctuations on the Company's cash flows
and earnings. Beginning in 2001, and upon management's analysis of the interest
rate environment and the costs and risks of such strategies, the Company entered
into two interest rate swaps in order to hedge against increases in the floating
interest rate on its TOP and P-FLOATS programs. Under such interest rate swap
agreements, the Company is required to pay Merrill Lynch Capital Services (the
"Counterparty") a fixed rate on a notional amount of debt. In return, the
Counterparty will pay the Company a floating rate equivalent to the BMA
Municipal Swap Index, an index of weekly tax-exempt variable rate issues on
which the Company's variable rate financing programs are based. On January 5,
2001, the Company entered into a five-year interest rate swap that fixes the BMA
index to 3.98% on a notional amount of $50 million. On February 5, 2001, the
Company entered into a three-year interest rate swap that fixes the BMA index to
3.64% on an additional notional amount of $100 million. This effectively fixes
$50 million and $100 million of the Company's secured borrowings at 3.98% and
3.64%, respectively, protecting the Company in the event the BMA Municipal Swap
Index rises. For the quarter ended September 30, 2002, the Company's cost to
borrow funds through the TOP and P-FLOATS programs averaged 2.32% and 2.38%,
respectively, which does not include the effect of the Company's hedging
activities.
With respect to the portion of the Company's floating rate financing programs
which are not hedged, a change in BMA rate would result in increased or
decreased payments under the financing programs, without a corresponding change
in cash flows from the investments in Revenue Bonds. For example, based on the
21
unhedged $379 million outstanding under these financing programs at September
30, 2002, the Company estimates that an increase of 1.0% in the BMA rate would
increase interest expense and therefore decrease annual net income by
approximately $3.8 million. Conversely, a decrease in market interest rates
would generally benefit the Company in the same amount described above, as a
result of decreased interest expense without corresponding decreases in interest
received on the Revenue Bonds.
Changes in market interest rates would also impact the estimated fair value of
the Company's portfolio of Revenue Bonds. The Company estimates the fair value
for each Revenue Bond as the present value of its expected cash flows, using a
discount rate for comparable tax-exempt and taxable investments. Therefore, as
market interest rates for tax-exempt and taxable investments increase, the
estimated fair value of the Company's Revenue Bonds will generally decline, and
a decline in interest rates would be expected to result in an increase in the
estimated fair values. For example, the Company projects that a 1% increase in
market rates for tax-exempt and taxable investments would decrease the estimated
fair value of its portfolio of Revenue Bonds from its September 30, 2002 value
of $1,402,979,000 to approximately $1,239,109,000. A 1% decline in interest
rates would increase the value of the September 30, 2002 portfolio to
approximately $1,622,066,000. Changes in the estimated fair value of the Revenue
Bonds do not impact the Company's reported net income, earnings per share,
distributions or cash flows, but are reported as components of other
comprehensive income and affect reported shareholders' equity.
The assumptions related to the foregoing discussion of market risk involve
judgments involving future economic market conditions, future corporate
decisions and other interrelating factors, many of which are beyond the control
of the Company and all of which are difficult or impossible to predict with
accuracy. Although the Company believes that the assumptions underlying the
forward-looking information are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
information included herein will prove to be accurate. Due to the significant
uncertainties inherent in forward-looking information, the inclusion of such
information should not be regarded as a representation of the Company that the
objectives and plans of the Company would be achieved.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included
in the Company's reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds - None.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
991. Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
992. Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current report on Form 8-K relating to the Company making
available unaudited supplemental data regarding its operations
for the first quarter of 2002, dated and filed July 2, 2002.
Current report on Form 8-K relating to the Company's renewal of
the management agreements between the Company and Related
Charter, L.P. and the Company and CharterMac Corporation.
23
SIGNATURES
Pursuant to the requirements 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.
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: November 13, 2002 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee, President
and Chief Executive Officer
Date: November 13, 2002 By: /s/Stuart A. Rothstein
----------------------
Stuart A. Rothstein
Chief Financial Officer and Chief
Accounting Officer
CERTIFICATION
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charter
Municipal Mortgage Acceptance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons
performing the equivalent functions:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/Stuart J. Boesky
----------------- -------------------
Stuart J. Boesky
Chief Executive Officer
CERTIFICATION
I, Stuart A. Rothstein, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charter
Municipal Mortgage Acceptance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons
performing the equivalent functions:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Stuart A. Rothstein
----------------- -----------------------
Stuart A. Rothstein
Chief Financial Officer
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Charter Municipal Mortgage Acceptance
Company (the "Company") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stuart J. Boesky, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Chief Executive Officer
November 13, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Charter Municipal Mortgage Acceptance
Company (the "Company") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stuart A. Rothstein, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
November 13, 2002