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 June 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)
============ ============
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Revenue Bonds-at fair value $1,286,108 $1,137,715
Investment in ARCap 19,055 18,950
Guaranteed investment contracts 23,412 18,406
Mortgage servicing rights - net 35,708 33,708
Cash and cash equivalents 128,899 105,364
Cash and cash equivalents-restricted 4,837 4,670
Interest receivable, net 7,964 6,458
Promissory notes and mortgages receivable 46,475 45,022
Deferred costs, net 36,905 31,796
Goodwill 1,203 9,842
Other intangible assets, net 11,557 3,154
Other assets 3,164 3,104
---------- -----------
Total assets $1,605,287 $1,418,189
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 529,035 $ 541,796
Notes payable 64,873 56,586
Interest rate derivatives 4,005 2,958
Accounts payable, accrued expenses and other
liabilities 9,470 13,820
Due to Manager and affiliates 2,530 2,266
Due to FNMA 23,412 18,406
Distributions payable to preferred shareholders
of subsidiary 4,052 3,693
Deferred tax liability 11,415 10,251
Distributions payable to Convertible CRA Shareholders 693 565
Distributions payable to common shareholders 12,759 10,448
---------- -----------
Total liabilities 662,244 660,789
---------- -----------
Preferred shares of subsidiary (subject to mandatory
repurchase) 273,500 218,500
---------- ----------
Minority interest in consolidated subsidiary 4,403 3,652
---------- -----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity - convertible CRA
shareholders (1,882,364 shares, issued and
outstanding in 2002 and 2001, respectively) 25,751 25,522
Beneficial owner's equity-manager 1,375 1,069
Beneficial owners' equity-other common shareholders
(100,000,000 shares authorized; 41,161,138 issued
and 41,152,738 outstanding and 34,834,308
shares issued and 34,825,908 outstanding in
2002 and 2001, respectively) 607,450 511,456
Treasury shares of beneficial interest (8,400
shares) (103) (103)
Accumulated other comprehensive income (loss) 30,667 (2,696)
---------- -----------
Total shareholders' equity 665,140 535,248
---------- ----------
Total liabilities and shareholders' equity $1,605,287 $1,418,189
========= =========
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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
--------------------- ---------------------
Revenues:
Interest income:
Revenue bonds $ 22,025 $ 16,360 $ 44,945 $ 32,701
Temporary investments 575 391 795 615
Promissory notes 160 233 323 490
Equity in earnings of ARCap 563 -- 1,110 --
Mortgage banking fees 1,394 -- 3,050 --
Servicing fees 2,009 -- 3,862 --
Other income 1,897 507 3,888 542
--------- ---------- --------- --------
Total revenues 28,623 17,491 57,973 34,348
--------- ---------- --------- --------
Expenses:
Interest expense 3,014 3,890 7,005 7,304
Recurring fees relating to the
Private Label Tender Option
Program 751 570 1,478 1,134
Bond servicing 878 595 1,644 1,137
General and administrative 5,953 730 11,552 1,472
Amortization 1,760 202 4,000 401
Income (loss) allocated to
minority interest (49) -- 253 --
Provision for loss under FNMA
DUS product line 202 -- 528 --
Loss on impairment of
revenue bonds -- 400 -- 400
--------- ---------- --------- --------
Total expenses 12,509 6,387 26,460 11,848
--------- ---------- --------- --------
Income before gain on repayment
of revenue bonds and sale of
loans 16,114 11,104 31,513 22,500
Gain on sale of loans 3,321 -- 6,934 --
Gain on repayment of revenue bonds 222 -- 3,979 102
--------- ---------- --------- --------
Income before allocation to
preferred shareholders of
subsidiary 19,657 11,104 42,426 22,602
Income allocated to preferred
shareholders of subsidiary (4,053) (2,962) (7,817) (5,924)
--------- ---------- --------- --------
Income before provision for
income taxes 15,604 8,142 34,609 16,678
Provision for income taxes 1,457 -- 1,638 --
--------- ---------- --------- --------
Net Income $ 14,147 $ 8,142 $ 32,971 $16,678
========= ========== ========= ========
Allocation of net income to:
Special distribution to
Manager $ 1,240 $ 866 $ 2,328 $ 1,694
========= ========== ========= ========
Manager $ 129 $ 73 $ 306 $ 150
========= ========== ========= ========
Common shareholders $ 12,234 $ 6,548 $ 28,941 $13,398
Convertible CRA shareholders 544 655 1,396 1,436
--------- ---------- --------- --------
Total for shareholders $ 12,778 $ 7,203 $ 30,337 $ 14,834
========= ========== ========= ========
Net income per share
Basic $ .30 $ .24 $ .74 $ .54
========= ========== ========= ========
Diluted $ .30 $ .24 $ .74 $ .54
========= ========== ========= ========
Weighted average shares
outstanding :
Basic 43,035,102 29,607,203 40,920,033 27,460,354
========== ========== ========== ==========
Diluted 43,107,175 29,664,418 40,988,572 27,520,773
========== ========== ========== ==========
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
Owners' Beneficial Accumulated
Equity - Beneficial Owners' Treasury Other
Convertible Owner's Equity- Shares of Compre-
CRA Equity - Other 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 1,396 2,634 28,941 -- $ 32,971 32,971
----------
Other comprehensive gain (loss):
Net unrealized loss on (1,263)
interest rate derivatives
Net unrealized gain on revenue bonds:
Net unrealized holding gain arising 38,605
during the period
Add: Reclassification adjustment
for net gain included in net income (3,979)
----------
Total other comprehensive gain 33,363 33,363 33,363
----------
Comprehensive income $ 66,334
==========
Issuance of common shares -- -- 92,570 -- -- 92,570
Distributions (1,167) (2,328) (25,517) -- -- (29,012)
---------- --------- --------- ------- --------- ---------
Balance at June 30, 2002 $ 25,751 $ 1,375 $ 607,450 $ (103) $ 30,667 $ 665,140
========== ======== ========= ======= ========= =========
See accompanying notes to consolidated financial statements.
4
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
==========================
Six Months Ended
June 30,
--------------------------
2002 2001
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,971 $ 16,678
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on repayment of revenue bonds (3,979) (137)
Loss on impairment of revenue bonds -- 400
Other amortization 495 401
Amortization of other intangible assets 237 235
Amortization of bond selection costs 1,845 1,301
Amortization of mortgage servicing rights 3,437 --
Accretion of deferred income and purchase
accounting adjustment (23) (45)
Income allocated to preferred shareholders
of subsidiary 7,817 5,923
Equity in earnings of ARCap, in excess of
distributions received (105) --
Increase in mortgage servicing rights (5,965) --
Increase in provision for loss under FNMA DUS
product line 528 --
Income allocated to minority interest 253 --
Issuance of shares of subsidiary as compensation expense 498 --
Changes in operating assets and liabilities:
Interest receivable (1,506) (169)
Other assets (61) (171)
Increase in due to FNMA 5,006 --
Increase in guaranteed investment contracts (5,006) --
Accounts payable, accrued expenses and
other liabilities (4,224) 413
Deferred tax liability 1,165 --
Due to Manager and
affiliates 380 165
------------- ------------
Net cash provided by operating activities 33,763 24,994
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of revenue bonds 86,130 21,645
Periodic principal payments of revenue bonds 3,392 746
Proceeds from repayment of note 6,600 5
Purchase of revenue bonds (199,013) (87,050)
Increase in deferred bond selection costs (5,397) (1,950)
Increase in promissory notes (1,409) (3,065)
Increase in cash and cash equivalents - restricted (167) --
Increase in notes receivable (8,287) --
Principal payments received from loans
made to properties 1,643 99
------------- ------------
Net cash used in investing activities (116,508) (69,570)
------------- ------------
See accompanying notes to consolidated financial statements
5
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
========================
Six Months Ended
June 30,
------------------------
2002 2001
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to the Manager and Common
shareholders (25,321) (14,114)
Distributions paid to preferred shareholders
of subsidiary (7,457) (5,923)
Distributions paid to Convertible CRA
shareholders (1,148) (1,271)
Proceeds from financing arrangements 54,500 53,413
Principal repayments of financing arrangements (67,261) (90,944)
Increase in notes payable - warehouse lines 8,287 --
Increase in deferred costs relating to the
Private Label Tender Option Program (298) (101)
Issuance of common shares 92,539 115,750
Retirement of Convertible CRA Shares -- (8,987)
Increase in fair value of interest rate cap (216) --
Issuance of preferred stock of subsidiary 55,000 --
Increase in deferred costs relating to
the preferred shares offering (1,922) --
Increase in other deferred costs (423) --
---------- ----------
Net cash provided by financing activities 106,280 47,823
---------- ----------
Net increase in cash and cash equivalents 23,535 3,247
Cash and cash equivalents at the
beginning of the period 105,364 36,116
---------- ----------
Cash and cash equivalents at the
end of the period $ 128,899 $ 39,363
========== ==========
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,372 $ 2,494
========== ==========
Reclassification of goodwill to intangible assets:
Decrease in goodwill $(8,639,142)
Increase in intangible assets 8,639,142
----------
$ --
----------
See accompanying notes to consolidated financial statements
6
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1 - General
Charter Municipal Mortgage Acceptance Company (the "Company") is a Delaware
business trust principally engaged in the acquisition and ownership (directly or
indirectly) of tax-exempt multifamily 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. Charter Mac, through Charter Mac Corporation, a wholly-owned subsidiary,
has engaged Related Charter L.P. (the "Manager"), an affiliate of Related, to
manage its day-to-day affairs. Charter Mac has also directly engaged the Manager
to provide additional management services.
The consolidated financial statements include the accounts of Charter Mac and
four subsidiary business trusts which it controls and/or majority owns: CM
Holding Trust, Charter Mac Equity Issuer Trust, Charter Mac Origination Trust I
and Charter Mac Owner Trust I, and one wholly-owned corporation, Charter Mac
Corporation. Charter Mac 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 swaps.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
7
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
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.
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.
8
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
The weighted average interest rates recognized on the face amount of the
portfolio of Revenue Bonds for the six months ended June 30, 2002 and 2001 were
7.71% and 7.33%, respectively, based on weighted average face amounts of
approximately $1,165,370,000 and $890,132,000, respectively.
The amortized cost basis of the Company's portfolio of Revenue Bonds at June 30,
2002 and December 31, 2001 was $1,251,219,735 and $1,137,453,098, respectively.
The net unrealized gain on Revenue Bonds in the amount of $34,888,267 at June
30, 2002 consisted of gross unrealized gains and losses of $45,728,048 and
$10,839,781, 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.
2002 Transactions
- -----------------
The following table summarizes the Company's acquisition activity for the six
months ended June 30, 2002.
Weighted Weighted
Aggregate Average Average Number
Purchase Construction Permanent of
Face Amount Price Interest Interest Revenue
Rate Rate Bonds
- --------------------------------------------------------------------------------
Non-participating (Dollars in
Revenue Bonds Thousands)
Construction/
rehabilitation
properties $199,013 $204,410 7.35% 7.17% 30
During the six months ended June 30, 2002, nine Revenue Bonds were sold or
repaid. The Revenue Bonds had an aggregate face amount of approximately $95.5
million and a carrying value of $95.9 million. Additionally, one note was repaid
at par in the amount of $6.6 million.
NOTE 3 - Deferred Costs
The components of deferred costs are as follows:
(Dollars in Thousands)
June 30, December 31,
2002 2001
-------- --------
Deferred bond selection costs $ 28,644 $ 25,356
Deferred costs relating to the Private
Label Tender Option Program 7,087 6,788
Deferred costs relating to the issuance
of preferred shares of subsidiary 10,298 8,377
Deferred financing costs PWF acquisition
and warehouse debt 982 332
Other Deferred Costs 800 --
-------- --------
47,811 40,853
Less: Accumulated amortization (10,906) (9,057)
-------- --------
$ 36,905 $ 31,796
======== ========
9
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
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
private investors. As a result of this process approximately $8.6 million has
been reclassified from goodwill to intangible assets, representing the market
value of PWF's licenses. These licenses have an indefinite life, and as a result
are not being amortized.
The following table provides further information regarding the Company's
intangible assets:
(Dollars in Thousands)
Initial ATEBT PWF Total
Formation Merger Licenses
---------- ---------- ---------- ----------
Balance at June 30, 2002 $3,107 $1,320 $8,639 $13,066
Accumulated Amortization (1,294) (215) - (1,509)
------ ------ ------ -------
Net balance at June 30,
2002 $1,813 $1,105 $8,639 $11,557
====== ====== ====== =======
Amortization Expense for
6 months ended June 30,
2002 $ 171 $ 65 $ - $ 236
====== ====== ====== =======
Estimated amortization
expense per year for next
five years $ 345 $ 132 $ - $ 477
====== ====== ====== =======
The amortization is included as an offset to Revenue Bond interest.
The amount indicated as goodwill in the accompanying financial statements as of
June 30,2002 is related to the acquisition, on December 31, 2001, of PW Funding
Inc. This amount represents goodwill under SFAS 142, and therefore, is not being
amortized.
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% of the face amount of each asset invested in or
acquired by the Company.
II. Special distributions .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.
10
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
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).
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 equal to
1.0% to 1.5% 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 Charter Mac's management agreements is one year. The term of
each of Charter Mac's subsidiaries' management agreements is five years;
provided that if Charter Mac'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.
The costs, expenses and the special distributions incurred to the Manager and
its affiliates for the six months ended June 30, 2002 and 2001 were as follows:
Six Months Ended Three Months Ended
June 30, June 30,
(Dollars in Thousands) (Dollars in Thousands)
2002 2001 2002 2001
--------------------- ----------------------
Bond selection fees $ 3,980 $ 1,631 $ 3,412 $ 1,441
Expense reimbursement 431 327 122 162
Bond servicing fees 1,644 1,137 878 595
Special distribution 2,328 1,694 1,240 866
---------- ---------- ---------- ----------
$ 8,383 $ 4,789 $ 5,652 $ 3,064
========== ========== ========== ==========
Certain of the Revenue Bonds held by the Company have various guarantees from
affiliates of the Company.
During the quarter ended June 30, 2002, River Run, a bond held by the Company
was repaid. The general partner of the owner of the underlying property was
comprised of affiliates of the Company. 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
11
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
River Run, included in Gain on repayment of Revenue Bonds, and received
approximately $767,000 in contingent interest, included in Revenue Bond interest
income.
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
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% to the Manager,
are then allocated to shareholders in accordance with their percentage
interests.
12
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
Three Months Ended June 30, 2002 Six Months Ended June 30, 2002
-------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- ---------- ---------- ---------
Net income allocable to
shareholders (Basic EPS) $ 12,778 43,035,102 $ .30 $ 30,337 40,920,033 $ .74
========= =========
Effect of dilutive securities
228,262 stock options - 72,073 - 68,539
---------- ----------- --------- ---------
Diluted net income allocable to
shareholders (Diluted EPS) $ 12,778 43,107,175 $ .30 $ 30,337 40,988,572 $ .74
========= =========== ========= ========= ========== =========
Three Months Ended June 30, 2001 Six Months Ended June 30, 2001
--------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ ---------- ----------- ------
Net income allocable to
shareholders (Basic EPS) $ 7,203 29,607,203 $ .24 $ 14,834 27,460,354 $ .54
========= =========
Effect of dilutive securities
297,830 stock options - 57,215 - 60,419
--------- ----------- --------- ----------
Diluted net income allocable to
shareholders (Diluted EPS) $ 7,203 29,664,418 $ .24 $ 14,834 27,520,773 $ .54
========= =========== ========= ========= ========== =========
13
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 multifamily mortgage loans for
Fannie Mae, Freddie Mac and FHA. Under the Fannie Mae DUS program, the Company
oversees 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 $3.8 million at June 30, 2002, for
loans originated under this program which management believes is adequate to
provide for estimated losses.
The Company has entered into a credit enhancement 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 multifamily mortgage loans. The Related
Companies, L.P. 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 June 30, 2002, does not anticipate any losses to be incurred.
Fees related to the credit enhancement transaction for the three and six months
ended June 30, 2002, included in other income, were approximately $315,000 and
$627,000, respectively. Income is recognized monthly as the fees are received.
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 would allow Company management to hedge against
the impact of interest rate fluctuations on the Company's cash flows and
earnings. Prior to December 31, 2000, upon management's analysis of the interest
rate environment and the costs and risks of such strategies, the Company had not
engaged in any of these hedging strategies.
Subsequent to December 31, 2000, the Company 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 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.
The average BMA rate for the quarter ended June 30, 2002 and the year ended
December 31, 2001 was 1.36% and 2.61%, 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.
14
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
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. Currently, the Company has a strategy to reduce its interest rate risk
through the use of interest rate swaps. 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 the
first two 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 June 30, 2002, the combined fair market value of the two interest rate swaps
was a liability of approximately $4.2 million, included in interest rate
derivatives on the consolidated balance sheet. Interest paid or payable under
the terms of the swaps, of approximately $1.7 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. The
Company has not designated this interest rate cap as a hedging derivative. At
June 30, 2002, the fair market value of this interest rate cap was an asset of
$139,000 included in interest rate derivatives in the consolidated balance
sheet. Because the Company has not designated this derivative as a hedge, the
change in fair market value flows through the Consolidated Statement of Income,
where it is included in interest income, in the amounts of $215,500 and $139,000
for the three and six months ended June 30, 2002, respectively.
NOTE 9 - Shareholders' Equity
During the first quarter of 2002, the Company sold to the public 6.3 million
Common Shares at a price of $15.47 per share. The net proceeds from this
offering, approximately $92.5 million, have been used to fund additional
investments in Revenue Bonds. The underwriters for this offering were UBS
Warburg, Robertson Stephens, Legg Mason Ward Walker, Wachovia Securities, RBC
Capital Markets and Hilliard Lyons, Inc.
In June 2002, a subsidiary of the Company issued 60 6.80% Series A-3 cumulative
preferred shares and 50 7.2% 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.
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.
15
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
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 year ended
December 31, 2001; prior to the year ended 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:
Six Months Ended June 30, 2002 Three Months Ended June 30, 2002
------------------------------------- ------------------------------------
(Dollars in thousands) (Dollars in Thousands)
------------------------------------- ------------------------------------
Investing Operating Total Investing Operating Total
------------ ---------- ------------ --------- ----------- -------
Revenues $ 48,613 $ 9,360 $ 57,973 $24,123 $ 4,500 $28,623
Net Income (loss) $ 31,958 $ 1,013 $ 32,971 $14,344 $ (197) $14,147
Identifiable Assets $ 1,487,630 $ 117,657 $ 1,605,287
NOTE 11 - Subsequent Events
LIHTC Guarantee
- ---------------
On July 18, 2002, the Company entered into an agreement with Merrill Lynch (the
"Primary Guarantor") to guarantee an agreed upon internal rate of return ("IRR")
for a pool of 11 multifamily properties being developed by Related Capital
Guaranteed Corporate Partners II, L.P. ("RCGCP") for which the Company will
receive a guarantee fee 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 this
guarantee 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.
16
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
RCGCP is a fund sponsored by Related Capital Company ("RCC") an affiliate of the
Company's Advisor. 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 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
provided by The Related Companies L.P. ("TRCLP"), an affiliate of RCC. 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.
Chief Financial Officer
- -----------------------
On August 8, 2002, the Company announced that effective September 3, 2002,
Stuart Rothstein will become the Chief Financial Officer and Executive Vice
President of the Company. Mr. Rothstein joins the Company with approximately 11
years of professional experience, including seven years of direct experience
with Spieker Properties, a San Francisco-based office REIT that was purchased by
Equity Office Properties in July 2001. On September 3, 2002, Alan Hirmes will
step down from the position of interim Chief Financial Officer, but will
continue in his position of Executive Vice President and Director of the
Company.
Convertible CRA Shares
- ----------------------
In July 2002, the Company issued approximately 1.4 million of its Convertible
CRA Shares, at $15.43 per share, raising net proceeds of approximately $23
million. The Company intends to use the proceeds to invest in additional
tax-exempt Revenue Bonds and for general corporate purposes, including reduction
of the Company's indebtedness.
New Acquisitions
- ----------------
On August 8, 2002, the Company acquired three tax-exempt Revenue Bonds in the
face amount of $2,835,000, $660,000 and $680,000, all secured by a 128-unit
multi-family affordable housing apartment complex located in Fort Smith, AK, to
be known as Briarwood. The bonds mature in February 1, 2039 and May 1, 2023,
respectively and all have a stated interest rate of 6.25%
On August 13, 2002, the company acquired two tax-exempt Revenue Bonds in the
face amount of $6,245,000 and $1,015,000, both secured by a 133-unit
multi-family affordable housing apartment complex located in Pasadena, CA, to be
known as Community Arms. The bonds mature in October 1, 2038 and September 1,
2014, respectively and both have a stated interest rate of 7%.
17
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
Other
- -----
On August 9, 2002, the Kingsbury loan was repaid in full. The outstanding
balance of the loan at June 30, 2002 was $114,500.
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 used to be used as employee
compensation.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
- -------
Charter Municipal Mortgage Acceptance Company (the "Company") is a Delaware
business trust principally engaged in the acquisition and ownership (either
directly or indirectly) of tax-exempt multifamily housing revenue bonds
("Revenue Bonds") and other instruments that produce tax-exempt income, issued
by various state or local governments, agencies, or authorities. Revenue Bonds
are 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
multifamily 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 50% of all new
multifamily 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
multifamily 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 multifamily owners and
developers for over 26 years. According to the 2000 National Multi Housing
Council survey, Related is the third largest owner of apartments in the United
States.
As a result of the acquisition of PWF, the Company has diversified the range of
the Company's investment products and is able to offer developers fixed and
floating rate tax-exempt and taxable financing through Fannie Mae, Freddie Mac
and, to a lesser extent, FHA for affordable and market rate multifamily
properties. Combining this with the Company's core business of investing in
Revenue Bonds and its affiliation with Related Capital, 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,
19
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.
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 equity offerings. To date, the primary sources of
long-term liquidity has come from the Company's Private Label Tender Option
Program (TOP), common equity offerings and preferred equity offerings by the
Company or a subsidiary.
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 $92.5 million.
During the six months ended June 30, 2002 cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $23.5 million.
The increase was primarily due to cash provided by operating activities, $33.8
million, proceeds from the repayment of nine Revenue Bonds and one Note, $92.7
million, the issuance of new common shares, $92.5 million, issuance of preferred
stock, $55.0 million and increased borrowings under finance arrangements, $54.5
million, less funds used to purchase Revenue Bonds, $204.4 million, , net
principal payments of secured borrowings, $67.3 million and distributions to
common, convertible CRA and preferred shareholders, $33.9 million.
In July and August 2002, distributions declared in June 2002 were paid to
Preferred Shareholders as shown in the table below:
Liquidation
Distribution per Total Value
Series Share Distribution per share
------ ----- ------------ ---------
A $33,125 $1,490,625 $2,000,000
A-1 8,875 426,000 500,000
A-2 7,875 488,250 500,000
A-3 2,550 153,000 500,000
B 9,500 1,045,000 500,000
B-1 8,500 314,500 500,000
B-2 2,700 135,000 500,000
Also paid were distributions of $13,342,358 ($.31 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.
Acquisitions
- ------------
During the period January 1, 2002 through June 30, 2002, the Company acquired 23
tax-exempt Revenue Bonds, seven taxable Revenue Bonds and one bridge loan with
an aggregate face amount of approximately $202 million, not including bond
selection fees and expenses of approximately $4 million.
Results of Operations
- ---------------------
For the three and six months ended June 30, 2002 as compared to 2001, total
revenues, total expenses and net income increased due to the net result of the
acquisition of 64 Revenue Bonds during 2002 and 2001, and the repayment of nine
Revenue Bonds and one Note. Total reve-
20
nues and expenses and net income also increased due to the December 2001
acquisition of PWF and the CMC credit enhancement transaction.
Interest income from Revenue Bonds increased approximately $5.7 million and
$12.2 million for the three and six months ended June 30, 2002 as compared to
2001. This increase was primarily due to an increase in interest income of
approximately $12.5 million on new Revenue Bonds acquired during 2001 and 2002,
partially off-set by the sale or repayment of Revenue Bonds of approximately
$0.8 million.
Total revenues for the three and six months ended June 30, 2002, increased by
approximately $11.1 million and $23.6 million, respectively, including the
increases in interest income from Revenue Bonds noted above, and increases of
approximately $563,000 and $1.1 million equity interest in the income of ARCap,
approximately $4.9 million and $9.4 million from PWF, and $627,000 in fees
related to the CMC credit enhancement transaction.
Interest expense and recurring fees decreased approximately $876,000 and
$299,000 for the three and six months ended June 30, 2002, respectively, as
compared to 2001, primarily due to lower interest associated primarily to the
TOP refinement, partially off-set by higher interest expense on the swaps and
interest associated with the PWF Acquisition loan.
Bond servicing fees increased approximately $283,000 and $507,000 for the three
and six months ended June 30, 2002 as compared to 2001 primarily due to new
acquisitions and the corresponding increase in the Revenue Bond portfolio
serviced.
General and administrative expenses increased approximately $5.2 million and
$10.1 million for the three and six months ended June 30, 2002 as compared to
2001 primarily due to the addition of PWF's expenses.
The provision for possible DUS losses of $202,000 and $528,000 for the three and
six months ended June 30, 2002, is related to PWF's DUS line of business.
Minority interest expenses of approximately $253,000 represents PWF's continued
20% ownership.
Amortization increased approximately $1.6 million and $3.6 million for the three
and six months ended June 30, 2002 primarily due to amortization of mortgage
servicing rights at PWF.
Income allocated to preferred shareholders of subsidiary for the three and six
months ended June 30, 2002 increased approximately $1.1 million and $1.9
million, respectively, due to the preferred offerings consummated on October 9,
2001 and June 4, 2002.
During the six months ended June 30, 2002, the Company recorded a provision for
income taxes of approximately $1.6 million, related to the activity of PWF and
CM Corp.
During the three and six months ended June 30, 2002, the Company recognized net
gains of approximately $222,000 and $3.9 million, respectively, versus $102,000
for 2001, due to the number and size of Revenue Bonds repaid or sold.
Additionally, the Company recognized gains on sales of loans of approximately
$3.3 million and $6.9 million due to PWF's activities.
During the three months ended June 30, 2001, the Company wrote down one Revenue
Bond $400,000. There was no similar item in 2002.
21
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.
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. Prior to December 31, 2000, management did not engage in any of
these hedging strategies. However, 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
June 30, 2002, the Company's cost to borrow funds through the TOP and P-FLOATS
programs averaged 2.32% and 2.39%, respectively.
22
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
unhedged $379 million outstanding under these financing programs at June 30,
2002, the Company estimates that an increase of 1.0% in the BMA rate would
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 June 30, 2002 value of
$1,286,108,000 to approximately $1,151,964,000. A 1% decline in interest rates
would increase the value of the June 30, 2002 portfolio to approximately
$1,463,944,000. 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.
23
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.
See Note 9 of the financial statements regarding the sale by a
subsidiary of the Company of preferred shares for gross proceeds of
approximately $55 million.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
A proxy and proxy statement soliciting the vote of the Company's
shareholders for the Company's annual meeting of shareholders was sent to
shareholders on or about April 30, 2002. Such meeting was held on June 11, 2002.
Charles Edson, Alan Hirmes and Thomas White were re-elected as trustees for
three-year terms. The three individuals elected, and the number of votes cast
for and abstaining, with respect to each of them, is as follows:
For Abstain
--------- -------
Alan P. Hirmes 35,611,560 1,323,002
The Company's Amended and Restated Trust Agreement was further amended
to increase the number of authorized shares from 50,000,000 to 100,000,000. The
number of votes cast for, against and abstaining is as follows:
Charles L. Edson 36,496,473 438,090
Thomas W. White 36,513,028 421,534
For Against Abstain
------------- ------- -------
35,131,998 1,326,618 475,946
Item 5. Other Information
On August 8, 2002, the Company announced the selection of a new Chief
Financial Officer and Executive Vice President, Stuart Rothstein. Mr. Rothstein
was previously CFO of Speiker Properties.
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
unauditedsupplemental data regarding its operation for the fourth
quarter of 2001, dated April 10, 2002 and filed April 12, 2002.
24
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.
25
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: August 14, 2002 By: /s/ Stuart J. Boesky
-------------------------------
Stuart J. Boesky
Managing Trustee, President and
Chief Executive Officer
Date: August 14, 2002 By: /s/ Alan Hirmes
-------------------------------
Alan Hirmes
Chief Financial Officer and Chief
Accounting Officer