SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---- ACT OF 1934
For the fiscal year ended December 31, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Shares of Beneficial Interest
Name of each exchange on which registered:
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American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of June 28, 2002 was
$729,517,070, based on a price of $17.88 per share, the closing sales price for
the Registrant's shares of beneficial interest on the American Stock Exchange on
that date.
As of March 27, 2003 there were 41,220,138 outstanding shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
Part IV: Definitive proxy statement for the 2003 Annual Meeting of Shareholders,
to be file pursuant to Regulation 14A.
Index to exhibits may be found on page 90
Page 1 of 106
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
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PART I
Item 1. Business
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 and 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 believes that it can earn
above market rates of interest on its Revenue Bond acquisitions by focusing its
efforts primarily on affordable housing. The Company utilizes the services and
advice of two managers, Charter Mac Corporation, the Company's wholly-owned
subsidiary and Related Charter L.P. (collectively the "Manager") which is an
affiliate of Related Capital Company ("Related"), a nationwide fully integrated
real estate services firm, to operate its day-to-day activities and advise it on
the selection and underwriting of investments. The Manager estimates that nearly
30% of all new multi-family housing development contains an affordable component
which produces tax credits pursuant to Section 42 of the Internal Revenue Code.
In addition, the Company believes it can earn above market rates of interest via
its "Direct Purchase Program". The traditional methods of financing affordable
housing with tax-exempt Revenue Bonds are complex and time consuming, and
involve the participation of many intermediaries. This 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, 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.
Corporate Strategy
The Company focuses on providing shareholders with a stable investment by, in
part, operating at relatively low levels of leverage. The Company chose not to
operate as a mortgage REIT, which typically have leverage ratios ranging from
3:1 to 10:1. Pursuant to the Company's Trust Agreement, the Company is only able
to incur leverage or other financing up to 50% of its Total Market Value (as
defined in the Trust Agreement).
Adding to the Company's overall stability is the fact the Revenue Bond
investments carry fixed interest rates and, generally, can not be repaid before
ten years, without substantial repayment penalties. This significantly reduces
the risk of repayment in markets where interest rates are declining.
The Company has sought to keep as much of the income, passed through to the
shareholders, tax-exempt, by investing mostly in tax-exempt Revenue Bonds. The
Company has begun to guarantee third party mortgage loans and tax credit yields,
through Charter Mac Corporation ("CM Corp."), its wholly-owned taxable
subsidiary. While these new lines of business will increase the Company's
taxable revenues, the Company is able to reduce taxable income by deducting
certain expenses which qualify for income tax purposes.
Proposed Acquisition of Related Capital Company
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 December 18, 2002, the Company announced it had
entered into an agreement to acquire 100% of the ownership interests in and
substantially all of the businesses operated by Related. The acquisition will
enable the Company to terminate its outside management agreement with the
Manager and to become an internally-managed company.
Acquisition Terms
The acquisition will be structured so that the ownership interests held by the
Related principals in both Related and the other entities which control other
aspects of Related's business will be contributed into a newly-formed,
wholly-owned subsidiary of CharterMac (the "CharterMac Sub"). The selling
principals of Related include the four executive managing partners (Stuart J.
Boesky, Alan P. Hirmes, Marc D. Schnitzer and Denise L. Kiley) and an affiliate
of The Related Companies, L.P. ("TRCLP"), which is majority owned by Stephen M.
Ross (the "Related Principals"). Messrs. Boesky, Hirmes and Schnitzer and Ms.
Kiley have managed RCC over the past 15 years.
CharterMac will pay total consideration to the Related Principals of up to $338
million. The consideration will be paid as follows:
o The Initial Payment - $210 million consisting of $160 million in
special common units of the CharterMac Sub ("SCUs") and $50
million in cash (with the cash position being paid only to
TRCLP). The Initial Payment SCUs will be issued at $17.78 per
unit, which was the average closing price of CharterMac Common
Shares, for the 30 calendar days prior to this announcement (the
"Initial Payment SCUs");
o The Contingent Payment - Up to $128 million of additional SCUs
(the "Contingent Payment SCUs"), following the determination of
Related's adjusted audited earnings before interest, taxes,
depreciation and amortization, as well as certain other
adjustments, for the year ending December 31, 2002 ("Adjusted
Earnings"). The Contingent Payment SCUs will be issued in an
amount equal to 7.73x RCC 2002 Adjusted Earnings minus $210
million, subject to a cap of $338 million of total consideration.
The Contingent Payment SCUs are expected to be issued at the same
price as the Initial Payment SCUs, subject to a 17.5% symmetrical
collar.
In connection with the acquisition, CharterMac will establish a restricted share
program and will broadly issue to employees of Related, other than the Related
Principals, $15 million of CharterMac Common Shares. Following the completion of
the acquisition, TRCLP's economic interest in CharterMac will equal
approximately 19% and management and Related employees' economic interest in
CharterMac will equal approximately 11%.
On February 28, 2003, the Company filed a preliminary proxy regarding this
proposed acquisition.
The Predecessor
CharterMac was formed on October 1, 1997 as the result of the merger (the
"Merger") of three publicly registered limited partnerships: Summit Tax Exempt
Bond Fund, L.P., Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III (the
"Partnerships"). One of the general partners of the Partnerships was an
affiliate of Related. Pursuant to the Merger, CharterMac issued common shares of
beneficial interest ("Common Shares") to all partners in each of the
Partnerships in exchange for their proportionate interests. The Common Shares
commenced trading on the American Stock Exchange on October 1, 1997 under the
symbol "CHC."
-3-
Significant Subsidiaries
CharterMac Equity Issuer Trust
In 1999, CharterMac created CharterMac Equity Issuer Trust, a wholly-owned
subsidiary, (collectively, with its subsidiaries, "Equity Issuer") which holds a
substantial portion of the Company's Revenue Bonds. From time to time, Equity
Issuer may issue Series A and Series B Cumulative Preferred Shares
(cumulatively, "Preferred Shares") to institutional investors. The Preferred
Shares have a senior claim to the tax-exempt income derived from the investments
owned by Equity Issuer. Any income in Equity Issuer after the payment of the
cumulative distributions on its Preferred Shares, and after the fulfillment of
certain covenants, may then be allocated to CharterMac. The assets of Equity
Issuer, while included in the consolidated financial statements of the Company,
are legally owned by Equity Issuer and are not available to any creditors of the
Company outside of Equity Issuer.
CharterMac Corporation
In July 2001, the Company formed CM Corp. as a wholly-owned, consolidated
taxable subsidiary to help the Company more efficiently manage its taxable
business. CM Corp. allows the Company to better diversify its business lines to
include, among other things, mortgage origination and servicing on behalf of
third parties and guaranteeing mortgage loans for a fee. CM Corp. will conduct
most of the Company's taxable business, including any fee-generating activities
in which the Company may engage and provide management services to CharterMac
and its other subsidiaries. CM Corp. isolates a substantial portion of the
taxable income and expenses of the Company. Unlike CharterMac, CM Corp. is a
corporation which is subject to both Federal and State income tax. Any
distributions of net income from CM Corp. to CharterMac are taxable and are
passed through to the shareholders of CharterMac in its dividend.
PW Funding, Inc.
In December 2001, the Company, through CM Corp. acquired 80% of the outstanding
capital stock of PW Funding, Inc. and its subsidiaries ("PWF"), for
approximately $34.9 million, of which, approximately $21.6 million was financed
and $7.6 million was paid in cash. Additionally, the Company repaid a $5.7
million loan on behalf of PWF. It is anticipated that CM Corp. will acquire the
remaining 20% of the issued and outstanding capital stock of PWF over the next
12 to 24 months. Under the acquisition agreement, the stockholders of PWF were
granted the right to put their remaining 20% stock interest to CM Corp. after an
initial period of 24 to 36 months. The agreement also grants CM Corp. the right
to call the remaining 20% stock interest of PWF from PWF's stockholders after
the same initial period of 24 to 36 months. During the year ended December 31,
2002 and the three months ended March 31, 2003, the Company, pursuant to the
original acquisition agreement, paid approximately $3.6 million in "true-up"
payments representing payments due to the original PWF stockholders. These
true-up payments were based on i) the increase in the value of servicing rights
due to certain loans closing, ii) positive changes between the audited balance
sheet used for the initial purchase price and the audited balance sheet at
December 31, 2001, iii) payments of certain servicing fees, and iv) forward
conversions of loans previously committed. The acquisition agreement stipulates
additional true-up payments to be made periodically for a period of up to three
years from the acquisition date.
PWF is a national mortgage-banking firm which specializes in providing financing
and ancillary services to the multi-family housing industry, including
construction and permanent debt financing, mortgage loan servicing and asset
management. Founded in 1971, PWF became one of the original Federal National
Mortgage Association ("Fannie Mae") Delegated Underwriter and Servicers ("DUS")
and is a Federal Housing Administration ("FHA") approved mortgagor. In 2000, PWF
joined a select group of Federal Home Loan Mortgage Corporation ("Freddie Mac")
Program Plus lenders through the acquisition of Larson Financial Resources, Inc.
("Larson").
Since 1988, PWF has originated more than $2.8 billion in Fannie Mae loans and
currently services a $3.2 billion loan portfolio including about $1.8 billion in
Fannie Mae DUS loans, $337.2 million in FHA loans, and $548.3 million in Freddie
Mac loans. PWF and its subsidiaries provide a full range of financing services
to the conventional multi-family market and complements CharterMac's principal
business in the acquisition of tax-exempt affordable housing Revenue Bonds.
CharterMac is entitled to a cumulative preferential distribution from PWF's cash
available for distribution equal to 10% of its invested capital. The remaining
cash available for distribution will be distributed approximately 80% to
CharterMac and 20% to the other stockholders. CharterMac will also be entitled
to an additional cumulative priority return equal to 4.3% of its invested
capital prior to the purchase payments to PWF's stockholders on exercise of the
put or call options. The fee income generated by PWF is taxable income, which is
partially offset by tax-deductible expenses incurred by CM Corp.
Governance
The Company is governed by a board of trustees comprised of three independent
managing trustees and five managing trustees who are affiliated with Related.
The Company utilizes the services and advice provided by CM Corp. and the
Manager to operate its day-to-day activities and advise on the selection and
underwriting of investments. CM Corp. and the Manager provide these services
pursuant to management agreements between (i) CM Corp. and/or Related Charter LP
and CharterMac, and (ii) CM Corp. and each of the Company's subsidiaries. The
Manager has subcontracted its obligations under the management agreements to
Related and uses Related's resources and real estate and investment expertise to
advise the Company and provide it with services with a core group of experienced
staff and executive management. These services include, among other things,
acquisition, accounting, tax, capital markets, asset monitoring, portfolio
management, investor relations and public relations services.
-4-
Business Plan
The Company focuses its efforts on investing in Revenue Bonds that are secured
by multi-family affordable housing properties. Through PWF, the Company focuses
on originating and servicing multi-family mortgage loans on behalf of Government
Sponsored Enterprises ("GSEs") and government agencies such as Fannie Mae and
Freddie Mac and the FHA. Together, these components offer a full range of debt
capital solutions to developers of affordable and market rate multi-family
housing.
Investing in Tax-Exempt Revenue Bonds
The Company's primary business is investing in tax-exempt Revenue Bonds secured
by multi-family affordable housing properties. The Company has been successful,
using its Direct Purchase Program, in achieving above market interest rates on
its investments in Revenue Bonds, and the Manager believes this continues to be
a viable business model.
In addition to investing in tax-exempt Revenue Bonds secured by multi-family
properties producing tax credits, the Company may acquire other multi-family
tax-exempt bonds including those issued to finance affordable multi-family
projects and facilities for the elderly owned by Section 501(c)(3)
not-for-profit organizations. A portion of assets of the Company produce a small
amount of taxable income.
Credit Enhancement and Yield Guarantee Transactions
Through CM Corp., the Company has begun guaranteeing third party mortgage loans
and tax credit yields for a fee. In 2001, the Company executed its first
mortgage loan credit enhancement transaction. In 2002 the Company entered into
two transactions whereby it guaranteed an agreed upon internal rate of return
(IRR), for a pool of 11 properties owned by Related Capital Guaranteed Corporate
Partners II LP (RCGCP), an investment fund sponsored by Related, an affiliate of
the Manager. In such transactions, the Company will generally receive a
guarantee fee in return for guaranteeing an agreed upon IRR. The Company expects
to be able to selectively grow the value of this new fee business over time.
CMBS Investment
The Company owns 739,741 preferred equity units of ARCap Investors, L.L.C.
("ARCap"), with a face amount of $25 per unit, representing a 6.73% ownership
and voting interest. The preferred equity units are convertible, at the
Company's option, into ARCap common units. If converted into common units, the
conversion price is equivalent to $25 per unit, subject to certain adjustments.
Also, if not already converted, for a period of sixty days following the fifth
anniversary of the first closing date, which will be August 4, 2005, the
preferred equity units are convertible, at the Company's option, into a
three-year note bearing interest at 12% that would be junior to all of ARCap's
then existing indebtedness. The preferred equity units are also redeemable, at
the option of ARCap, up until the fifth anniversary of the first closing date.
As of December 31, 2002, ARCap had approximately $823 million in assets,
including investments of approximately $799 million of CMBS. Approximately
one-third of ARCap's CMBS are secured by multi-family properties.
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 the yield guaranty business.
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
These 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.
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The following table provides more information regarding the Company's segments:
Year Ended December 31, 2002
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(Dollars in Thousands)
Investing Operating Total
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Revenues $ 98,208 $ 18,205 $ 116,413
Interest Revenues 94,683 3,409 98,092
Interest Expense 14,558 1,265 15,823
Depreciation and Amortization Expense 1,131 7,760 8,891
Equity in the net income of investees
accounted for by the equity method 2,219 -- 2,219
Income tax expense (benefit) (214) 1,498 1,284
Total Assets 1,729,194 123,674 1,852,868
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" ("SFAS 115"). Accordingly, the Revenue Bonds are carried at their
estimated fair values, with unrealized gains and losses reported in other
comprehensive income.
Generally, Revenue Bonds are secured by mortgage loans on Underlying Properties.
The Underlying Properties are primarily garden apartment complexes located in
major metropolitan markets in 25 states and the District of Columbia. The
following table summarizes the Company's portfolio at December 31, 2002.
Outstanding Fair Stated Occupancy Average
Balance at Value1 at Interest Rate at Rental Rate
Investments/Asset Type Units 12/31/2002 12/31/2002 Rate2 12/31/02 at 12/31/02
-------------------------- -------- ------------ ------------- -------- --------- -----------
(Dollars in thousands)
Tax-Exempt First Mortgage Bonds
Stabilized:
Participating 3,874 $ 152,977 $ 154,440 6.9% 88.1% $711
Non-participating 10,463 414,859 445,723 7.2% 94.1% 684
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Total stabilized 14,337 567,836 600,163 7.2%
Lease-Up3 4,725 227,147 245,866 7.4%
Construction 9,779 512,668 532,669 7.0%
Rehabilitation 2,976 142,330 153,489 7.5%
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Subtotal/Weighted Average 31,817 $1,449,981 $1,532,187 7.2%
Tax-Exempt Subordinate Bonds
Stabilized 692 $ 17,000 $ 17,000 9.4%
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Taxable Bonds
First Mortgages * $ 28,368 $ 30,403 8.9%
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Total Revenue Bonds $1,495,349 $1,579,590 7.2%
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Notes:
* Not applicable to avoid duplication with Tax-Exempt First Mortgage Bonds
which are secured by the Underlying Property
1 The Revenue Bonds are deemed to be available-for-sale debt securities and,
accordingly, are carried at their estimated fair values.
2 The stated interest rate represents the weighted average coupon rates of
the Revenue Bonds, based on their face amounts at December 31, 2002.
3 Represents properties that have completed construction/rehabilitation and
have not achieved occupancy above 90% and/or debt coverage ratios of 1.10:1
or greater for three consecutive months. This lease-up definition may
differ from the definition of stabilization in individual Revenue Bond
documents.
The principal and interest payments on each Revenue Bond are payable only from
the cash flows of the Underlying Properties, including proceeds from a sale of
an Underlying Property or the refinancing of the mortgage loan securing such
Revenue Bonds (the "Mortgage Loans"). None of the Revenue Bonds constitute a
general obligation of any state or local government, agency or authority. The
structure of each Mortgage Loan mirrors the structure of the corresponding
Revenue Bond that it secures. In order to protect the tax-exempt status of the
Revenue Bonds, the owners of the Underlying Properties are required to enter
into certain agreements to own, manage and operate the Underlying Properties in
accordance with requirements of the Internal Revenue Code of 1986, as amended.
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Revenue Bonds generally are not subject to optional prepayment during the first
five to ten years of the Company's ownership of the bonds and may carry
prepayment penalties thereafter generally beginning at 5% of the outstanding
principal balance, declining by 1% per annum. Certain Revenue Bonds may be
purchased at a discount from their face value. In selected circumstances and
generally only in connection with the acquisition of tax-exempt Revenue Bonds,
the Company may acquire a small amount of taxable bonds (i) which the Company
may be required to acquire in order to satisfy state regulations with respect to
the issuance of tax-exempt bonds and (ii) to fund certain costs associated with
the issuance of Revenue Bonds, that under current law cannot be funded by such
Revenue Bonds.
Modified Revenue Bonds
From time to time, the Company, as an alternative to foreclosure in the event of
default, enters into forbearance agreements and/or permanent modifications with
certain borrowers. The determination as to whether it is in the best interest of
the Company to enter into permanent modifications or forbearance agreements, to
advance second mortgages, or alternatively, to pursue its remedies under the
loan documents, including foreclosure, is based upon several factors. These
factors include, but are not limited to, Underlying Property operations and
performance, owner cooperation and projected costs of foreclosure and litigation
- irrespective of whether or not the obligor has an affiliation with the
Manager. These modifications have generally encompassed an extension of the
maturity together with a prepayment lock out feature and/or prepayment penalties
together with an extension of the mandatory redemption feature (5-10 years from
modification). Stated interest rates have also been adjusted together with a
change in the participating interest features. Base interest rates,
participating interest, prepayment lock-outs, mandatory redemption and maturity
features are arrived at through negotiations between the Company and the owners
of the Underlying Properties and vary dependent on the facts of a particular
Revenue Bond, the owner of the Underlying Property, the Underlying Property's
performance and requirements of bond counsel and local issuers. Should
negotiations break down, the Company has the option to pursue its other remedies
including acceleration and foreclosure. The Company may agree to the
modification of other Revenue Bonds to generally reflect similar terms as those
modified previously, where and as appropriate. Significant modifications to
interest rates and maturity dates are subject to final approval of the local
issuers, bond counsel and indenture trustees. Since inception, the Company has
modified Revenue Bonds with an aggregate face amount of only $187 million.
With respect to Revenue Bonds which are subject to forbearance agreements with
their respective obligors, the difference between the stated interest rates and
the rates paid (whether deferred and payable out of available future cash flow
or, ultimately, from sale or refinancing proceeds) is not accrued for financial
statement purposes. The accrual of interest at the stated interest rate will
resume once an Underlying Property's ability to pay the stated rate has been
adequately demonstrated. Unrecorded contractual interest income was
approximately $434,500, $662,000 and $1.6 million for the years ended December
31, 2002, 2001 and 2000, respectively. Payments under each of the existing
forbearance agreements are current as of December 31, 2002.
Revenue Bonds with the Obligor as an Affiliate of the Manager
The obligors of Revenue Bonds with an aggregate original par amount of
approximately $1.1 billion are partnerships in which affiliates of the Manager
own a 1% general partner interest. In addition, the original owners of
Underlying Properties and obligors of approximately $12.2 million of Revenue
Bonds have been replaced with affiliates of the Manager who have not made equity
investments. Up to 15% of the Total Market Value of the Company (as defined in
its Trust Agreement) may be invested in Revenue Bonds secured by Underlying
Properties in which affiliates of the Manager have a controlling interest,
equity interest or security interest. The 15% limit is not applicable to
properties to which the Manager or its affiliates have taken title for the
benefit of the Company and only applies to Revenue Bonds acquired after the
Merger. These affiliate entities could have interests that do not coincide with,
and may be adverse to, the interests of the Company. Negotiations, if any, with
respect to modifications of Revenue Bonds between the Company and obligors who
are affiliates may be affected by these conflicts as the Manager determines the
appropriate terms and conditions of modifications or otherwise opts for some
other remedy including foreclosure.
The original obligor and owner of the Underlying Property of the Highpointe
Revenue Bond has been replaced with an affiliate of the Manager who has not made
an equity investment. This affiliate has assumed the day-to-day responsibilities
and obligations of the Underlying Property. A buyer is being sought for the
Underlying Property securing the Highpointe Revenue Bond. Highpointe is
generally paying as interest an amount equal to the net cash flow generated by
operations, which is less than the stated rate of the Revenue Bond. The Company
has no present intention of declaring default on this Revenue Bond. The
aggregate carrying value of Highpointe at December 31, 2002 and 2001 was
approximately $6.2 million and $5.7 million, respectively, and the income earned
from Highpointe for the years ended December 31, 2002 and 2001 was approximately
$322,000 and $315,000, respectively.
Impaired Revenue Bond
During 2002, the Company took a write down of approximately $920,000, 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 of the bond to
$4.5 million, the fair value of the Underlying Property.
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Accessing Multiple Forms of Capital
In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company utilizes multiple sources of debt and equity capital. The
Company's access to multiple sources of debt and equity capital provides
financial flexibility and enables the Company to not have to rely on one single
source of capital. Further, the particular structure of each capital source has
attributes that may make it more accommodating to certain investors or more
favorably received in the then current climate of the capital markets.
The Company has collateralized debt securitizations and equity offerings to
raise capital. The most efficient and economical source of capital is
securitization. The Company has two primary securitization programs: the Private
Label Tender Option Program ("TOP") and the P-FLOATS/RITES program.
Securitizations continue to offer the lowest cost of capital, albeit with
certain covenants and leverage limits. Pursuant to its Trust Agreement, the
Company is only able to incur leverage or other financing up to 50% of the
Company's Total Market Value; this leverage restriction is generally consistent
or more conservative than leverage covenants on the Company's securitized debt.
The Company's conservative capital structure therefore requires periodic
preferred and common equity offerings to maintain leverage within required
limits.
During 2002, the Company's growth was financed by the TOP, an additional
offering of common share, two offerings of Convertible CRA Shares, preferred
share offerings by a subsidiary, and securitization transactions as well as
funds generated from operations in excess of distributions. The Company's
continued growth is expected to be financed by new issuances of Common Shares,
the TOP or similar programs, additional securitization transactions and funds
generated from operations in excess of distributions.
Public Offerings and Private Placements
In February 2002, the Company issued approximately 6.3 million Common Shares, at
$15.47 per share, raising proceeds net of underwriting discounts of
approximately $92.8 million. The Company used these proceeds to fund additional
investments in Revenue Bonds.
In July 2002, the Company issued approximately 1.4 million Convertible CRA
Shares, at $17.43 per share, raising proceeds net of underwriting discounts of
approximately $23 million. The Company used these proceeds to invest in
additional Revenue Bonds and for general Company purposes, including reduction
of the Company's indebtedness.
In November 2002, the Company completed a private placement of approximately
576,000 Convertible CRA Shares, at $17.37 per share, raising proceeds net of
underwriting discounts of approximately $9.6 million. The Company used these
proceeds to invest in additional Revenue Bonds.
Preferred Equity Issuances
One of CharterMac's subsidiaries, Equity Issuer, has issued preferred shares to
institutional investors with an aggregate liquidation preference of
approximately $273.5 million, issued as follows: $90 million in 1999, $79
million in 2000, $49.5 million in 2001 and $55 million in 2002. The Preferred
Shares are not convertible into Common Shares of Equity Issuer or the Company.
The preferred shares have an annual preferred dividend payable quarterly in
arrears, but only upon declaration thereof by Equity Issuer's board of trustees
and only to the extent of Equity Issuer's tax-exempt income (net of expenses)
for the particular quarter. Since inception, all quarterly distributions have
been declared at the stated annualized dividend rate for each respective series
and all distributions so declared have been paid. See Item 5, "Market for the
Company's Common Shares and Related Shareholder Matters" for more detailed
information.
The preferred shares issued during June 2002, consisted of 60 6.80% Series A-3
cumulative preferred shares and 50 7.20% Series B-2 subordinate cumulative
preferred shares, raising proceeds net of underwriting discounts of
approximately $53.1 million. Each of these preferred shares is subject to
mandatory repurchase in 2052 at a liquidation amount of $500,000 per share.
Private Label Tender Option Program
On May 21, 1998, the Company closed on its TOP. As of December 31, 1999, the
maximum amount of capital that could be raised under the TOP was $400 million.
On December 7, 2000, the Company refined the structure of the TOP for the
primary purpose of segregating Revenue Bonds issued by governmental entities in
California from the remainder of the Revenue Bonds under the TOP and to increase
the maximum amount of capital available under the program to $500 million.
As of December 31, 2002, the Company has contributed 83 issues of Revenue Bonds
in the aggregate outstanding bond amount of approximately $704 million to
CharterMac Origination Trust I (the "Origination Trust"), a wholly-owned,
indirect subsidiary of the Company. The Origination Trust then contributed 56 of
its Revenue Bonds, with an aggregate outstanding bond amount of approximately
$505 million, to CharterMac Owner Trust I (the "Owner Trust") which is
controlled by the Company. The Owner Trust contributes selected bonds to
specific "Series Trusts" in order to segregate Revenue Bonds issued by
governmental entities selected by state of origin. As of December 31, 2002, six
such Series Trusts had been created: two "California only" series that had 16
issues of Revenue Bonds in the aggregate outstanding bond amount of
approximately $118 million and four "National" (non-state specific) series that
had 40 issues of Revenue Bonds in the aggregate outstanding bond amount of
approximately $387 million.
Each Series Trust issues two equity certificates: (i) a Senior Certificate,
which has been deposited into another Delaware business trust (a "Certificate
Trust") which issues and sells "Floater Certificates" representing proportional
interests in the Senior Certificate to
-8-
new investors and (ii) a Residual Certificate representing the remaining
beneficial ownership interest in each Series Trust, which has been issued to the
Origination Trust. At December 31, 2002, the California only and National Series
Trusts had Floater Certificates with an outstanding amount of $115 million and
$341.5 million, respectively.
The Revenue Bonds remaining in the Origination Trust (aggregate principal amount
of approximately $199 million) are additional collateral for the Owner Trust's
obligations under the Senior Certificate. In addition, the Owner Trust obtained
a municipal bond insurance policy from MBIA to credit enhance Certificate
distributions for the benefit of the holders of the Floater Certificates and
arranged for a liquidity facility, issued by a consortium of highly-rated
European banks, with respect to the Floater Certificates. The Company owns no
beneficial interest in and does not control the Certificate Trusts.
The effect of the TOP structure is that a portion of the interest received by
the Owner Trust on the Revenue Bonds it holds is distributed through the Senior
Certificate to the holders of the Floater Certificates with the residual
interest remitted to the Origination Trust (and thus to the benefit of the
Company) via the Residual Certificate. The effect of the December 7, 2000
refinement of the TOP structure was to segregate the California-related Floater
Certificates as they generally will pay distributions at lower rates than
National (non-state specific) Floater Certificates and thus the yield on the
Residual Certificates owned by the Origination Trust is increased.
The Company's cost of funds relating to the TOP (calculated as interest expense
plus recurring fees as a percentage of the weighted average amount of the
outstanding Senior Certificate) was approximately 2.4%, 3.5% and 5.4% for the
years ended December 31, 2002, 2001 and 2000, respectively before the effects of
hedging.
P-FLOATs/RITES
Another source of financing for the Company's investments is the securitization
of selected Revenue Bonds through the Merrill Lynch Pierce Fenner & Smith
Incorporated ("Merrill Lynch") P-FLOATS/RITES program. Merrill Lynch deposits
each Revenue Bond into an individual special purpose trust together with a
Credit Enhancement Guarantee ("Guarantee"). Two types of securities are then
issued by each trust, (1) Puttable Floating Option Tax-Exempt Receipts
("P-FLOATS"), a short-term senior security which bears interest at a floating
rate that is reset weekly and (2) Residual Interest Tax Exempt Securities
("RITES"), a subordinate security which receives the residual interest payment
after payment of P-FLOAT interest and ongoing transaction fees. The P-FLOATS are
sold to qualified third party, tax-exempt investors and the RITES are generally
sold back to the Company. The Company has the right, with 14 days notice to the
trustee, to purchase the outstanding P-FLOATS and to withdraw the underlying
Revenue Bonds from the trust. When the Revenue Bonds are deposited into the
P-FLOAT Trust, the Company receives the proceeds from the sale of the P-FLOATS
less certain transaction costs. In certain other cases, Merrill Lynch may
directly buy the Revenue Bonds from local issuers, deposit them in the trust,
sell the P-FLOAT security to qualified investors and then sell the RITES to the
Company.
In order to facilitate the securitization under the P-FLOATS program, the
Company has pledged certain additional Revenue Bonds, cash and cash equivalents
and temporary investments as collateral for the benefit of the credit enhancer,
Merrill Lynch. At December 31, 2002, the total par amount of such additional
Revenue Bonds, cash and cash equivalents and temporary investments pledged as
collateral was approximately $180 million.
During the year 2002, the Company transferred six Revenue Bonds with an
aggregate par amount of approximately $91 million to the P-FLOATS/RITES program
and received proceeds of approximately $90.7 million. Additionally, the Company
repurchased eight Revenue Bonds with an aggregate par value of approximately $67
million.
The Company's cost of funds relating to its secured borrowings under the Merrill
Lynch P-FLOATS/RITES program (calculated as interest expense as a percentage of
the weighted average amount of the secured borrowings) was approximately 2.4%,
3.7% and 5.0%, for the years ended December 31, 2002, 2001 and 2000,
respectively before the effects of hedging.
Other Debt
In conjunction with the acquisition of PW Funding, the Company, through its
subsidiary CM Corp., borrowed approximately $27.3 million ("the PWF Acquisition
Loan"). CM Corp. may request a resizing of the loan, up to the maximum facility
size of $40 million, in order to generate additional funding ("Final Advance")
that may be required in connection with CM Corp.'s acquisitions of the remaining
20% stock ownership of PWF. The Final Advance would equal the lesser of 100% of
the cost of the remaining 20% equity interests of PWF or an amount that
represents an overall maximum advance of 75% of the value of the PWF mortgage
servicing portfolio at the time of the Final Advance.
The PWF Acquisition Loan has a term of five years with an interest rate of LIBOR
plus 2.25%. The loan was interest only for the first twelve months. Beginning in
January 2003 and through the remaining loan term, quarterly straight-line
principal amortization on the Initial Advance is paid based on a ten-year
amortization period. Additionally, after receiving the Final Advance, additional
quarterly straight-line principal amortization payments on the Final Advance
will be made based on the remaining years of the amortization period for the
Initial Advance.
PWF established a $100 million secured, revolving mortgage warehouse facility in
December 2001, subject to annual renewal during December of each year. CM Corp.
is a guarantor of this warehouse facility. The interest rate for each warehouse
advance is the federal funds rate plus 125 basis points. The interest rate as of
December 31, 2002 was 2.48%. At December 31, 2002, PWF had out-
-9-
standing borrowings under the facility of approximately $41.3 million. At
December 31, 2002, the Company was in compliance with all covenants of the
facility.
The $100 million facility replaced PWF's $50 million multi-family revolving
warehouse facility, which expired on May 31, 2002. At December 31, 2001, the $50
million facility had outstanding borrowings of $29.3 million at an interest rate
of 30-day LIBOR plus 1.00%, which at December 31, 2001, was 4.0%. Borrowings
under the $50 million facility were collateralized by PWF's ownership interests
in the original mortgage notes. At December 31, 2001, PWF was in compliance with
all covenants of the $50 million facility. This facility was repaid during the
first quarter of 2002.
PWF was the guarantor for a $35 million loan and security agreement for Larson,
which expired on May 31, 2002. The interest rate for the agreement was the lower
of 30 day LIBOR plus 209 basis points or the 30-day Treasury Bill rate plus 205
basis points. At December 31, 2001, there were no outstanding borrowings under
the agreement.
Competition
The Company, from time to time, may be in competition with private investors,
regional investment banks, mortgage banking companies, lending institutions,
quasi-governmental agencies such as Fannie Mae and Freddie Mac, trust funds,
mutual funds, domestic and foreign credit enhancers, bond insurers, investment
partnerships and other entities with objectives similar to the Company. Although
the Company operates in a competitive environment, competitors focused on
providing tax-exempt financing on multifamily housing consistent with the
Company's custom-designed programs are relatively few.
The Company's business is also affected by competition to the extent that the
Underlying Properties from which it derives interest and, ultimately, principal
payments may be subject to competition relating to rental rates and relative
levels of amenities from those offered by comparable neighboring properties. See
the comprehensive table under the heading "Revenue Bonds - Characteristics",
above, for additional competitive information.
In addition, through PWF, the Company is also in competition with 25 other
licensed DUS lenders which originate multi-family mortgages on behalf of Fannie
Mae. However, PWF through its affiliation with the Company, is better positioned
to offer a full range of financing programs on both affordable and market-rate
multi-family housing. PWF's origination groups are able to cross market the
Company's tax-exempt Revenue Bonds and Related Capital's Low Income Tax Credit
equity with its loan products, thereby offering developers a single, streamlined
execution.
The Manager and/or its affiliates have formed, and may continue to form, various
entities to engage in businesses that may be competitive with the Company. At
this time, there is no other such business that has a tax-exempt execution.
However, the Company's relationship with the Manager and its affiliates offers
developers different products for all their financing needs, including
pre-development loans, bridge loans and Low Income Housing Tax Credit Equity.
These "Capital Solutions" enable developers to have a single, streamlined
process, which reduces the time and cost of financing. As a result, the savings
in time and up-front costs and the certainty of execution that the Company
offers developers enables the Company to receive above-market rates of interest
on our Revenue Bonds.
Employees
CharterMac and each of its subsidiaries have entered into separate management
agreements with Related Charter L.P. and/or CM Corp. pursuant to which they
provide each respective entity with investment advice, portfolio management, and
all other services vital to such entity's operations.
Prior to the acquisition of PWF in December 2001, the Company had no employees.
PWF, which is a subsidiary of CM Corp., operates as a stand-alone entity and is
actively self-managed with its own employees. Thus on a consolidated basis, the
Company had 69 employees as of December 31, 2002. These employees are not a
party to any collective bargaining agreement.
Regulatory Matters
Neither CharterMac nor its subsidiaries are registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Company
would not be able to conduct its activities as it currently conducts them if it
was required to register.
CharterMac at all times intends to conduct its, and those of its subsidiaries'
activities, so as not to become regulated as an "investment company" under the
Investment Company Act. While CharterMac is not an "investment company" under
the Investment Company Act, if one of CharterMac's subsidiaries were deemed to
be an "investment company," CharterMac could also be subject to regulation under
the Investment Company Act. There are a number of exemptions from registration
under the Investment Company Act that CharterMac believes applies to it and its
subsidiaries, and which CharterMac believes make it possible for the Company not
to be subject to registration under the Investment Company Act.
Additional information about the Company is also available at
www.chartermac.com.
-10-
Item 2. Properties
The Company leases office space as follows (See Note 15 - Commitments and
Contingencies of Item 8. Financial Statements and Supplementary Data):
Mineola, New York. In 1997, PWF entered into a 10 year, 2 month lease for an
office facility. The lease expires in 2007.
Bernardsville, New Jersey. In 1999, Larson entered into a 5 year lease for an
office facility. The lease expires in 2004.
Dallas, Texas. In 2000, PWF entered into a 5 year lease for an office facility.
The lease expires in 2005.
The Manager leases office space located at 625 Madison Avenue, New York, New
York, 10022.
The Company and the Manager believe that these facilities are suitable for
current requirements and contemplated future operations.
Item 3. Legal Proceedings
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 material adverse impact on the Company's financial
position, results of operations or cash flows.
On or about December 24, 2002, an alleged shareholder of the Company commenced a
stockholder's derivative action ostensibly on behalf of the Company in the
Supreme Court of the State of New York, County of Nassau, against each member of
the Company's Board of Trustees and Related Capital Company ("RCC"). The case is
entitled Dulitz v. Hirmes, et al., Index No. 02-020389, and the Company is named
as a nominal defendant in the action. The plaintiff alleges that each of the
members of the Board of Trustees and RCC allegedly breached fiduciary duties
and/or aided and abetted breaches of fiduciary duties owed to the Company and
its shareholders in approving the proposed acquisition of RCC by the Company.
The complaint alleges, among other things, that the purchase price for RCC is
excessive, the transaction has been pursued and structured solely for the
benefit of the Trustees that are affiliated with RCC and the members of the
Special Committee are not independent because they are supposedly "dominated or
controlled" by the Trustees that are affiliated with RCC. The complaint further
alleges that shareholder ratification of the proposed transaction supposedly
will not be effective because the Trustees allegedly will not "disclose the true
nature and purpose of the proposed transaction." The complaint seeks declaratory
and injunctive relief, including enjoining the consummation of the proposed
transaction, and unspecified amounts of compensatory damages, costs,
disbursements and attorneys' fees. The individual defendants and RCC have
informed the Company that they intend to defend against the claims vigorously.
Item 4. Submission of Matters to a Vote of Shareholders
None.
-11-
PART II
Item 5. Market for the Company's Common Shares and Related Shareholder Matters.
As of March 27, 2003, there were 3,383 registered shareholders owning
41,220,138. Common Shares. The Company's Common Shares have been listed on the
American Stock Exchange since October 1, 1997 under the symbol "CHC". Prior to
October 1, 1997, there was no established public trading market for the
Company's Common Shares.
The high and low prices for each quarterly period of the last two years during
which the Common Shares were traded are as follows:
2002 2001
---- ----
Quarter Ended Low High Low High
------------- --- ---- --- ----
March 31 $15.45 $16.79 $13.30 $16.10
June 30 $15.53 $18.20 $14.21 $15.95
September 30 $14.75 $18.19 $15.00 $15.99
December 31 $15.01 $18.44 $14.75 $16.48
The last reported sale price of Common Shares on the American Stock Exchange on
March 27, 2003 was $17.75
The following table provides information related to the Company's Incentive
Share Option Plan as of December 31, 2002:
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
remaining available
Number of securities Weighted-average for future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column a)
-----------------------------------------------------------------------------
Equity compensation plans
approved by security holders 263,509 $12.47 1,720,918(1)
Equity compensation plans
Not approved by security
holders -- -- --
Total 263,509 $12.47 1,720,918(1)
Notes:
(1) The Incentive Share Option Plan authorizes the issuance of options equal to
3% of the Common Shares outstanding as of December 31, of the preceding year,
for any year the Company's distribution is in excess of $0.9517 per share, up to
10% of the total Common Shares outstanding at October 1, 1997 (2,058,748). The
Company has reached the 10% cap.
-12-
Common Share Repurchase Plan
On October 9, 1998, the Board of Trustees authorized the implementation of a
Common Share repurchase plan, enabling the Company to repurchase, from time to
time, up to 1,500,000 of its Common Shares. The repurchases, if any, are to be
made in the open market and the timing is dependent on the availability of
Common Shares and other market conditions. As of December 31, 2002, the Company
has acquired 8,400 of its Common Shares for an aggregate purchase price of
$103,359 (including commissions and service charges). Repurchased Common Shares
are accounted for as treasury Common Shares of beneficial interest.
Other
Two of the Company's independent trustees are entitled to receive annual
compensation for serving as trustees in the aggregate amount of $17,500 payable
in cash (maximum of $7,500 per year) and/or Common Shares valued at their fair
market value on the date of issuance. The third independent trustee is entitled
to receive annual compensation in the aggregate amount of $30,000 payable in
cash (maximum of $20,000 per year) and/or Common Shares. As of December 31,
2002 and 2001, 1,830 and 2,001 Common Shares, respectively, having an aggregate
value on the date of issuance of $30,000 each year, were issued to the
independent trustees as compensation for services rendered during the years
ended December 31, 2001 and 2000. The independent trustees also received an
aggregate of 5,535 shares, worth $97,500 at the time of issuance, as payment for
their work on the special committee analyzing the proposed acquisition of
Related. An additional 1,728 shares, with an aggregate value of $30,000 at
issuance, were issued to the independent trustees in January 2003 as
compensation for their 2002 services.
Distribution Information
Distributions Per Share
The Company's earnings are allocated pro rata among the Common Shares and the
Convertible CRA Shares (collectively, "Shares"), and the Convertible CRA Shares
rank on parity with the Common Shares with respect to rights upon liquidation,
dissolution or winding up of the Company. Quarterly cash distributions per
Share for the years ended December 31, 2002 and 2001 were as follows:
Shareholders of the Company
Cash Distribution Date Per Total Amount
for Quarter Ended Paid Share Distributed
--------------------- --------------- -------------- ----------------
March 31, 2002 5/15/02 $0.31 $13,340,885
June 30, 2002 8/14/02 0.31 13,342,358
September 30, 2002 11/14/02 0.32 14,139,587
December 31, 2002 2/14/03 0.32 14,296,126
---- ----------
Total for 2002 $1.26 $55,118,956
==== ==========
March 31, 2001 5/15/01 $0.275 $ 6,954,856
June 30, 2001 8/14/01 0.275 9,064,756
September 30, 2001 11/15/01 0.290 9,575,495
December 31, 2001 2/15/02 0.300 11,012,485
----- ----------
Total for 2001 $1.140 $36,607,592
===== ==========
In addition to the distributions set forth in the table above, the Company paid
Related Charter, as Manager a special distribution (equal to .375% per annum of
the total invested assets of the Company), which amounted to approximately $4.9
million and $3.6 million for the years ended December 31, 2002 and 2001,
respectively.
There are no material legal restrictions upon the Company's present or future
ability to make distributions in accordance with the provisions of the Company's
Amended and Restated Trust Agreement. Future distributions paid by the Company
will be at the discretion of the Trustees based upon evaluation of the actual
cash flow of the Company, its financial condition, capital requirements and such
other factors as the Trustees deem relevant.
-13-
Item 6. Selected Financial Data
The information set forth below presents selected financial data of the Company.
Additional financial information is set forth in the audited consolidated
financial statements and notes thereto contained in "Item 8. Financial
Statements and Supplementary Data".
For the Year Ended December 31, ($000s except for share data)
-------------------------------------------------------------
OPERATIONS 2002 2001 2000 1999 1998
---------- -------- -------- -------- --------- -------
Total revenues $116,413 $ 74,625 $ 59,091 $ 40,437 $ 27,940
Operating expenses (33,397) (6,074) (4,563) (3,151) (2,391)
Interest expense and financing costs (19,004) (16,132) (16,488) (8,768) (3,523)
Other-than-temporary impairments related
to investments in Revenue Bonds (920) (400) -- (1,859) --
Equity in earnings of ARCap 2,219 456 -- -- --
Gain/(Loss) on repayment of Revenue Bonds
and sales of loans 14,568 (912) 645 (463) --
------ ------- ------ ------- -------
Income before allocation to preferred
shareholders and minority interest 79,879 51,563 38,685 26,196 22,026
Income allocated to preferred shareholders
of subsidiary (17,266) (12,578) (8,594) (3,014) --
Income allocated to minority interest (496) -- -- -- --
------ ------- ------ ------- -------
Income before provision for income taxes 62,117 38,985 30,091 23,182 22,026
Provision for income taxes (1,284) -- -- -- --
------ ------- ------ ------- -------
Net income $ 60,833 $38,985 $30,091 $23,182 $22,026
======= ======= ======= ======= =======
Net income applicable to Shareholders (2) $ 55,905 $35,010 $27,074 $20,951 $20,343
======= ======= ======= ======= =======
Net income per Share (2)
Basic $ 1.31 $ 1.14 $ 1.22 $ 1.02 $ .99
======= ======= ======= ======= =======
Diluted $ 1.31 $ 1.14 $ 1.22 $ 1.02 $ .98
======= ======= ======= ======= =======
Weighted average Shares outstanding
Basic 42,697,195 30,782,161 22,140,576 20,580,756 20,587,151
========== ========== ========== ========== ==========
Diluted 42,768,139 30,837,340 22,152,239 20,580,756 20,740,641
========== ========== ========== ========== ==========
FINANCIAL POSITION
Total assets $ 1,852,868 $ 1,421,059 $ 925,236 $ 673,791 $ 492,586
========== =========== ========== =========== ==========
Financing arrangements $ 671,659 $ 541,796 $ 385,026 $ 257,770 $ 150,000
========== =========== ========== =========== ==========
Notes payable $ 68,556 $ 56,586 $ -- $ -- $ --
========== =========== ========== =========== ==========
Total liabilities $ 821,031 $ 663,659 $ 399,222 $ 268,239 $ 165,092
========== =========== ========== =========== ==========
Preferred shares of subsidiary (subject to
mandatory repurchase) $ 273,500 $ 218,500 $ 169,000 $ 90,000 $ --
========== =========== ========== =========== ==========
Total shareholders' equity/partners'
capital $ 753,515 $ 535,248 $ 357,014 $ 315,552 $ 327,494
========== =========== ========== =========== ==========
DISTRIBUTIONS
Distributions to Series A preferred
shareholders $ 5,962,500 $ 5,962,500 $ 5,962,500 $ 3,014,375 N/A
========== ========== =========== ==========
Distributions to Series A-1 preferred
shareholders $ 1,704,000 $ 1,704,000 $ 762,067 N/A N/A
========== ========== ===========
Distributions to Series B preferred
shareholders $ 4,180,000 $ 4,180,000 $ 1,869,389 N/A N/A
========== ========== ===========
Distributions to Series A-2 preferred
shareholders $ 1,953,000 $ 444,850 N/A N/A N/A
========== ==========
Distributions to Series B-1 preferred
shareholders $ 1,258,000 $ 286,544 N/A N/A N/A
========== ==========
Distributions to Series A-3 preferred
shareholders $ 1,173,000 N/A N/A N/A N/A
==========
Distributions to Series B-2 preferred
shareholders $ 1,035,000 N/A N/A N/A N/A
==========
Distributions to Shareholders (2) $55,118,956 $36,607,592 $23,973,872 $20,478,112 $19,144,597
========== ========== ========== ========== ==========
Distributions per share (1) $ 1.26 $ 1.14 $ 1.07 $ 1.00 $ .93
========== ========== ========== ========== ==========
-14-
Other Data
(1) Distributions per share are the same for both Common Shares and Convertible
CRA Shares.
(2) Includes common shareholders and Convertible CRA Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The following is a summary of the Company's results of operations for the years
ended December 31, 2002, 2001 and 2000. Net income for the years ended December
31, 2002, 2001 and 2000 was approximately $60.8 million, $39.0 million and $30.1
million, respectively.
2002 vs. 2001
For the year ended December 31, 2002 as compared to 2001, total revenues, total
expenses and net income increased due to the net result of the acquisition of 72
Revenue Bonds and the repayment of 11 Revenue Bonds and three notes. Total
revenues and expenses and net income also increased due to the December 2001
acquisition of PWF, the credit enhancement and yield guarantee transaction.
Interest income from Revenue Bonds increased approximately $21.2 million for the
year ended December 31, 2002 as compared to 2001. This increase was primarily
due to an increase in interest income of approximately $26.6 million from new
Revenue Bonds acquired during 2002 and 2001 and an increase of approximately
$1.6 million in contingent interest collections, partially off-set by a decrease
in interest income of approximately $3.2 million due to the sale or repayment of
Revenue Bonds.
Total revenues for the year ended December 31, 2002 increased by approximately
$41.8 million, including the increases in interest income from Revenue Bonds
noted above, approximately $18.2 million from PWF, $1.3 million in fees related
to the credit enhancement transaction and approximately $1.4 million in fees
from the LIHTC yield guarantee.
Interest expense and recurring fees increased approximately $2.9 million for the
year ended December 31, 2002 as compared to 2001, primarily due to higher
interest expense on the interest rate swaps and a higher level of borrowing
throughout the year.
General and administrative expenses increased approximately $18.2 million for
the year ended December 31, 2002 as compared to 2001 primarily due to the
addition of PWF's expenses and the growth of the Company.
Income allocated to minority interest of approximately $496,000 for the year
ended December 31, 2002 represents PWF's third party continued 20% ownership.
Amortization increased approximately $8 million for the year ended December 31,
2002 as compared to 2001 primarily due to amortization of mortgage servicing
rights at PWF.
Income allocated to preferred shareholders of subsidiary for the year ended
December 31, 2002 as compared to 2001 increased approximately $4.7 million due
to the preferred offerings consumated on October 9, 2001 and June 4, 2002.
During the year ended December 31, 2002, the Company recognized net gains on
repayments of Revenue Bonds of approximately $3.9 million, versus a net loss for
2001 of approximately $912,000, due to the number and size of Revenue Bonds
repaid or sold. Additionally, during the year end December 31, 2002, the Company
recognized gains on sales of loans of approximately $10.7 million due to PWF's
activities.
During the year ended December 31, 2001, the Company wrote down the Lexington
Trails Revenue Bond in the amount of $400,000. The Company has continued to seek
a buyer for the Lexington Trails property and feels it may be necessary to
restructure the debt on the Underlying Property, so felt it prudent to take a
further write down of approximately $920,000.
2001 vs. 2000
For the year ended December 31, 2001 as compared to 2000, total revenues, total
expenses and net income increased due to the net result of the acquisition of 42
Revenue Bonds and the repayment of three Revenue Bonds.
Interest income from Revenue Bonds increased approximately $15.8 million for the
year ended December 31, 2001 as compared to 2000. This increase was primarily
due to an increase in interest income of approximately $21.9 million on new
Revenue Bonds acquired during 2001 and 2000, partially offset by a decrease in
additional base interest, contingent interest and a decrease in interest income
due to Revenue Bond repayments.
Total revenues for the year ended December 31, 2001 increased by approximately
$16 million, including the net increase from Revenue Bonds noted above, the
equity in earnings of ARCap of approximately $456,000, an increase in other
income of approximately $627,000, which included a breakup fee of $250,000
related to the Country Lake repayment and a placement fee of $141,000 related
-15-
to Mayflower, partially offset by a decrease in interest income from temporary
investments of approximately $1.1 million due to lower cash balances and lower
interest rates.
Total expenses for the year ended December 31, 2001, increased by approximately
$1.6 million primarily due to increases in bond servicing costs, general and
administrative expenses and amortization due to the acquisition of 42 new
Revenue Bonds during the year and a loss on impairment of $400,000 taken against
the Lexington Trails Revenue Bond, partially offset by a decrease in interest
expense due to lower interest rates and the refinement of the Private Label
Tender Option Program. During 2001, Lexington Trails failed to make the regular
interest payments due of $210,000 for the period from April through September.
As a result this bond was written down to the estimated fair value of the
underlying property of approximately $4.5 million.
For the year ended December 31, 2001, the Company recognized a net loss on the
repayment of Revenue Bonds of approximately $912,000 as compared to a gain of
approximately $645,000 in 2000.
Income allocated to preferred shareholders of subsidiary for the year ended
December 31, 2001, increased by approximately $4.0 million related to the
preferred offerings executed on July 21, 2000 and October 9, 2001.
As of December 31, 2001, the Company recorded an unrealized gain on its Revenue
Bonds of approximately $262,000 versus a net unrealized loss in 2000 of
approximately $22.9 million. The large fluctuation between the years was due to
declining interest rates and is recorded as part of other comprehensive income
in the consolidated statements of changes in shareholders' equity.
Acquisitions and Dispositions of Revenue Bonds
During 2002, the Company acquired Revenue Bonds with an aggregate par value of
approximately $457 million, not including bond selection fees and expenses of
approximately $10 million.
Acquisitions for the Year Ended December 31, 2002
-------------------------------------------------
Bond
Aggregate Interest
Closing Purchase Rate
Property/Bond Name Date Par Amount Price (a) at 12/31/02
----------------------------- --------- ----------- -------------- ------------
West Oaks Feb-02 $10,150,000 $10,376,008 7.500%
Circle S Feb-02 9,300,000 9,511,859 7.500%
Circle S Feb-02 1,925,000 1,963,500 8.750%
Faircliff Mar-02 7,000,000 7,152,289 7.900%
Johnston Mill April-02 16,000,000 16,378,889 6.900%
Johnston Mill April-02 500,000 510,000 8.000%
Bryte Gardens April-02 5,358,800 5,501,960 7.000%
Meridian April-02 8,255,000 8,420,100 7.500%
Meridian April-02 375,000 382,500 8.750%
Stonebridge May-02 5,270,000 5,387,215 7.000%
Oaks At Brandlewood May-02 12,725,000 12,979,500 7.000%
Oaks At Brandlewood May-02 1,200,000 1,224,000 8.750%
Lansing Heights May-02 8,320,500 8,486,910 6.800%
Lansing Heights May-02 231,500 236,130 6.800%
Clearwood Villas May-02 15,000,000 15,311,843 7.000%
Clearwood Villas May-02 125,000 127,500 9.000%
Viewcrest Villages May-02 8,723,200 8,897,664 8.000%
Viewcrest Villages May-02 2,180,800 2,224,416 8.750%
Matthew Ridge May-02 10,968,000 11,187,360 7.150%
Cobblestone Landing May-02 11,500,000 11,740,399 6.900%
Lincoln Park May-02 4,900,000 4,998,364 7.750%
Georgia King May-02 16,075,000 16,484,823 8.000%
Georgia King May-02 8,925,000 9,103,500 7.000%
Colonial Park June-02 8,200,000 8,364,198 7.500%
Colonial Park June-02 375,000 382,500 8.750%
Willow Creek June-02 4,130,000 4,223,252 7.000%
Laguna Pointe June-02 13,300,000 13,584,323 7.500%
Lakeside Villas June-02 6,020,000 6,140,400 7.250%
Lakeside Villas June-02 2,600,000 2,652,000 7.000%
Lakeside Villas June-02 1,350,000 1,377,000 6.750%
Inverness Centre Aug-02 5,950,000 6,091,833 6.835%
Inverness Centre Aug-02 750,000 765,000 8.000%
Pleasant Valley Aug-02 15,000,000 15,317,330 6.750%
Pleasant Valley Aug-02 1,470,000 1,499,400 8.500%
Briarwood Apts. Aug-02 2,835,000 2,893,912 6.250%
Briarwood Apts. Aug-02 660,000 673,200 6.250%
Briarwood Apts. Aug-02 680,000 693,600 6.250%
-16-
Acquisitions for the Year Ended December 31, 2002
-------------------------------------------------
Bond
Aggregate Interest
Closing Purchase Rate
Property/Bond Name Date Par Amount Price (a) at 12/31/02
----------------------------- --------- ----------- -------------- ------------
Community Arms Aug-02 6,245,000 6,378,363 7.000%
Community Arms Aug-02 1,015,000 1,035,300 7.000%
Palm Terrace Sept-02 1,000,000 1,020,000 9.500%
Clarkridge Villas Sept-02 14,600,000 14,901,921 7.000%
Chapel Ridge Of Yukon Sept-02 7,000,000 7,140,000 7.000%
Pheasant Ridge Sept-02 9,000,000 9,195,287 7.400%
Pheasant Ridge Sept-02 1,900,000 1,938,000 8.500%
Emerald Bay Sept-02 10,570,000 10,789,678 5.500%
Emerald Bay Sept-02 1,330,000 1,356,600 9.000%
Magnolia Commons at
Vicksburg Oct-02 8,700,000 8,881,167 6.750%
Heatherwilde Villas Oct-02 13,500,000 13,785,942 5.500%
Heatherwilde Villas Oct-02 1,500,000 1,530,000 5.500%
Oak Hill Oct-02 8,300,000 8,473,590 6.500%
Waterford Place II Oct-02 2,102,000 2,319,413 6.500%
Hickory Trace Nov-02 11,920,000 12,158,400 7.000%
Allapatah Gardens Nov-02 4,850,000 4,956,774 7.150%
Green Crest Nov-02 12,500,000 12,759,348 7.000%
Ironwood Crossing Nov-02 15,000,000 15,300,000 5.500%
Ironwood Crossing Nov-02 1,970,000 2,009,400 8.750%
Park Center Nov-02 15,000,000 15,368,750 6.375%
Grove Apts Dec-02 8,270,000 8,441,114 4.000%
Grove Apts Dec-02 3,055,000 3,116,100 4.000%
Grove Apts Dec-02 1,475,000 1,504,500 4.000%
Kensington Court Dec-02 10,000,000 10,201,169 6.850%
Southern Oaks Dec-02 14,990,000 15,289,800 6.750%
Creekside Landing Dec-02 5,000,000 5,100,480 6.800%
Creekside Landing Dec-02 1,100,000 1,122,000 8.250%
Chapel Ridge Of Jackson Dec-02 5,000,000 5,101,489 6.750%
Chapel Ridge Of Jackson Dec-02 900,000 918,000 8.250%
Rosemont Dec-02 14,990,000 15,292,800 6.750%
Hickory Falls Apartment Dec-02 12,350,000 12,609,757 5.000%
Ecumenical Homes Dec-02 2,793,000 2,858,576 6.875%
Ecumenical Homes Dec-02 556,000 567,120 6.875%
Ecumenical Homes Dec-02 165,000 168,300 9.000%
Ecumenical Homes Dec-02 86,000 87,720 6.875%
----------------------------------
$457,059,800 $466,921,532
==================================
(a) Includes bond selection fees and other direct costs of acquiring the bond.
-17-
During 2001, the Company acquired 42 Revenue Bonds with an aggregate par value
of approximately $296 million, not including bond selection fees and expenses of
approximately $6.4 million.
Acquisitions for the Year Ended December 31, 2001
-------------------------------------------------
Bond
Aggregate Interest
Closing Purchase Rate at
Project Name Date Par Amount Price (a) 12/31/01
----------------------------- --------- ----------- ----------- ---------
Draper Lane Feb-28 $11,000,000 $ 11,260,970 10.000%
Sherwood Lake Apr-24 4,100,000 4,193,572 8.450%
Magnolia Arbors Apr-26 12,500,000 12,789,997 7.500%
Magnolia Arbors Apr-26 1,000,000 1,020,000 8.950%
Bluffview May-03 10,700,000 10,947,687 8.600%
Knollwood Villas May-03 13,750,000 14,068,044 8.600%
Chapel Ridge of Lowell May-18 5,500,000 5,613,165 5.500%
Belmont Heights Estates June-06 7,850,000 8,030,136 8.150%
Arbors at Creekside June-12 8,600,000 8,800,720 8.000%
Midtown Square June-13 5,600,000 5,732,024 7.400%
Midtown Square June-13 235,000 239,700 8.950%
Oakwood Manor June-26 5,010,000 5,144,488 8.500%
Oakwood Manor June-26 440,000 448,800 7.650%
Oakwood Manor June-26 765,000 780,300 9.500%
Cobb Park July-31 7,500,000 7,669,755 7.900%
Cobb Park July-31 285,000 290,700 9.500%
Palm Terrace Aug-15 4,460,000 4,564,483 8.400%
Palm Terrace Aug-15 1,542,381 1,573,229 9.500%
Lakewood Terrace Aug-21 7,650,000 7,814,099 7.900%
Blunn Creek Aug-28 15,000,000 15,355,213 7.900%
Valley View & Ridgecrest Oct-12 9,200,000 9,387,268 5.000%
Merchandise Mart Oct-24 25,000,000 25,505,683 8.000%
Lakeline Apartments Nov-06 21,000,000 21,442,825 8.100%
Lakeline Apartments Nov-06 550,000 561,000 9.650%
Rivers Edge Nov-20 15,000,000 15,306,040 7.700%
Mecca Vineyards Nov-29 13,040,000 13,300,800 7.750%
Mecca Vineyards Nov-29 1,500,000 1,530,000 7.250%
Mecca Vineyards Nov-29 360,000 367,200 9.000%
Westlake Village Nov-30 6,425,000 6,553,500 7.200%
Westlake Village Nov-30 575,000 586,500 8.000%
Silverwood Dec-11 3,300,000 3,366,000 8.000%
Silverwood Dec-11 525,000 535,500 8.750%
Riverside Meadows Dec-13 11,500,000 11,732,121 7.500%
Riverside Meadows Dec-13 200,000 204,000 8.750%
Oak Hollow Dec-18 8,625,000 8,797,500 7.900%
Hillside Apartments Dec-18 12,500,000 12,760,859 7.900%
Hillside Apartments Dec-18 400,000 408,000 9.250%
White Rock Dec-21 20,345,000 20,751,900 7.750%
White Rock Dec-21 430,000 438,600 9.500%
West Meadows Dec-21 13,000,000 13,262,208 5.000%
Ocean Ridge Dec-21 6,675,000 6,808,500 7.750%
Ocean Ridge Dec-21 2,325,000 2,371,500 8.750%
---------------------------
$295,962,381 $302,314,586
---------------------------
(a) Includes bonds selection fees and other direct costs of acquiring the bond.
-18-
During the period January 1, 2002 through December 31, 2002, eleven Revenue
Bonds and three notes were sold or repaid as described in the table below.
Dispositions for the Year Ended December 31, 2002
-------------------------------------------------
Realized
Par Amortized Gains/
Property/Bond Name Amount Cost (Losses)
------------------------ ------------ -------------- -----------
Bonds
-----
Sunset Downs $15,000,000 $11,360,289 $ 389,711
Chandler Creek 15,850,000 15,915,839 (65,839)
Chandler Creek-
Taxable 350,000 350,000 --
Sunset Creek 8,275,000 6,155,801 326,199
Sunset Village 11,375,000 8,819,548 90,452
Sunset Terrace 10,350,000 8,014,072 93,928
River Run 7,200,000 7,238,328 (38,328)
Park at Landmark 9,500,000 9,619,990 260,010
Clarendon 17,600,000 14,684,445 2,915,555
Bristol Village 17,000,000 17,082,110 (82,110)
Chapel Ridge of
Lowell 5,500,000 5,609,166 (4,573)
Notes
-----
Clarendon Hills 6,600,000 6,600,000 --
Bristol Village 200,000 200,000 --
Kingsbury 550,000 550,000 --
---------
$3,885,005
=========
During the period January 1, 2001 through December 31, 2001, three Revenue Bonds
and one note were repaid and one RITE was terminated as described in the table
below.
Dispositions for the Year Ended December 31, 2001
-------------------------------------------------
Realized
Par Amortized Gains/
Property/Bond Name Amount Cost (Losses)
--------------------- --------------- -------------- -----------
Bonds
-----
Greenway $12,850,000 $12,744,443 $ 105,557
Rolling Ridge 4,925,000 5,989,416 (867,416)
Country Lake 6,255,000 6,400,979 (145,979)
Note
----
Country Lake 2,540,000 2,540,000 -
RITE
----
Courtyard 5,000 8,766 (3,766)
---------
$(911,604)
=========
-19-
Liquidity and Capital Resources
In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company uses various sources of capital including two different
methods of collateralized debt securitizations and preferred and common equity
offerings. 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. The following table summarizes, on a
gross basis, the Company's capital raising activities, which are described in
more detail below.
Amount of Capital Raised During (in $000's):
---------------------------------------------------------------------------------------------
Capital Source 2000 and prior 2001 2002
---------------------------------------------------------------------------------------------
Equity:
------
Preferred
---------
Series A $ 90,000 $ -- $ --
Series A-1 24,000 -- --
Series A-2 -- 31,000 --
Series A-3 -- -- 30,000
Series B 55,000 -- --
Series B-1 -- 18,500 --
Series B-2 -- -- 25,000
Convertible CRA 35,596 -- 34,000
------- -------- --------
Total $204,596 $ 49,500 $ 89,000
------- -------- --------
Common
------
May 2001 $ -- $ 122,683 $ --
November 2001 -- 55,140 --
February 2002 -- -- 92,835
-------- -------- --------
Total $ -- $ 177,823 $ 92,835
-------- -------- --------
Securitizations:
----------------
Private Label Tender Option
Program $ 275,000 $ 75,000 $ 106,500
P-Floats/RITES 110,117 81,770 23,272
------- -------- --------
Total $ 385,117 $ 156,770 $ 129,772
------- -------- --------
Fleet: PW Acquisition $ -- $ 27,261 $ --
--------------------- -------- -------- ---------
PW Warehouse Line $ -- $ 29,325 $ 11,969
----------------- ------- -------- --------
Total of all capital activity $ 589,713 $ 440,679 $ 323,576
======== ======== ========
Securitizations and Debt Financings
-----------------------------------
The Company has two primary securitization programs: the TOP and the
P-FLOATS/RITES program. Securitizations continue to offer efficient execution
and the lowest cost of capital, albeit with certain covenants and leverage
limits. Pursuant to its Trust Agreement, the Company is only able to incur
leverage or other financing up to 50% of the Company's Total Market Value; such
terms are generally consistent or more conservative than leverage covenants on
the Company' s securitized debt.
Short-term liquidity is provided by interest income from Revenue Bonds and
promissory notes in excess of the related financing costs, and interest income
from cash and temporary investments. For the Company's PWF subsidiary,
short-term liquidity is provided by a $100 million revolving warehouse line to
fund loans prior to a committed take-out by Fannie Mae, Freddie Mac, Ginnie Mae
or FHA, under which PWF is the originator, underwriter, and servicer under
established programs with these entities.
The Company believes that its financing capacity and cash flow from current
operations are adequate to meet its current and projected liquidity
requirements. As of December 31, 2002, the Company has no off-balance sheet
debt.
-20-
(i) Preferred Equity Issuances By Subsidiary
Since June 1999, the Company, through a subsidiary, has issued multiple series
of Cumulative Preferred Shares. Proceeds from these offerings were used to
invest in or acquire additional tax-exempt assets for the Company.
Liquidation
Preferred Date of Mandatory Mandatory Number Preference Total Face Dividend
Series Issuance Tender Repurchase of Shares per Share Amount Rate
------ -------- ------ ---------- --------- --------- ---------- --------
Series A 06/29/99 06/30/09 06/30/49 45 $2,000,000 $90,000,000 6.625%
Series A-1 07/21/00 06/30/09 06/30/49 48 500,000 24,000,000 7.100%
Series A-2 10/09/01 06/30/09 06/30/49 62 500,000 31,000,000 6.300%
Series A-3 06/04/02 10/31/14 10/31/52 60 500,000 30,000,000 6.800%
Series B 07/21/00 11/30/10 11/30/50 110 500,000 55,000,000 7.600%
Series B-1 10/09/01 11/30/10 11/30/50 37 500,000 18,500,000 6.800%
Series B-2 06/04/02 10/31/14 10/31/52 50 500,000 25,000,000 7.200%
Each series of Cumulative Preferred Shares has an annual preferred dividend
payable quarterly in arrears upon declaration thereof by the Company's Board of
Trustees, but only to the extent of tax-exempt net income for the particular
quarter. All series of Cumulative Preferred Shares are subject to mandatory
tender by the holders thereof for remarketing and purchase on their respective
mandatory tender dates and each remarketing date thereafter at their respective
liquidation preference per share plus an amount equal to all distributions
accrued but unpaid.
Holders of Cumulative Preferred Shares may elect to retain their shares upon
remarketing, with a distribution rate to be determined immediately prior to the
remarketing date by the remarketing agent. Each holder of Cumulative Preferred
Shares will be required to tender its shares to the Issuer for mandatory
repurchase on the mandatory repurchase date, unless the Company decides to
remarket the shares on such date. Cumulative Preferred Shares are not
convertible into Common Shares of the Company.
The Series A, A-1, A-2 and A-3 Cumulative Preferred Shares rank, with respect to
payment of distributions and amounts upon liquidation, dissolution or winding-up
of the Company, senior to all classes or series of Convertible CRA Shares,
Series B, B-1 and B-2 Subordinate Cumulative Preferred Shares and Common Shares
of the of the Company. The Series B Subordinate Cumulative Preferred Shares
rank, with respect to payment of distributions and amounts upon liquidation,
dissolution or winding-up of the Company, senior to the Company's Common Shares
and the Company's Convertible CRA Shares and junior to the Issuer's Series A,
A-1, A-2 and A-3 Cumulative Preferred Shares.
Since inception, all quarterly distributions have been declared at each stated
annualized dividend rate for each respective series and all distributions due
have been paid. In February 2003, preferred shareholder distributions that were
declared in December 2002, were paid to the preferred shareholders from cash
flow from operations for the quarter ended December 31, 2002. The per share
distributions declared and paid for this period were as follows:
Dividend per Share Total Distribution
------------------ ------------------
Series A; 6.625% $ 33,125 $ 1,490,625
Series A-1; 7.100% $ 8,875 $ 426,000
Series A-2; 6.300% $ 7,878 $ 488,250
Series A-3; 6.800% $ 8,500 $ 510,000
Series B; 7.600% $ 9,500 $ 1,045,000
Series B-1; 6.800% $ 8,500 $ 1,258,000
Series B-2; 7.200% $ 9,000 $ 450,000
(ii) Convertible Community Reinvestment Act Preferred Share Offerings
On May 10, 2000, the Company completed an offering of approximately $26.4
million, net of underwriters discount, of Convertible Community Reinvestment Act
Preferred Shares ("Convertible CRA Shares") to three financial institutions
(1,946,000 Convertible CRA Shares priced at $14.13 per share). On December 14,
2000, the Company completed an additional offering of approximately $8.7
million, net of underwriters discount, of Convertible CRA Shares to three
additional financial institutions (644,000 Convertible CRA Shares priced at
$14.13 per share). On May 24, 2001, the Company bought back 707,636 Convertible
CRA Shares, issued May 10, 2000, at $12.70 per share for a total purchase price
of approximately $9.0 million.
During July and November 2002, the Company issued approximately 1.4 million and
576,000 Series A Convertible CRA Shares, respectively. The shares were priced at
$17.43 and $17.37, respectively, raising proceeds net of underwriters discount,
for the two issuances of approximately $32.5 million.
As of December 31, 2002, the Company had outstanding, 3,835,002 Convertible CRA
Shares, which are convertible at the holders option into 3,717,301 Common
Shares.
The Convertible CRA Shares enable financial institutions to receive certain
regulatory benefits in connection with their investment. The Company has
developed a proprietary method for specially allocating these regulatory
benefits to specific financial institutions that invest in the Convertible CRA
Shares. Other than the preferred allocation of regulatory benefits, the
preferred investors receive
-21-
the same economic benefits as Common Shareholders of the Company, including
receipt of the same dividends per share as those paid to Common Shareholders.
The Convertible CRA Shares have no voting rights, except on matters relating to
the terms of the Convertible CRA Shares or to amendments to the Company's Trust
Agreement which would adversely affect the Convertible CRA Shares. The Company's
earnings are allocated pro rata among the Common Shares and the Convertible CRA
Shares, and the Convertible CRA Shares rank on parity with the Common Shares
with respect to rights upon liquidation, dissolution or winding up of the
Company.
The investors, at their option, have the ability to convert their Convertible
CRA Shares into Common Shares at a predetermined conversion price. Upon
conversion, the investors will no longer be entitled to a special allocation of
the regulatory benefit. The conversion price is the greater of (i) the Company's
book value per Common Share as set forth in the Company's most recently issued
annual or quarterly report filed with the SEC prior to the respective
Convertible CRA Share issuance date or (ii) 110% of the closing price of a
Common Share on the respective Convertible CRA Share's pricing date. The
conversion price for each Convertible CRA Share offering is indicated on the
following table:
Issuance Date Conversion Price Conversion Ratio
------------- ---------------- ----------------
May 10, 2000 $15.33 0.9217
December 14, 2000 $14.60 0.9678
July 15, 2002 N/A 1.0000
November 21, 2002 N/A 1.0000
(iii) Private Label Tender Option Program
On May 21, 1998, the Company closed on its TOP in order to raise additional
capital to acquire additional Revenue Bonds. As of December 31, 1999, the
maximum amount of capital that could be raised under the TOP was $400 million.
On December 7, 2000, the Company refined the structure the TOP for the primary
purpose of segregating Revenue Bonds issued by governmental entities in
California from the remainder of the Revenue Bonds under the TOP and to increase
the maximum amount of capital available under the program to $500 million. In
addition, the TOP's surety commitment was extended for a five-year term. The
liquidity commitment is a one-year renewable commitment. The Company expects to
renew or replace such commitments upon expiration of their terms.
Under the TOP structure, the Company contributes Revenue Bonds to CharterMac
Origination Trust I (the "Origination Trust"), a wholly owned, indirect
subsidiary of the Company. The Origination Trust then contributes certain of
these Revenue Bonds to CharterMac Owner Trust I (the "Owner Trust") which is
controlled by the Company. The Owner Trust contributes selected bonds to
specific "Series Trusts" in order to segregate Revenue Bonds issued by
governmental entities selected by state of origin. As of December 31, 2000, four
such Series Trusts were created: two California only series and two National
(non-state specific) series.
Each Series Trust, issues two equity certificates: (i) a Senior Certificate
which has been deposited into a "Certificate Trust" which issues and sells
"Floater Certificates" representing proportional interests in the Senior
Certificate to new investors and (ii) a Residual Certificate, issued to the
Origination Trust which represents the remaining beneficial ownership interest
in each Series Trust.
The effect of the TOP structure is that a portion of the interest received on
Revenue Bonds in the Owner Trust is distributed through the Senior Certificate
to the holders of the Floater Certificates with any remaining interest remitted
to the Origination Trust (and thus to the benefit of the Company) via the
Residual Certificate. The effect of the December 7, 2000, refinement of the TOP
structure was to segregate the California related Floater Certificates as they
generally will pay distributions at lower rates than National (non-state
specific) Floater Certificates and thus the yield on the Residual Certificates
owned by the Origination Trust is increased. The Revenue Bonds remaining in the
Origination Trust (aggregate principal amount of approximately $150 million) are
an additional collateral pool for the Owner Trust's obligations under the Senior
Certificate.
The balance of the TOP at December 31, 2002 (the equity in the Owner Trust,
represented by the Senior Certificate), was $456.5 million. The Company's
floating rate cost of funds relating to the TOP (calculated as interest expense
plus recurring fees as a percentage of the weighted average amount of the
outstanding Senior Certificate) was approximately 2.4%, 3.5% and 5.4% for the
years ended December 31, 2002, 2001 and 2000, respectively.
(iv) P-FLOATs/RITES
Another source for financing the Company's investments is the securitization of
selected Revenue Bonds through the Merrill Lynch Pierce Fenner & Smith
Incorporated ("Merrill Lynch") P-FLOATS/RITES program. Merrill Lynch deposits
each Revenue Bond into an individual special purpose trust together with a
credit enhancement guarantee. Two types of securities are then issued by each
trust, (1) Puttable Floating Option Tax-Exempt Receipts ("P-FLOATS"), a
short-term senior security which bears interest at a floating rate that is reset
weekly and (2) Residual Interest Tax Exempt Securities ("RITES"), a subordinate
security which receives the residual interest payment after payment of P-FLOAT
interest and ongoing transaction fees. The P-FLOATS are sold to qualified third
party, tax-exempt investors and the RITES are generally sold back to the
Company.
During the year 2002, the Company transferred six Revenue Bonds with an
aggregate face amount of approximately $91 million to P-FLOATS/RITES program and
received proceeds of approximately $90.7 million. Additionally, the Company
repurchased eight Revenue Bonds with an aggregate face value of approximately
$67 million.
-22-
The Company's cost of funds relating to its secured borrowings under the Merrill
Lynch P-FLOATS/RITES program (calculated as interest expense as a percentage of
the weighted average amount of the secured borrowings) was approximately 2.4%,
3.7% and 5.0%, annualized, for the years ended December 31, 2002 and 2001 and
2000, respectively.
(v) Other Debt
In December 2001, CM Corp. acquired of 80% the outstanding capital stock of PWF
for approximately $34.9 million, of which approximately $21.6 million was
financed and $7.6 million was paid in cash. Additionally, the Company borrowed
$5.7 million to pay off loans held by PWF. The acquisition loan commitment ("PWF
Acquisition Loan") is $40 million, with an aggregate loan advance of up to $30
million during the first three months, subject to a maximum advance ratio of 80%
of the value of PWF's mortgage servicing portfolio, following the PWF
acquisition and loan closing. At the time of closing, $27.3 million ("Initial
Advance") of the facility was drawn. CM Corp. may request a resizing of the
loan, up to the maximum facility size of $40 million, in order to generate
additional funding ("Final Advance") that may be required the remaining 20%
stock ownership of PWF. The Final Advance would equal the lesser of 100% of the
cost of the remaining 20% equity interests of PWF or an amount that represents
an overall maximum advance of 75% of the value of the PWF mortgage servicing
portfolio at the time of the Final Advance.
The PWF Acquisition Loan has a term of five years with an interest rate of LIBOR
plus 2.25%. The loan is interest only for the first twelve months. Beginning in
January 2003 and through the remaining loan term, quarterly straight-line
principal amortization on the Initial Advance is paid based on a ten-year
amortization period. Additionally, after receiving the Final Advance, additional
quarterly straight-line principal amortization payments on the Final Advance
will be made based on the remaining years of the amortization period for the
Initial Advance.
PWF established a $100 million secured, revolving mortgage warehouse facility,
subject to annual renewal during December of each year. CM Corp is a guarantor
of this warehouse facility. The interest rate for each warehouse advance is the
Fed Funds rate plus 1.25% (2.48% at December 31, 2002). At December 31, 2002,
the amount outstanding was $41.3 million. There were no outstanding borrowings
under the facility at December 31, 2001. At December 31, 2002 the Company was in
compliance with all covenants of the facility.
The $100 million facility replaced PWF's $50 million multi-family revolving
warehouse facility, which expired on May 31, 2002. At December 31, 2001, the
facility was temporarily increased to $160 million and had outstanding
borrowings of $ 29.3 million at an interest rate of 30-day LIBOR plus 1.00%,
which resets daily, with a LIBOR floor of 3%. At December 31, 2001, the interest
rate was 4.0%. Borrowings under the line of credit are collateralized by PWF's
ownership interests in the original mortgage notes. At December 31, 2001, PWF
was in compliance with all covenants of the facility. This facility was repaid
during the first quarter of 2002.
PWF was the guarantor for a $35 million loan and security agreement for Larson,
which expired on May 31, 2002. The interest rate for the agreement was the lower
of 30 day LIBOR plus 209 basis points or the 30 day Treasury Bill rate plus 205
basis points. At December 31, 2001, there were no outstanding borrowings under
the agreement. At December 31, 2001, the Company and Larson were in compliance
with all covenants of the agreement.
Critical Accounting Policies
In preparing the consolidated financial statements, management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Set forth below is a summary of the accounting policies
that management believes are critical to the preparation of the consolidated
financial statements. The summary should be read in conjunction with the more
complete discussion of the Company's accounting policies included in Note 1 to
the consolidated financial statements in this annual report on Form 10-K.
Investment in Revenue Bonds and Promissory Notes Receivable
The Company accounts for its investments in Revenue Bonds as available-for-sale
debt securities under the provisions of SFAS 115.
In most cases the Company has a right to require redemption of the Revenue Bonds
prior to their maturity, although it can and may elect to hold them up to their
maturity dates unless otherwise modified. As such, SFAS 115 requires the Company
to classify these investments as "available-for-sale." Accordingly, investments
in Revenue Bonds are carried at their estimated fair values, with unrealized
gains and losses reported in other comprehensive income. Unrealized gains or
losses do not affect the cash flow generated from property operations,
distributions to shareholders, the characterization of the tax-exempt income
stream or the financial obligations under the Revenue Bonds.
The Manager's bond review committee which meets monthly to review the status of
the Revenue Bond portfolio. The committee maintains a "watch list" of Revenue
Bonds where the underlying property may be experiencing difficulties. These
underlying properties are identified taking into account a number of factors,
including but not limited to, construction cost overruns, delays in completing
construction, occupancy shortfalls and lower than expected debt service coverage
ratios. In those instances where an underlying property has been identified as
possibly experiencing problems, members of the review committee work with the
borrower to attempt to resolve any issues. Actions taken at this point could
include recommending a change in the property management agent or such actions
as extending the term of the bond, making additional advances, or reducing
required payments. If, in
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the judgment of the Manager, it is determined probable that the Company will not
receive all contractual payments required, when they are due, the bond is deemed
impaired and is written down to its then estimated fair value, with the amount
of the write-down accounted for as a realized loss.
For Revenue Bonds and promissory notes, interest income is recognized at the
stated rate as it accrues and when collectibility of future amounts is
reasonably assured. Contingent interest is recognized when received. Interest
income from Revenue Bonds with modified terms or where the collectibility of
future amounts is uncertain is recognized based upon expected cash receipts.
Certain construction Revenue Bonds carry a higher interest rate during the
construction period, which declines to a lower rate for the balance of the term.
In these cases, the Company calculates the effective yield on the Revenue Bond
and uses that rate to recognize interest over the life of the bond.
Mortgage Banking Activities
Fannie Mae Program - The Company, through PWF, is approved by Fannie Mae as a
DUS. Under the Fannie Mae DUS product line, the Company originates, underwrites
and services mortgage loans on multi-family residential properties and sells the
loans directly to Fannie Mae. The Company assumes responsibility for a portion
of any loss that may result from borrower defaults, based on the Fannie Mae loss
sharing formulas, Levels I, II, or III. As of December 31, 2002, all of the
Company's loans consisted of Level I loans. For such loans, the Company is
responsible for the first 5% of the unpaid principal balance and a portion of
any additional losses to a maximum of 20% of the original principal balance.
Level II and Level III loans carry a higher loss sharing percentage. Fannie Mae
sustains any remaining loss.
Under the terms of the Master Loss Sharing Agreement between Fannie Mae and the
Company, the Company is responsible for funding 100% of mortgagor delinquency
(principal and interest) and servicing (taxes, insurance and foreclosure costs)
advances until the amounts advanced exceed 5% of the unpaid principal balance at
the date of default. Thereafter, for Level I loans, the Company may request
interim loss sharing adjustments which allow the Company to fund 25% of such
advances until final settlement under the Master Loss Sharing Agreement. No
interim sharing adjustments are available for Level II and Level III loans.
The Company maintains an allowance for loan losses for loans originated under
the Fannie Mae DUS product line at a level that, in management's judgment, is
adequate to provide for estimated losses. This judgment is based upon various
risk assessments including the value of the collateral, the operating results of
the properties, the borrower's financial condition and the Company's loss
experience. The Company's bond review committee meets monthly to review the
status of PWF's loan portfolio and after review of the risk assessment factors
may place a loan on the "watch list". Such loans are tracked more closely and
the committee may contact the borrowers in an attempt to resolve any issues,
taking steps similar to those discussed above for Revenue Bonds.
FHA Program - The Company, through PWF and its subsidiaries, is approved by the
U.S. Department of Housing and Urban Development ("HUD")/FHA as nonsupervised
mortgagees. The Company, through PWF, is also approved by the Government
National Mortgage Association ("GNMA") as a GNMA seller/servicer. As of December
31, 2002, the Company serviced approximately $337.2 million of loans under the
FHA 223(f), 232, and 242 Programs, of which approximately $127.6 million had
GNMA securities outstanding.
Freddie Mac Program - The Company, through PWF and its subsidiaries, is an
approved Freddie Mac seller/servicer of mortgage loans. At December 31, 2002,
the Company had approximately $548.3 million of such loans in its portfolio. A
substantial portion of the underlying properties subject to these mortgages are
located in New Jersey.
Other Programs - The Company's PWF subsidiary also originates, underwrites and
services multi-family and commercial mortgages for insurance companies, and
banks. The servicing for these loans is generally retained by the Company. At
December 31 2002, the Company had approximately $179.8 million of such loans in
its portfolio.
Mortgage banking fee revenues earned from arranging financings under the Fannie
Mae DUS product line, Freddie Mac, FHA, banking and other programs are recorded
at the point the financing commitment is accepted by the mortgagor and the
interest rate of the mortgage loan thereafter is fixed. Revenue from servicing
the loan portfolio is recognized on an accrual basis.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for
others, whether the servicing rights are acquired through a separate purchase or
through loan origination, by allocating total costs incurred between the loan
and the servicing rights retained based on their relative fair value. Mortgage
servicing rights are being carried at their adjusted cost basis.
SFAS No. 140 also requires an entity to measure the impairment of servicing
rights based on the difference between the carrying amount of the servicing
rights and their current fair value. Impairment of servicing rights is
recognized in the Consolidated Statements of Income during the applicable period
through additions to a valuation allowance. The amount of impairment recognized
is the amount by which the capitalized mortgage servicing rights exceed their
fair value. Subsequent to the initial measurement of impairment, the valuation
allowance is adjusted to reflect changes in the measurement of impairment. Fair
value in excess of the amount capitalized as mortgage servicing rights (net of
amortization ), however, is not recognized. For the purpose of evaluating and
measuring impairment of capitalized mortgage servicing rights, the Company
stratify those rights based on the predominant risk characteristics of the
underlying loans.
Financial Risk Management and Derivatives
-24-
During 2001, the Company entered into two interest rate swaps, which are
accounted for under the Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Standards No. 133". At the
inception, the Company designated these interest rate swaps as cash flow hedges
on the variable interest payments in 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 the hedges are effective in achieving offsetting cash
flows. These hedges have been highly effective, so these has been no
ineffectiveness included in earnings. Net amounts receivable or payable under
the swap agreements are recorded as adjustments to 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
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 December 31, 2002, this interest rate cap was recorded as
an asset with a fair market value of $61,054 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.
Income Taxes
Prior to 2001, the Company had no provision or benefit for income taxes have
since any income or loss passes through to, and is reportable by, the
shareholders on their respective income tax returns. Effective July 1, 2001, the
Company began operation of CM Corp., a new wholly-owned, taxable subsidiary,
which will conduct the taxable business of the Company, such as credit
enhancement and other types of guarantee transactions., and therefore, the
Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). FAS 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities. The Company assesses the likelihood that
any tax benefits may not be completely or partially available and will establish
an appropriate allowance for any such benefits.
Credit Enhancement and Yield Guarantee Transactions
The Company has expanded its lines of business to include credit enhancement and
yield guarantee transactions, for which the Company receives a fee, either on a
monthly basis over the life of the transaction, or a lump-sum, up-front fee. The
monthly fees are recognized as income when they become due. The up-front fees
are deferred and recognized on a straight-line basis over the life of the
guarantee.
The Company evaluates the ongoing risk in each credit enhancement and guarantee
transaction and should the Company determine the risk of loss is probable, would
record a provision for loss. Such provision could be material.
Commitments and Contingencies
PWF. Through PWF, the Company originates and services multi-family mortgage
loans for Fannie Mae, Freddie Mac and FHA. PWF and its subsidiaries' mortgage
lending business is subject to various governmental and quasi-governmental
regulation. PW Funding and/or its subsidiaries, collectively, are licensed or
approved to service and/or originate and sell loans under Fannie Mae, Freddie
Mac, Ginnie Mae and FHA programs. FHA and Ginnie Mae are agencies of the Federal
government and Fannie Mae and Freddie Mac are federally chartered,
investor-owned corporations. These agencies require PWF and its subsidiaries to
meet minimum net worth and capital requirements and to comply with other
requirements. Mortgage loans made under these programs are also required to meet
the requirements of these programs. In addition, under Fannie Mae's DUS program,
PWF has the authority to originate loans without a prior review by Fannie Mae
and is required to share in the losses on loans originated under this program.
The Company shares the risk of loss for loans it originates under the Fannie Mae
program, as described above. The Company's bond review committee meets monthly
to review the status of the portfolio in an effort to identify loans that may be
experiencing problems. Based on these reviews and possible communication with
borrowers, the Company estimates its possible loses and adjusts its allowance
for loan loss accordingly. The Company feels confident the current allowance for
loan losses, of approximately $4.3 million at December 31, 2002, is adequate to
provide for any estimated losses.
Unlike loans originated for Fannie Mae, PWF does not share the risk of loss for
loans it originates for Freddie Mac or FHA.
Credit Enhancement. On December 31, 2001, the Company completed a credit
enhancement transaction with Merrill Lynch Capital Services, Inc. ("MLCS")
pursuant to which CM Corp. initially will receive an annual fee of approximately
$1.2 million in return 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 originated by CreditRe Mortgage Capital, LLC, an affiliate of Credit
Suisse First Boston and The Related Companies, L.P. (TRCLP). The Related
Companies, L.P. has provided CM Corp. with an indemnity covering 50% of any
losses that are incurred by CM Corp. as part of this transaction. As the loans
mature or prepay, the first loss exposure and the fees paid to CM Corp. will
both be reduced. The latest maturity date on any loan in the portfolio occurs in
2009. Fannie Mae and Freddie Mac have assumed the remainder of the real estate
exposure after the $46.9 million first loss position. In connection with the
transaction, CharterMac has guaranteed the obligations of CM Corp., and as a
security therefore, have posted collateral, initially in an amount equal to 50%
of the first loss amount, which may be reduced to 40% if certain post closing
conditions are met. The Related Companies, L.P. is an affiliate of Related.
-25-
CM Corp. performed due diligence on each property in the pool, including an
examination of loan-to-value and debt service coverage both on a current and
"stressed" basis. CM Corp. analyzed the portfolio on a "stressed" basis by
increasing capitalization rates and assuming an increase in the low floater bond
rate. As of December 31, 2002, the credit enhanced pool of properties are
performing according to their contractual obligations and the Company does not
anticipate any losses to be incurred on its guaranty.
IRR Guarantee. During July 2002, the Company entered into two agreements with an
unrelated third party (the "Primary Guarantor") to guarantee an agreed-upon
internal rate of return ("IRR") for a pool of 11 multi-family properties owned
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.
In connection with the transaction, the Company posted $18.2 million of Revenue
Bonds as collateral to the Primary Guarantor, which will be reduced to
approximately $1.4 million over a period of up to 20 years 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
provided by TRCLP. If the Company's acquisition of Related is completed, then
this guarantee will no longer be in force. 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.
Credit Support for Construction Loans. During December 2002, the Company entered
into two transactions related to two properties, Coventry Place and Canyon
Springs. Pursuant to the terms of these deals, the Company will provide credit
support to the construction lender for project completion and FMNA conversion
and acquire subordinated bonds to the extent the construction period bonds do
not fully convert.
Up until the point of completion, the Company will guaranty the construction
lender reimbursement of any draw on its construction letter of credit up to 40%
of the stated amount of the Letter of Credit. Following completion, up until the
project loan converts to permanent loan status, the Company will guarantee the
full amount of the letter of credit. The developer has also issued several
guarantees to the construction lender, each of which would be called upon before
the Company's guarantees, and each of which would be assigned to the Company
should its guarantees are called.
Once the construction loans convert to permanent loans, the Company is obligated
to acquire subordinated loans for the amount by which each construction loan
exceeds the corresponding permanent loan, if any. The subordinated bonds will
bear interest at 10%. Under FNMA guidelines, the size of the subordinated bonds
will be limited to a 1.0x debt service coverage based on 75% of the cash flow
after the senior debt.
Forward Commitments. Also, during December 2002, the Company entered into two
forward commitment transactions related to Auburn Glenn and Cottonwood. Pursuant
to the terms of the transactions, a third party, unrelated lender will advance
funds to the developers, as needed, at a floating rate. At the completion of
construction, the Company is obligated to acquire the permanent Revenue Bonds at
a predetermined price and interest rate. The Company has designated these two
derivatives as hedges against the cash flow to be received from these
investments.
Leases. Minimum annual rentals, under non-cancelable leases for a office space,
are as follows:
2003 $ 639,000
2004 536,000
2005 387,000
2006 350,000
2007 85,000
------------
$1,997,000
============
Leases contain provisions for escalation based on certain increases in costs
incurred by the lessors.
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Income Taxes
CharterMac is organized as a Delaware Statutory Trust and, for tax purposes, is
classified as a partnership. Almost all of the Company's recurring income is
tax-exempt and from time to time CharterMac may sell or securitize various
assets which may result in capital gains and losses. This tax structure allows
CharterMac to have the pass-through income characteristics as a partnership for
both taxable and tax-exempt income. CharterMac does not pay tax at the
partnership level. Instead, the distributive share of CharterMac's income,
deductions and credits reported to each shareholder for inclusion on their
respective income tax return. The tax-exempt income derived from most of
CharterMac's Revenue Bonds remains tax-exempt as it is passed through to
shareholders. Any cash dividends received by CharterMac from subsidiaries,
organized as corporations, will be recorded as dividend income for tax purposes
(such subsidiaries, created in 2001, distributed no dividends during 2001).
Approximately 96%of CharterMac's tax basis income for each of the years ended
December 31, 2002, 2001 and 2000, was tax-exempt for federal income tax
purposes.
During 2001, the Company restructured its operations into two segments, an
investing segment and an operating segment. The investing segment invests
primarily in tax-exempt Revenue Bonds. The operating segment, which is directly
and wholly owned by CharterMac, generates taxable investment and fee income
through direct investment or through its PWF subsidiary. The Company provides
for income taxes in accordance with FAS 109. FAS 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities.
The Company derives a substantial portion of its income from ownership of first
mortgage "Private Activity Bonds." The interest from these bonds is generally
tax-exempt from regular Federal income tax. However, the Tax Reform Act of 1986
classifies the interest earned on Private Activity Bonds issued after August 7,
1986 as a tax preference item for alternative minimum tax purposes ("AMT"). The
percentage of the Company's tax-exempt interest income subject to AMT for the
years ended December 31, 2002, 2001 and 2000 was approximately 85%, 79% and 88%
respectively. AMT is a mechanism within the Internal Revenue Code to ensure that
all taxpayers pay at least a minimum amount of taxes. All taxpayers are subject
to the AMT calculation requirements although the vast majority of taxpayers will
not actually pay AMT. As a result of AMT, the percentage of the Company's income
that is exempt from federal income tax may be different for each shareholder
depending on that shareholder's individual tax situation.
Recently Issued Accounting Standards
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 consolidated 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 became effective until January 1, 2003. The implementation of SFAS No.
143 did not have a material impact on the Company's consolidated 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 consolidated
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. The
implementation of SFAS No. 145 did not have a material impact on the Company's
consolidated 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 became effective until
January 1, 2003. The implementation of SFAS No. 146 did not have a material
impact on the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors' Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has entered into one credit enhancement
transaction and two yield guarantee transactions. The fee for the credit
enhancement transaction is received monthly and recognized as income when due.
The fee for the first yield guarantee transaction was received in advance was
deferred and is being amortized over the guarantee period. The Company believes
that the fees received approximate the fair value of the obligations undertaken
in issuing the guarantees; therefore, the Company's current accounting for these
guarantees will not be affected by this Interpretation.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," an amendment of FASB statement No. 123.
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employer compensation. Because
the Company currently accounts for its stock options using the fair value
method, implementation of this statement will not have an impact on the
Company's consolidated financial statements. The Company has adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" for its
share options issued to non-employees. Accordingly, compensation cost is accrued
based on the estimated fair value of the options issued, and amortized over the
vesting period. Because vesting of the options is contingent upon the recipient
continuing to provide services to the Company until the vesting date, the
Company estimates the fair value of the non-employee options at each period-end
up to the vesting date, and adjusts expensed amounts accordingly. The fair value
of each option grant is estimated using the Black-Scholes option-pricing model.
-27-
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This Interpretation clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The provision of FIN 46 will be immediately effective for all variable interests
in variable interest entities created after January 31, 2003, and the Company
will need to apply its provisions to any existing variable interests in variable
interest entities by no later than July 1, 2003. The Company believes at this
time, it has no variable interests in variable interest entities requiring
consolidation.
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 7. Quantitative and Qualitative Disclosures About Market Risk
The Company invests in certain financial instruments, primarily Revenue Bonds
and other bond related investments that are subject to various forms of market
risk, including real estate risk, interest rate risk, credit and liquidity risk
and prepayment risk. The Company seeks to prudently and actively manage such
risks to earn sufficient compensation to justify the undertaking of such risks
and to maintain capital levels which are commensurate with the risks the Company
undertakes.
Real Estate Risk
The Company derives income by investing in Revenue Bonds secured by
multi-family, affordable, residential properties. Investing in such Revenue
Bonds collateralized by such properties subjects the Company to various types
and degrees of risk that could adversely affect the value of the Company's
assets and the Company's ability to generate revenue. The factors that may
reduce the Company's revenues, net income and cash available for distributions
to shareholders include the following: the property securing a Revenue Bond may
not generate income sufficient to meet its operating expenses and debt service
on its related Revenue Bond; economic conditions, either local, regional or
national, may limit the amount of rent that can be charged for rental units at
the properties, and may result in a reduction in timely rent payments or a
reduction in occupancy levels; occupancy and rent levels may be affected by
construction of additional housing units and national, regional and local
politics, including current or future rent stabilization and rent control laws
and agreements; federal LIHTC and city, state and federal housing subsidy or
similar programs which apply to many of the properties, could impose rent
limitations and adversely affect the ability to increase rents to maintain the
properties in proper condition during periods of rapid inflation or declining
market value of such properties; and, if a Revenue Bond defaults, the value of
the property securing such Revenue Bond (plus, for properties that have availed
themselves of the federal LIHTC, the value of such credit) may be less than the
face amount of such Revenue Bond.
All of these conditions and events may increase the possibility that a property
owner may be unable to meet its obligations to the Company under its mortgage
Revenue Bond. This could affect the Company's net income and cash available for
distribution to shareholders. The Company manages these risks through diligent
and comprehensive underwriting, asset management and ongoing monitoring of loan
performance.
The Company may be adversely affected by periods of economic or real estate
downturns that result in declining property performance or property values. Any
material decline in property values used as collateral for the Company's Revenue
Bonds increases the possibility of a loss in the event of default. Additionally,
some of the Company's income may come from additional interest received from the
participation of a portion of the cash flow, sale or refinancing proceeds on
Underlying Properties. The collection of such additional interest may decrease
in periods of economic slowdown due to lower cash flows or values available from
the properties. In a few instances, the Revenue Bonds are subordinated to the
claims of other senior interest and uncertainties may exist as to a borrower's
ability to meet principal and interest payments. Because of these economic
factors, debt service on the Revenue Bonds, and therefore net income and cash
available for distribution to shareholders is dependent on the performance of
the Underlying Properties.
-28-
Interest Rate Risk
The nature of the Company's investments and the instruments used to raise
capital for their acquisition expose the Company to income and expense
volatility due to fluctuations in market interest rates. Market interest rates
are highly sensitive to many factors, including governmental policies, domestic
and international economic and political considerations and other factors beyond
the control of the Company.
The 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-FLOAT program vary based
on market interest rates based on the Bond Market Association ("BMA") index and
are re-set weekly.
The Company, through CM Corp., has floating rate debt related to the acquisition
financing of PWF. PWF has loans receivable and short term borrowings related to
its mortgage origination operations which are not expected to subject PWF to
significant interest rate risk. PWF typically provides mortgages to borrowers
(mortgages receivable) by borrowing from third parties (short-term borrowings).
Since PWF's mortgages receivable are typically subject to a take-out commitment
by Fannie Mae, Freddie Mac or FHA, the related borrowings to finance such
mortgages are typically short-term. The interest income or expense that
represents the difference between the interest charged to borrowers and the
interest paid to PWF's lender during the warehousing period will be earned by
PWF.
Other long-term sources of capital, such as the Company's various series of
Cumulative Preferred Shares, carry a fixed dividend rate and as such, are not
impacted by changes in market interest rates.
A rising interest rate environment could reduce the demand for multi-family
tax-exempt and taxable financing, which could limit the Company's ability to
invest in Revenue Bonds or to structure transactions. Conversely, falling
interest rates may prompt historical renters to become homebuyers, in turn
potentially reducing the demand for multi-family housing.
An effective interest rate management strategy can be complex and no strategy
can insulate the Company from all potential risks associated with interest rate
changes. 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, based upon management's analysis of the
interest rate environment and the costs and risks of such strategies, the
Company entered into interest rate swaps in order to hedge a portion of the risk
of rising interest rates and the impact of such a rise on its TOP and P-Floats
programs.
On January 5, 2001, the Company entered into a five-year interest 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 swap that fixes the BMA
index to 3.64% on a notional amount of an additional $100 million. Interest rate
swap agreements are subject to risk of early termination by the Company or the
counterparty, possibly at times unfavorable to the Company and, depending on
market conditions at the time, may result in the recognition of a significant
gain or loss from changes in the market value of the hedging instrument. There
can be no assurance that the Company will be able to acquire hedging instruments
at favorable prices, or at all, when the existing arrangements expire or are
terminated which would then fully expose the Company to interest rate risk to
the extent of the balance of debt subject to such hedges. In addition, there is
no assurance that the counterparty to these hedges will have the capacity to pay
or perform under the stated terms of the interest rate swap agreement; however,
the Company seeks to enter into such agreements with reputable and investment
grade rated counterparties to mitigate this risk.
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
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.
With respect to the portion of the Company's floating rate financing programs
which are not hedged, a change in the BMA rate would result in increased or
decreased payments under these financing programs, without a corresponding
change in cash flows from the investments in Revenue Bonds. For example, based
on the unhedged $522 million ($672 million outstanding under these financing
programs at December 31, 2002, less the $150 million notional amount
subsequently hedged and assuming a perfect hedge correlation) the Company
estimates that an increase of 1.0% in the BMA rate would decrease the Company's
annual net income by approximately $5.2 million. Conversely, a decrease in
market interest rates would generally benefit the Company in the same amount
described above, as a result of decreased allocations to the minority interest
and interest expense without corresponding decreases in interest received on
Revenue Bonds.
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 2001
or 2002, and the Company expects that these hedging relationships will be highly
effective in achieving offsetting changes in
-29-
cash flow throughout their terms. Net amounts payable or receivable under the
swap agreements are recorded as adjustments to interest expense.
At December 31, 2002, the combined fair market value of the two interest rate
swaps and the interest rate cap was a net liability of approximately $5.5
million, included in interest rate swaps on the Consolidated Balance Sheets.
Interest paid or payable under the terms of the swaps, of approximately $3.5
million, is included in interest expense for the year ended December 31, 2002.
At December 31, 2002, this interest rate cap was recorded as an asset with a
fair market value of $61,054 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.
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 investments. Therefore, as market
interest rates for tax-exempt 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 their estimated fair values.
For example, the Company projects, using the same methodology used to estimate
the portfolio fair market value under FAS 115, that a 1% increase in market
rates for tax-exempt investments would decrease the estimated fair value of its
portfolio of Revenue Bonds from its December 31, 2002 value of approximately
$1,579,590,000 to approximately $1,403,098,000. A 1% decline in interest rates
would increase the value of the December 31, 2002 portfolio to approximately
$1,816,819,000. 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.
Changes in interest rates would also affect both the PWF acquisition loan with
Fleet and the PWF warehouse lines. A 1% change in the underlying interest rates
would affect the Company's annual net income by approximately $686,000 (based on
the outstanding balances at December 31, 2002 of approximately $27.3 million for
the PWF acquisition loan and $41.3 million for the warehouse line).
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.
Liquidity Risk
The Company's investments generally lack a regular trading market, particularly
during turbulent market conditions or if any of the Company's tax-exempt Revenue
Bonds become taxable or are in default. There is no limitation as to the
percentage of investments that may be illiquid and the Company does not expect
to invest a substantial portion of its assets in liquid investments. There is a
risk involved in investing in illiquid investments, particularly in the event
that the Company needs additional cash. In a situation requiring additional
cash, the Company could be forced to liquidate some of its investments on
unfavorable terms that could substantially impact the Company's balance sheet
and reduce the amount of distributions available and payments made in respect of
the Company's shares.
Risk Associated with Securitization
Through securitizations, the Company seeks to enhance its overall return on its
investments and to generate proceeds that, along with equity offering proceeds,
facilitate the acquisition of additional investments. In the Company's debt
securitizations, an investment bank and/or credit enhancer provides liquidity to
the underlying trust and credit enhancement to the bonds, which enables the
senior interests to be sold to certain accredited third party investors seeking
investments rated "AA" or better. The liquidity facilities are generally for
one-year terms and are renewable annually. To the extent that the credit
enhancer is downgraded below "AA", either an alternative credit enhancement
provider would be substituted to reinstate the desired investment rating or the
senior interests would be marketed to other accredited investors. In either
case, it is anticipated that the return on the residual interests would
decrease, which would negatively impact the Company's income. If the Company is
unable to renew the liquidity or credit enhancement facilities, the Company
would be forced to find alternative liquidity or credit enhancement facilities,
repurchase the underlying bonds or liquidate the underlying bonds and its
investment in the residual interests. If the Company is forced to liquidate its
investment, the Company would recognize gains or losses on the liquidation,
which may be significant depending on market conditions. As of December 31,
2002, $672 million of the senior interests were subject to annual "rollover"
renewal for liquidity and credit enhancement, respectively. Of the $672 million,
$456.5 million is credit enhanced by a longer-term facility by MBIA. The Company
continues to review alternatives that would reduce and diversify risks
associated with securitization.
-30-
Item 8. Financial Statements and Supplementary Data.
Page
(a) 1. Financial Statements ----
Independent Auditors' Report 32
Consolidated Balance Sheets as of December 31, 2002 and 2001 33
Consolidated Statements of Incomefor the years
ended December 31, 2002, 2001 and 2000 34
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2002, 2001 and 2000 35
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 37
Notes to Consolidated Financial Statements 39
-31-
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees
And Shareholders of
Charter Municipal Mortgage Acceptance Company
New York, New York
We have audited the accompanying consolidated balance sheets of Charter
Municipal Mortgage Acceptance Company and subsidiaries (the "Company") as of
December 31, 2002 and 2001, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2002. Our audits also included the financial
statement schedule listed in Item 15(a)2. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Charter Municipal Mortgage
Acceptance Company and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
March 7, 2003, except for Note 19, as to which the date is April 1, 2003
-32-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
-------------------------
2002 2001
---- ----
ASSETS
Revenue Bonds-at fair value $1,579,590 $1,137,715
Investment in ARCap 19,054 18,950
Guaranteed investment contracts 19,642 18,406
Temporary investments 5,400 --
Mortgage servicing rights - net of reserves
of $4,271 and $1,937 35,595 33,708
Cash and cash equivalents 55,227 105,364
Cash and cash equivalents-restricted 5,257 4,670
Interest receivable - net 9,020 6,458
Promissory notes and mortgages receivable 53,278 45,022
Deferred costs - net of amortization of
$8,451 and $6,187 48,693 34,666
Goodwill 4,793 9,842
Other intangible assets - net of amortization
of $1,750 and $1,272 11,316 3,154
Other assets 6,003 3,104
--------- ---------
Total assets $1,852,868 $1,421,059
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 671,659 $ 541,796
Notes payable 68,556 56,586
Interest rate derivatives 5,504 2,958
Accounts payable, accrued expenses and
other liabilities 12,736 13,820
Deferred Income 8,998 2,870
Due to Manager and Affiliates 4,126 2,266
Due to FNMA 19,642 18,406
Distributions payable to preferred shareholders
of subsidiary 4,724 3,693
Deferred tax liability 10,790 10,251
Distributions payable to convertible CRA
shareholders 1,125 565
Distributions payable to common shareholders 13,171 10,448
--------- ---------
Total liabilities 821,031 663,659
--------- ---------
Preferred shares of subsidiary
(subject to mandatory repurchase) 273,500 218,500
--------- ---------
Minority interest in consolidated
subsidiary 4,822 3,652
--------- ---------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity -
Convertible CRA shareholders
(3,835,002 and 1,882,364 shares,
issued and outstanding in 2002
and 2001, respectively) 58,174 25,522
Beneficial owner's equity-manager 1,126 1,070
Beneficial owners' equity-other common
shareholders (100,000,000 shares
authorized; 41,168,618 issued and
41,160,218 outstanding and 34,834,308
issued and 34,825,908 outstanding in
2002 and 2001, respectively) 604,496 511,456
Treasury shares of beneficial interest
(8,400 shares) (103) (103)
Accumulated other comprehensive
income (loss) 89,822 (2,697)
---------- ----------
Total shareholders' equity 753,515 535,248
---------- ----------
Total liabilities and shareholders' equity $1,852,868 $1,421,059
========= =========
See accompanying notes to consolidated financial statements
-33-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
Years Ended December 31,
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenues:
Interest income:
Revenue Bonds $ 92,681 $ 71,500 $ 55,709
Temporary investments 1,293 1,279 2,380
Promissory notes and mortgages
receivable 709 1,184 1,002
Mortgage banking fees 5,710 -- --
Mortgage servicing fees 7,971 -- --
Other income 8,049 662 --
-------- --------- ----------
Total revenues 116,413 74,625 59,091
-------- --------- ----------
Expenses:
Interest expense 15,823 13,641 14,291
Recurring fees relating to the
Private Label Tender Option
Program 3,181 2,491 2,198
Bond servicing 3,530 2,454 1,817
General and administrative 20,976 2,755 2,168
Depreciation and amortization 8,891 865 577
Loss on impairment of assets 920 400 --
-------- --------- ----------
Total expenses 53,321 22,606 21,051
-------- --------- ----------
Income before gain (loss) on
repayment of Revenue Bonds,
gain on sale of loans
and equity in earnings of ARCap 63,092 52,019 38,040
Equity in earnings of ARCap 2,219 456 --
Gain on sales of loans 10,683 -- --
Gain (loss) on repayment of
Revenue Bonds 3,885 (912) 645
-------- --------- ----------
Income before allocation to preferred
shareholders of subsidiary and
minority interest 79,879 51,563 38,685
Income allocated to preferred
shareholders of subsidiary (17,266) (12,578) (8,594)
Income allocated to minority
interest (496) -- --
-------- --------- ----------
Income before provision for income
taxes 62,117 38,985 30,091
Provision for income taxes (1,284) -- --
-------- --------- ----------
Net income $ 60,833 $ 38,985 $ 30,091
======== ========= ==========
Allocation of net income to:
Special distribution to Manager $ 4,872 $ 3,621 $ 2,743
======== ========= ==========
Manager $ 56 $ 354 $ 274
======== ========= ==========
Common shareholders $ 52,516 $ 32,558 $ 25,501
Convertible CRA Shareholders 3,389 2,452 1,573
-------- --------- ----------
Total for shareholders $ 55,905 $ 35,010 $ 27,074
======== ========= ==========
Net income per share:
Basic $ 1.31 $ 1.14 $ 1.22
======== ========= ==========
Diluted $ 1.31 $ 1.14 $ 1.22
======== ========= ==========
Weighted average shares
outstanding:
Basic 42,697,195 30,782,161 22,140,576
========== ========== ==========
Diluted 42,768,139 30,837,340 22,152,239
========== ========== ==========
See accompanying notes to consolidated financial statements
-34-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Beneficial
Owners' Beneficial Accumulated
Equity- Beneficial Owners' Treasury Other Com-
Convertible Owner's Equity- Shares of prehensive
CRA Share- Equity- Other Beneficial Comprehen- Income
holders Manager Shareholders Interest sive Income (Loss) Total
---------- -------- ------------ ---------- ------------ ---------- -----
Balance at January 1, 2000 $ -- $ 442 $ 312,800 $ (103) $ 2,413 $ 315,552
Comprehensive income:
Net income 1,573 3,017 25,501 $ 30,091 30,091
Other comprehensive loss:
Net unrealized loss on Revenue
Bonds
Net unrealized holding loss arising (24,635)
during the period
Add: Reclassification adjustment for
losses included in net income
(645)
---------
Total other comprehensive loss (25,280) (25,280) (25,280)
Comprehensive income ---------
$ 4,811
=========
Issuance of Common Shares 29,175 -- 29,175
Issuance of Convertible CRA Shares 34,193 34,193
Distributions (1,369) (2,743) (22,605) -- (26,717)
---------- ------ ----------- -------- ---------
Balance at December 31, 2000 34,397 716 344,871 (103) (22,867) 357,014
Comprehensive income:
Net income 2,452 3,975 32,558 $ 38,985 38,985
Other comprehensive gain (loss):
Net unrealized loss interest rate
swaps (2,958)
Net unrealized loss on Revenue
Bonds:
Net unrealized holding loss arising 26,225
during the period
Add: Reclassification adjustment for net
gain included in net income
(3,097)
---------
Total other comprehensive gain 20,170 20,170 20,170
---------
Comprehensive income $ 59,155
=========
Retirement of convertible CRA shares (8,986) (8,986)
Issuance of Common Shares 168,294 168,294
Distributions (2,341) (3,621) (34,267) (40,229)
---------- ------ ----------- ---------
(continued)
-35-
(continued)
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Beneficial
Owners' Beneficial Accumulated
Equity- Beneficial Owners' Treasury Other Com-
Convertible Owner's Equity- Shares of prehensive
CRA Share- Equity- Other Beneficial Comprehen- Income
holders Manager Shareholders Interest sive Income (Loss) Total
--------- -------- ------------ ---------- ------------ ---------- -----
Balance at December 31, 2001 25,522 1,070 511,456 (103) (2,697) 535,248
Comprehensive income:
Net income 3,389 4,928 52,516 $ 60,833 60,833
Other comprehensive gain [loss]:
Net unrealized loss on interest rate (2,607)
derivatives
Net unrealized gain on Revenue Bonds:
Unrealized holding gain arising during 99,011
the period
Less: Reclassification adjustment for net
gain included in net income (3,885)
---------
Total other comprehensive gain 92,519 92,519 92,519
---------
Comprehensive income $ 153,352
=========
Issuance of Convertible CRA shares 32,523 32,523
Issuance of Common Shares -- -- 92,383 92,383
Distributions (3,260) (4,872) (51,859) (59,991)
------- ------- -------- --------
Balance at December 31, 2002 $ 58,174 $ 1,126 $ 604,496 $ (103) $ 89,822 $ 753,515
======= ======= ======== ======= ========= ========
See accompanying notes to consolidated financial statements
-36-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
Years Ended December 31,
----------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating
activities:
Net income $ 60,833 $ 38,985 $ 30,091
Adjustments to reconcile net
income to net cash provided
by operating activities:
(Gain) loss on repayments of
Revenue Bonds (3,885) 912 (645)
Loss on impairment of Revenue Bonds 920 400 --
Other amortization 2,836 865 577
Amortization of other intangible assets 476 475 365
Amortization of bond selection costs 1,782 2,425 938
Amortization of mortgage servicing rights 7,684 -- --
Amortization of interest income 2,617 -- --
Accretion of deferred income and purchase
accounting adjustment 18 (144) (163)
Income allocated to preferred
shareholders of subsidiary 17,266 12,578 8,594
Equity in earnings of ARCap, in excess
of distributions received (104) (456) --
Increase in mortgage servicing rights (9,571) -- --
Income allocated to minority interest 496 -- --
Issuance of shares of subsidiary-
compensation expenses 674 -- --
Changes in operating assets and
liabilities:
Interest receivable (2,562) (1,255) (2,279)
Other assets (2,900) (167) 51
Due to FNMA 1,236 -- --
Guaranteed investment contracts (1,236) -- --
Deferred Income 2,008 1,302 --
Accounts payable, accrued expenses
and other liabilities (1,053) 1,381 212
Deferred tax liability 539 -- --
Due to Manager and affiliates 1,623 629 (705)
Fair value of interest rate cap (61) -- --
--------- ----------- ------------
Net cash provided by operating
activities 79,636 57,930 37,036
--------- ----------- ------------
Cash flows from investing
activities:
Proceeds from repayments of
Revenue Bonds 108,630 24,227 22,400
Periodic principal payments
of Revenue Bonds 4,986 1,584 380
Proceeds from repayment of notes 7,260 2,540 --
Purchase of Revenue Bonds (457,060) (295,962) (276,011)
Increase in deferred bond selection
costs (10,702) (9,100) (6,499)
Investment in preferred shares of ARCap -- (18,494) 45,541
Increase in temporary investments (5,400) -- --
Additional Purchase Price - PWF (3,590) -- --
(Increase) decrease in cash and
cash equivalents-restricted (587) (4,670) 1,028
Increase in mortgages receivable (11,969) -- --
Increase in promissory notes (5,409) (11,122) (200)
Principal payments received
from loans made to properties 1,862 2,794 438
Cash acquired in ATEBT merger -- -- 838
Acquisition of PWF, net of cash acquired -- (22,340) --
--------- ----------- ------------
Net cash used in investing activities (371,979) (330,543) (212,085)
--------- ----------- ------------
(continued)
-37-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE
COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
Years Ended December 31,
----------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from financing activities:
Distributions paid to the Manager
and Common shareholders (53,741) (33,456) (24,344)
Distributions paid to preferred
shareholders of subsidiary (16,234) (11,846) (7,123)
Distributions paid to Convertible
CRA shareholders (2,700) (2,334) (810)
Repayment of minority interest -- -- (250,000)
Proceeds from financing arrangements 197,176 253,596 377,349
Principal repayments of financing
arrangements (67,313) (96,826) (92)
Increase in notes payable 11,969 27,262 --
Increase in deferred costs relating
to the Private Label Tender Option
Program (921) (873) (2,301)
Issuance of Common Shares 92,353 168,264 --
Issuance of Convertible CRA shares 32,523 -- 34,193
Retirement of Convertible CRA Shares -- (8,987) --
Issuance of preferred stock of
subsidiary 55,000 49,500 79,000
Increase in deferred costs relating
to the preferred shares of subsidiary (2,068) (1,886) (2,814)
Increase in other deferred costs (3,838) (553) (546)
--------- ----------- ------------
Net cash provided by financing
activities 242,206 341,861 202,512
--------- ----------- ------------
Net (decrease) increase in cash and
cash equivalents (50,137) 69,248 27,463
Cash and cash equivalents at the
beginning of the year 105,364 36,116 8,653
--------- ----------- ------------
Cash and cash equivalents at the
end of the year $ 55,227 $ 105,364 $ 36,116
========= =========== ============
Supplemental information:
Interest paid $ 12,703 $ 4,493 $ 4,109
========= =========== ============
Reclassification of goodwill
to other intangible assets:
Decrease in goodwill $ (8,639) $ -- $ --
Increase in other intangible assets 8,639 -- --
--------- ----------- ------------
$ -- $ -- $ --
========= =========== ============
Years Ended December 31,
----------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Supplemental disclosure of noncash activities:
Merger and issuance of shares:
Increase in Revenue Bonds $ (28,729)
Increase in interest receivable (121)
Increase in accounts payable, accrued
expenses and other liabilities 356
Increase in due to affiliates 1,014
Increase in goodwill, net (1,483)
Issuance of shares of common stock 29,155
Decrease in deferred costs 646
----------
Cash acquired in ATEBT merger $ 838
==========
Acquisition of PW Funding Inc.
Increase in guaranteed investment contracts $ (18,406)
Increase in mortgage servicing rights (35,646)
Increase in promissory notes receivable (29,325)
Increase in other assets (2,500)
Increase in notes payable 29,325
Increase in due to FNMA 18,406
Increase in accounts payable, accrued
expenses and other liabilities 9,807
Increase in reserves for possible DUS losses 1,938
Increase in minority interest in subsidiary 3,652
Increase in deferred tax liability 10,251
Increase in goodwill (9,842)
----------
Acquisition of PWF, net of cash acquired $ (22,340)
==========
See accompanying notes to consolidated financial statements
-38-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Significant Accounting Policies
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 some cases the Company also acquires
smaller taxable loans in conjunction with acquiring a Revenue Bond.
The Company was formed on October 1, 1997 as the result of the merger (the
"Merger") of three publicly registered limited partnerships, Summit Tax Exempt
Bond Fund, L.P., Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III (the
"Partnerships"). One of the general partners of the Partnerships was an
affiliate of Related Capital Company ("Related"), a nationwide, fully integrated
real estate financial services firm. Pursuant to the Merger, the Company issued
shares of beneficial interest ("Common Shares") to all partners in each of the
Partnerships in exchange for their proportionate interests.
CharterMac Corporation ("CM Corp."), a wholly-owned, consolidated taxable
subsidiary of CharterMac, allows the Company to better diversify its business
lines to include mortgage origination and servicing to third parties and the
guarantee of mortgage loans for a fee. CM Corp. will conduct most of the
Company's taxable business, including any fee-generating activities in which the
Company may engage and provide management services to CharterMac and its other
subsidiaries. CM Corp. isolates a substantial portion of the taxable income and
expenses of the Company and is subject to federal income tax. Any distributions
of net income from CM Corp. to CharterMac are taxable and are passed through to
the shareholders of CharterMac in its dividend.
In December 2001, the Company acquired 80% of the common stock of PW Funding
Inc. ("PWF") and it is anticipated that the Company will acquire the remaining
20% of the issued and outstanding stock of PWF within the next 12 to 24 months.
PWF is a national mortgage banking firm and, with its subsidiaries, specializes
in providing financing and ancillary service to the multi-family housing
industry, including construction and permanent debt financing mortgage loan
servicing and asset management.
The Company is governed by a board of trustees comprised of three independent
managing trustees and five managing trustees who are affiliated with Related.
CharterMac, through CM Corp., a wholly-owned subsidiary, has engaged the Manager
to manage its day-to-day affairs. CharterMac has also directly engaged the
Manager to provide additional management services.
On December 18, 2002, the Company announced it had entered into an agreement to
acquire 100% of the ownership interests and substantially all of the businesses
operated by Related. The acquisition will enable the Company to terminate its
outside management agreement with Manager and to become an internally managed
company.
Acquisition Terms
The acquisition will be structured so that the ownership interests held by the
Related principals in both Related and the other entities which control other
aspects of Related's business will be contributed into a newly-formed,
wholly-owned subsidiary of CharterMac (the "CharterMac Sub"). The selling
principals of Related include the four executive managing partners (Stuart J.
Boesky, Alan P. Hirmes, Marc D. Schnitzer and Denise L. Kiley) and an affiliate
of The Related Companies, L.P. ("TRCLP"), which is majority owned by Stephen M.
Ross (the "Related Principals"). Messrs. Boesky, Hirmes and Schnitzer and Ms.
Kiley have managed RCC over the past 15 years.
CharterMac will pay total consideration to the Related Principals of up to $338
million. The consideration will be paid as follows:
o The Initial Payment - $210 million consisting of $160 million in
special common units of the CharterMac Sub ("SCUs") and $50
million in cash (with the cash position being paid only to
TRCLP). The Initial Payment SCUs will be issued at $17.78 per
unit, which was the average closing price of CharterMac Common
Shares, for the 30 calendar days prior to this announcement (the
"Initial Payment SCUs");
o The Contingent Payment - Up to $128 million of additional SCUs
(the "Contingent Payment SCUs"), following the determination of
Related's adjusted audited earnings before interest, taxes,
depreciation and amortization, as well as certain other
adjustments, for the year ending December 31, 2002 ("Adjusted
Earnings"). The Contingent Payment SCUs will be issued in an
amount equal to 7.73x RCC 2002 Adjusted Earnings minus $210
million, subject to a cap of $338 million of total consideration.
The Contingent Payment SCUs are expected to be issued at the same
price as the Initial Payment SCUs, subject to a 17.5% symmetrical
collar.
In connection with the acquisition, CharterMac will establish a restricted share
program and will broadly issue to employees of Related, other than the Related
Principals, $15 million of CharterMac Common Shares. Following the completion of
the acquisition, TRCLP's economic interest in CharterMac will equal
approximately 19% and management and Related employees' economic interest in
CharterMac will equal approximately 11%.
Basis of Presentation
The consolidated financial statements of the Company are prepared on the accrual
basis of accounting in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). The preparation of financial
statements in conformity with GAAP 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 and interest rate swap agreements.
The consolidated financial statements include the accounts of the Company and
four majority owned subsidiary business trusts which it controls: CM Holding
Trust, CharterMac Equity Issuer Trust, CharterMac Origination Trust I and
CharterMac Owner Trust I (see Note 5), and one wholly-owned corporation, CM
Corp. CM Corp, in turn, owns 80% of PWF and its subsidiary, Larsen Financial
Services, Inc. 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.
Reclassifications
Certain amounts from prior years have been reclassified to conform to the 2002
presentation.
Investment in Revenue Bonds and Promissory Notes Receivable
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" ("SFAS 115"). Accordingly, the Revenue Bonds are carried at their
estimated fair values, with unrealized gains and losses reported in other
comprehensive income.
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE
COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In most cases, the Company has a right to require redemption of the Revenue
Bonds prior to their maturity, although it can and may elect to hold them up to
their maturity dates unless otherwise modified. As such, SFAS 115 requires the
Company to classify these investments as "available-for-sale." Accordingly,
investments in Revenue Bonds are carried at their estimated fair values, with
unrealized gains and losses reported in other comprehensive income. Unrealized
gains or losses do not affect the cash flow generated from property operations,
distributions to shareholders, the characterization of the tax-exempt income
stream or the financial obligations under the Revenue Bonds.
If, in the judgment of the manager, it is determined probable that the Company
will not receive all contractual payments required, when they are due, the bond
is deemed impaired and is written down to its then estimated fair value, with
the amount of the write-down accounted for as a realized loss.
Because Revenue Bonds have a limited market, the Company estimates fair value
for each bond as the present value of its expected cash flows using a discount
rate for comparable tax-exempt investments. This process is based upon
projections of future economic events affecting the real estate collateralizing
the bonds, such as property occupancy rates, rental rates, operating cost
inflation, market capitalization rates and upon determination of an appropriate
market rate of interest, all of which are based on good faith estimates and
assumptions developed by the Manager. Changes in market conditions and
circumstances may occur which would cause these estimates and assumptions to
change; therefore, actual results may vary from the estimates and the variance
may be material.
Occasionally, the Company has advanced funds to owners of certain Underlying
Properties in order to preserve the underlying asset due to difficulties
including construction completion, past due real estate taxes and/or deferred
maintenance. Such advances are typically secured by promissory notes and/or
second mortgages and are carried at cost less a valuation allowance as may be
periodically deemed appropriate.
Investment in ARCap
The Company's preferred equity investment in ARCap Investors, L.L.C. ("ARCap")
is accounted for using the equity method because the Company has the ability to
exercise significant influence, but not control, over ARCap's operating and
financial policies (see Note 3).
Mortgage Banking Activities
Fannie Mae Program - The Company, through its PWF subsidiary, is approved by the
Federal National Mortgage Association ("Fannie Mae") as a Delegated Underwriter
and Servicer ("DUS"). Under the Fannie Mae DUS product line, the Company
originates, underwrites and services mortgage loans on multi-family residential
properties and sells the loans directly to Fannie Mae. The Company assumes
responsibility for a portion of any loss that may result from borrower defaults,
based on the Fannie Mae loss sharing formulas, Levels I, II, or III. As of
December 31, 2002, all of the Company's loans consisted of Level I loans. For
such loans, the Company is responsible for the first 5% of the unpaid principal
balance and a portion of any additional losses to a maximum of 20% of the
original principal balance. Level II and Level III loans carry a higher loss
sharing percentage. Fannie Mae sustains any remaining loss.
Under the terms of the Master Loss Sharing Agreement between Fannie Mae and the
Company, the Company is responsible for funding 100% of mortgagor delinquency
(principal and interest) and servicing (taxes, insurance and foreclosure costs)
advances until the amounts advanced exceed 5% of the unpaid principal balance at
the date of default. Thereafter, for Level I loans, the Company may request
interim loss sharing adjustments which allow the Company to fund 25% of such
advances until final settlement under the Master Loss Sharing Agreement. No
interim sharing adjustments are available for Level II and Level III loans.
Since the inception of the Fannie Mae DUS product line in 1988, PWF has closed
over $2.8 billion of mortgage loans. At December 31, 2002, the Company had
approximately $1.8 billion of such loans in its servicing portfolio. In
addition, as of December 31, 2002, the Company received a commitment from Fannie
Mae on a loan totaling approximately $4.2 million. A substantial portion of the
underlying properties subject to these mortgages are located in California. The
Company also services approximately $95.7 million under other Fannie Mae
non-risk sharing programs.
The Company maintains on allowance for loan losses for loans originated under
the Fannie Mae DUS product line at a level that, in management's judgment, is
adequate to provide for estimated losses. This reserve was approximately $4.3
million and $1.9 million in 2002 and 2001, respectively. This judgment is based
upon various risk assessments including the value of the collateral, the
operating results of the properties, the borrower's financial condition and the
Company's loss experience.
FHA Program - The Company, through PWF and its subsidiaries, is approved by the
U.S. Department of Housing and Urban Development ("HUD")/Federal Housing
Administration ("FHA") as nonsupervised mortgagees. The Company, through a PWF
subsidiary, is also approved by the Government National Mortgage Association
("GNMA") as a GNMA seller/servicer. As of December 31, 2002, the Company
serviced approximately $337.2 million of loans under the FHA 223(f), 232, and
242 Programs, of which approximately $127.6 million had GNMA securities
outstanding.
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE
COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Freddie Mac Program - The Company, through PWF and its subsidiaries, is an
approved Federal Home Loan Mortgage Corporation ("Freddie Mac") seller/servicer
of mortgage loans. At December 31, 2002, the Company had approximately $548.3
million of such loans in its portfolio and had received commitments from Freddie
Mac on eleven loans totaling approximately $61.1 million. A substantial portion
of the underlying properties subject to these mortgages are located in New
Jersey.
Other Programs - The Company's PWF subsidiary also originates, underwrites and
services multi-family and commercial mortgages for insurance companies, and
banks. The servicing for these loans is generally retained by the Company. At
December 31 2002, the Company had approximately $179.8 million of such loans in
its portfolio.
Mortgage banking fee revenues earned from arranging financings under the Fannie
Mae DUS product line Freddie Mac, FHA, insurance and banking or other programs
are recorded at the point the financing commitment is accepted by the mortgagor
and the interest rate of the mortgage loan thereafter is fixed. Revenue from
servicing the loan portfolio is recognized on an accrual basis.
Guaranteed Investment Contracts
The Company, through PWF, is participating in the Fannie Mae "Guaranteed
Investment Agreement Rate Lock Loan Financing" program for four properties which
are currently in the construction phase. Under this program, Fannie Mae commits
to a fixed interest rate on a permanent loan, which will be closed at the
completion of the construction phase of the project. The rate lock forward
commitment provided by Fannie Mae exists for a maximum period of twenty-four
months. Fannie Mae loans the Company the amount of the future permanent loan,
which is required to be deposited in a guaranteed investment contract during the
construction phase. In exchange for such loan, the Company issues Fannie Mae a
promissory note whose interest will be paid from the interest on the guaranteed
investment contract and the negative arbitrage paid by the borrower. The
interest rate on the note will be equivalent to the fixed rate committed to on
the permanent loan. At the close of the construction phase, the Company will
unwind the guaranteed investment contract to repay the note to Fannie Mae. The
Company will originate the permanent loan to the borrower at the rate locked
amount, which will be subsequently purchased from the Company by Fannie Mae. The
Company has commitments from Fannie Mae under this program of approximately
$19.3 million as of December 31, 2002.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for
others, whether the servicing rights are acquired through a separate purchase or
through loan origination, by allocating total costs incurred between the loan
and the servicing rights retained based on their relative fair value. Mortgage
servicing rights are being carried at their adjusted cost basis.
SFAS No. 140 also requires an entity to measure the impairment of servicing
rights based on the difference between the carrying amount of the servicing
rights and their current fair value. Impairment of servicing rights is
recognized in the Consolidated Statements of Income during the applicable period
through additions to a valuation allowance. The amount of impairment recognized
is the amount by which the capitalized mortgage servicing rights exceed their
fair value. Subsequent to the initial measurement of impairment, the valuation
allowance is adjusted to reflect changes in the measurement of impairment. Fair
value in excess of the amount capitalized as mortgage servicing rights (net of
amortization), however, is not recognized. For the purpose of evaluating and
measuring impairment of capitalized mortgage servicing rights, the Company
stratifies those rights based on the predominant risk characteristics of the
underlying loans.
In using this valuation model, the Company incorporated assumptions that market
participants would use in estimating future net servicing income. The Company
estimates the term of servicing for each loan by assuming that servicing would
not end prior to the yield maintenance date, at which point the prepayment
penalty expires. The Company provides an estimated default amount to be deducted
in each year based on the borrower's debt service ratio. The debt service ratio
is a measurement of the amount of excess cash flow a borrower has to make
monthly mortgage payments. Purchased servicing rights are measured initially at
the price paid, which approximates fair value. Mortgage servicing rights
("MSR's") are amortized in proportion to, and over the period of, estimated net
servicing income. At December 31, 2002, the Company has not provided for
impairment on any mortgage servicing rights.
Temporary Investments
Temporary investments may consist of puttable floating option tax-exempt
receipts, short-term senior securities which bear interest at a floating rate
that is reset weekly and other short-term investments that generate tax-exempt
and taxable interest income. These investments are recorded at cost which is
generally equal to market value.
Cash and Cash Equivalents
Cash and cash equivalents includes cash in banks and investments in short-term
instruments with an original maturity of three months or less. Certain amounts
of cash and cash equivalents are restricted and serve as additional collateral
for borrowings under securitizations (see Note 5).
-41-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE
COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
The Company derives its revenues from a variety of investments and guarantees,
summarized as follows:
o Interest Income from Revenue Bonds - Interest income is recognized at
the stated rate as it accrues and when collectibility of future
amounts is reasonably assured. Contingent interest is recognized when
received. Interest income from Revenue Bonds with modified terms or
where the collectibility of future amounts is uncertain is recognized
based upon expected cash receipts. Certain construction Revenue Bonds
carry a higher interest rate during the construction period, which
declines to a lower rate for the balance of the term. In these cases,
the Company calculates the effective yield on the Revenue Bond and
uses that rate to recognize interest over the life of the bond.
o Interest Income from Promissory Notes and Mortgages Receivable -
Interest on mortgage loans and notes receivable is recognized on the
accrual basis as it becomes due. Deferred loan origination costs and
fees are amortized over the life of the applicable loan as an
adjustment to interest income, using the interest method. Interest
which was accrued is reversed out of income if deemed to be
uncollectible.
o Interest Income on Temporary Investments - Interest income from
temporary investments, such as cash in banks and short-term
instruments, is recognized on the accrual basis as it becomes due.
o Equity in Earnings of ARCap - The Company's equity in the earnings of
ARCap Investors, LLC ("ARCap") is accrued at the Company's preferred
dividend rate of 12%, unless ARCap does not have earnings and cash
flows adequate to meet this dividend requirement.
o Construction Service Fees - The Company receives fees, in advance,
from borrowers for servicing Revenue Bonds during the construction
period. These fees are deferred and amortized into other income over
the anticipated construction period.
o Credit Enhancement and Guarantee Fees - The Company receives fees for
providing credit enhancement and guarantees guaranteed yields. The
credit enhancement fees are received monthly and recognized in other
income when received. The guarantee fees are deferred and recognized
in other income on a prorata basis over the guarantee period.
o Mortgage Banking Fees -PWF fees earned for arranging financings under
the FNMA DUS product line as well as Freddie Mac, insurance and
banking or other programs are recorded at the point the financing
commitment is accepted by the mortgagor and the interest rate of the
mortgage loan is fixed.
o Mortgage Servicing Fees - PWF receives fees for servicing the loans it
has originated. This income is recognized on an accrual basis.
Deferred Costs
Fees paid to the Manager (see Note 9) for its activities performed to originate
Revenue Bonds, including their evaluation and selection, negotiation of mortgage
loan terms, coordination of property developers and government agencies, and
other direct expenditures of acquiring or investing in Revenue Bonds, are
capitalized and amortized as a reduction to interest income over the terms of
the Revenue Bonds. Direct costs relating to unsuccessful acquisitions and all
indirect costs relating to the Revenue Bonds are charged to operations.
Costs incurred in connection with the Company's TOP (see Note 5), such as legal,
accounting, documentation and other direct costs, have been capitalized and are
being amortized using the straight-line method over 10 years, which approximates
the average remaining term to maturity of the Revenue Bonds in this program.
Costs incurred in connection with the issuance of cumulative preferred shares of
subsidiary (see Note 7), such as legal, accounting, documentation and other
direct costs, have been capitalized and are being amortized using the straight
line method over the period to the mandatory repurchase date of the shares,
approximately 50 years.
Costs incurred in connection with the issuance of Convertible CRA Shares (see
Note 9), such as legal, accounting, documentation and other direct costs, have
been accounted for as an offset to beneficial owners' equity of such shares.
Financial Risk Management and Derivatives
-42-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has entered into two interest rate swaps, an interest rate cap and
two forward commitments, all of which are accounted for under the State of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended and interpreted. The Company designated the
two interest rate swaps as cash flow hedges on the variable interest payments in
the 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 the hedges are
effective in achieving offsetting cash flows. These hedges have been highly
effective, so there has been no ineffectiveness included in earnings. The
interest rate cap, although designed to mitigate the Company's exposure to
rising interest rates, was not designated as a hedging derivative; therefore,
any change in fair market value flows through the Consolidated Statements of
Income, where it is included in interest income.
Goodwill and Other 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. Therefore, the implementation of
SFAS 142 did not materially affect the Company's results of operations.
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 estimated
market value of PWF's licenses. These licenses have an indefinite life and, as a
result, are not being amortized. Since CM Corp. purchased PWF December 31,
2001, the effect of not amortizing the goodwill, is not material.
The following table provides further information regarding the Company's
other intangible assets:
(Dollars in Thousands)
Identifiable Other PWF
Intangible Assets Licenses Total
----------------- -------- -----
Balance at December 31,
2002 $4,427 $8,639 $13,066
Accumulated Amortization (1,750) - (1,750)
------ ------ -------
Net balance at December
31, 2002 $2,677 $8,639 $11,316
====== ====== =======
Amortization Expense for
the year ended December
31, 2002 $ 477 $ - $ 477
====== ====== ======
Estimated amortization
expense per year for next
five years $ 477 $ - $ 477
====== ====== ======
The amount indicated as goodwill in the accompanying consolidated financial
statements as of December 31, 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 tested this
goodwill for impairment during the fourth quarter of 2002 and determined there
was no impairment.
During 2002, CM Corp. made additional payments to the original shareholders of
PWF of approximately $3.6 million ("the True-Up payments") pursuant to the
original acquisition agreement. The True-Up payments were 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, and iv) forward conversions of loans previously committed. These
True-Up payments were recorded as additional goodwill related to the PWF
acquisition. The acquisition agreement stipulates additional true-up payments to
be made periodically for a period of up to three years from the acquisition
date.
Fair Value of Financial Instruments
As described above, the Company's investments in Revenue Bonds, its mortgage
servicing rights and its liability under the interest rate derivatives are
carried at estimated fair values. The Company has determined that the fair value
of its remaining financial instruments, including its temporary investments,
cash and cash equivalents, promissory notes receivable, mortgage notes
receivable and borrowings approximate their carrying values at December 31, 2002
and 2001.
Income Taxes
Prior to 2001, no provision or benefits for income taxes have been included in
these financial statements since the income or loss passes through to, and is
reportable by, the shareholders on their respective income tax returns.
Effective July 1, 2001, the Company
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
began operation of a new wholly-owned, taxable subsidiary -- CM Corp., which on
December 31, 2001, purchased PWF. CM Corp will own the taxable Revenue Bonds and
other taxable investments acquired by the Company. The Company provides for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109") (see Note 8). FAS 109 requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities. At December 31,
2002, the net book basis of the Company's assets and liabilities exceeded the
net tax basis by approximately $56.6 million.
Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires enterprises to report certain financial and descriptive
information about their reportable operating segments, and certain
enterprise-wide disclosures regarding products and services, geographic areas
and major customers.
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, through the ownership of taxable bonds, loans
and other investments, loan servicing and origination fees, and fees for credit
enhancement and guaranty services.
Prior to the year ended December 31, 2001, all the Company's operations were
attributable to the investing segment. Because the acquisition of PWF took place
on December 31, 2001, there was no impact on the Company's net income, revenues
or expenses. Of the total assets for the Company at December 31, 2002 and 2001,
approximately $1.73 billion and $1.32 billion, respectively, are attributable to
the investing segment and approximately $124 million and $100 million,
respectively, are attributable to the operating segment.
New Pronouncements
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 became effective January 1, 2003. The implementation of SFAS No. 143 did
not have a material impact on the Company's consolidated 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 consolidated
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. The
implementation of SFAS No. 145 did not have a material impact on the Company's
consolidated 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 became effective January 1,
2003. The implementation of SFAS No. 146 did not have a material impact on the
Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors' Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has entered into one credit enhancement
transaction and two yield guarantee transactions. The fee for the credit
enhancement transaction is received monthly and recognized as income when due.
The fee for the first yield guarantee transaction was received in advance was
deferred and is being amortized over the guarantee period. The Company believes
that the fees received approximate the fair value of the obligations undertaken
in issuing the guarantees; therefore, for any such similar transactions entered
into after December 31, 2002, the Company will record the fair market value of
the guarantee, when entered into.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," an amendment of FASB statement No. 123.
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employer compensation. Because
the Company currently accounts for its stock options using the fair value
method, implementation of this statement will not have an impact on the
Company's consolidated financial statements. The Company has adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" for its
share options issued to non-employees. Accordingly, compensation cost is accrued
based on the estimated fair value of the options issued, and amortized over the
vesting period. Because vesting of the options is contingent upon the recipient
continuing to provide services to the Company until the vesting date, the
Company estimates the fair value of the non-employee options at each period-end
up to the vesting date, and adjusts expensed amounts accordingly. The fair value
of each option grant is estimated using the Black-Scholes option-pricing model.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This Interpretation clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The provision of FIN 46 will be immediately effective for all variable interests
in variable interest entities created after January 31, 2003, and the Company
will need to apply its provisions to any existing variable interests in variable
interest entities by no later than July 1, 2003. The Company believes at this
time, it has no variable interests in variable interest entities requiring
consolidation.
-44-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has adopted an incentive share option plan (the "Incentive Share
Option Plan"), the purpose of which is to (i) attract and retain qualified
persons as trustees and officers and (ii) to provide incentive and more closely
align the financial interests of the Manager and its employees and officers with
the interests of the shareholders by providing the Manager with substantial
financial interest in the Company's success. The Compensation Committee of the
Company's Board of Trustees administers the Incentive Share Option Plan.
Pursuant to the Incentive Share Option Plan, if the Company's distributions per
Common Share in the immediately preceding calendar year exceed $0.9517 per
Common Share, the Compensation Committee has the authority to issue options to
purchase, in the aggregate, that number of Common Shares which is equal to three
percent of the shares (including Common Shares and Convertible CRA Shares)
outstanding as of December 31 of the immediately preceding calendar year,
provided that the Compensation Committee may only issue, in the aggregate,
options to purchase a maximum number of Common Shares over the life of the
Incentive Shares Option Plan equal to 10% of the Common Shares outstanding on
October 1, 1997 (2,058,748 Common Shares).
Subject to the limitations described in the preceding paragraph, if the
Compensation Committee does not grant the maximum number of options in any year,
then the excess of the number of authorized options over the number of options
granted in such year will be added to the number of authorized options in the
next succeeding year and will be available for grant by the Compensation
Committee in such succeeding year.
All options granted by the Compensation Committee have an exercise price equal
to or greater than the fair market value of the Common Shares on the date of the
grant. The maximum option term is ten years from the date of grant. All Common
Share options granted pursuant to the Incentive Share Option Plan may vest
immediately upon issuance or in accordance with the determination of the
Compensation Committee. Since 1999, the Company has made distributions in excess
of $0.9517, thus allowing the Compensation Committee to issue options. Three
percent of the Common Shares outstanding as of December 31, 2001, 2000 and 1999
is equal to a maximum option grant of 1,234,807, 1,044,777 and 680,950 Common
Shares, respectively. The 10% cap has been reached, therefore 2,058,748 options
are available to be issued.
On May 1, 2000, options to purchase 297,830 Common Shares were granted to
officers of the Company and certain employees of an affiliate of the Manager,
none of who are employees of the Company. The exercise price of these options is
$11.5625 per share. The term of each option is ten years. The options vest in
equal installments on May 1, 2001, 2002 and 2003. The Company has adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" for its
share options issued to non-employees. Accordingly, compensation cost is accrued
based on the estimated fair value of the options issued, and amortized over the
vesting period. Because vesting of the options is contingent upon the recipient
continuing to provide services to the Company until the vesting date, the
Company estimates the fair value of the non-employee options at each period-end
up to the vesting date, and adjusts expensed amounts accordingly. The fair value
of each option grant is estimated using the Black-Scholes option-pricing model.
-45-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Revenue Bonds
The following table provides certain information with respect to each of the
Revenue Bonds owned by the Company and its consolidated subsidiaries:
-46-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
----------------- --------- -------- -------- -------- --------- --------- -------- --------
Tax-Exempt First Mortgage Bonds
Stabilized
Portfolio
Autumn Ridge San Marcos, CA 192 Aug-00 Aug-27 Jul-37 7.650% -- --
Barnaby Manor Washington, DC 124 Nov-99 May-17 May-32 7.375% -- --
Carrington Point Los Banos, CA 80 Sep-98 Oct-17 Sep-40 6.375% -- --
Casa Ramon Orange County,
CA 75 Jul-00 Oct-16 Sep-35 7.500% -- --
Cedar Creek McKinney, TX 250 Dec-86 Oct-10 Oct-20 7.430% -- --
Cedar Pointe Nashville, TN 210 Apr-87 Nov-06 Apr-17 7.000% -- --
Cedarbrook Hanford, CA 70 Apr-98 May-17 May-40 7.125% -- --
Chapel Ridge at
Texarkana Texarkana, AR 144 Sep-99 Oct-16 Sep-41 7.375% -- --
College Park Naples, FL 210 Jul-98 Jul-25 Jul-40 7.250% -- --
Crowne Pointe Olympia, WA 160 Dec-86 Aug-29 7.250% -- --
Cypress Run Tampa, FL 408 Aug-86 Dec-29 Dec-29 5.500% -- --
Del Monte Pines Fresno, CA 366 May-99 May-17 May-36 6.800% -- --
Douglas Pointe Miami, FL 176 Sep-99 Oct-26 Sep-41 7.000% -- --
Fort Chaplin Washington, DC 549 Dec-99 Jan-16 Jan-36 6.900% -- --
Franciscan
Riviera Antioch, CA 129 Aug-99 Apr-16 Aug-36 7.125% -- --
Garfield Park Washington, DC 94 Aug-99 Aug-17 Aug-31 7.250% -- --
Golf and
Lakeside Villas Miami, FL * Jun-02 Jun-06 Dec-16 7.000% -- --
Golf and
Lakeside Villas Tamarac, FL 166 Jun-02 Jun-06 Dec-10 6.750% -- --
Golf and
Lakeside Villas Miami, FL 224 Jun-02 Jun-06 Dec-25 7.250% -- --
Greenbriar Concord, CA 199 May-99 May-17 May-36 6.875% -- --
Gulfstream Dania, FL 96 Jul-98 Apr-16 Jul-38 7.250% -- --
Hamilton Gardens Hamilton, NJ 174 Mar-99 Mar-17 Mar-35 7.125% -- --
Highland Ridge St. Paul, MN 228 Dec-86 Jun-10 Jun-18 7.250% -- --
Highpointe Harrisburg, PA * Nov-00 Jun-06 Jun-06 9.000% -- --
Highpointe Harrisburg, PA 240 Jul-86 Jun-06 8.500% -- --
King's Village Pasadena, CA 313 Jul-00 Dec-16 Dec-36 7.500% -- --
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
----------------- ---------- ------------ ---------
Tax-Exempt First
Stabilized
Portfolio
Autumn Ridge $9,286,388 $10,509,000 E,K
Barnaby Manor 4,472,011 4,900,000 D,J
Carrington Point 3,330,714 3,169,000 E,K
Casa Ramon
4,675,524 5,240,000 E,K
Cedar Creek 8,100,000 8,886,000 E,K
Cedar Pointe 9,500,000 9,818,000 D,J
Cedarbrook 2,804,561 2,977,000 E,K
Chapel Ridge at
Texarkana 5,768,870 6,315,000 E,K
College Park 9,986,710 10,784,000 E,K
Crowne Pointe 5,075,000 5,432,000 E,K,Q
Cypress Run 15,402,428 13,288,000 D,J,P
Del Monte Pines 10,864,772 11,044,000 E,K
Douglas Pointe 7,057,726 7,338,000 D,J
Fort Chaplin 25,423,633 26,254,000 E,K
Franciscan
Riviera 6,528,099 6,930,000 D,J
Garfield Park 3,214,613 3,490,000 D,J
Golf and
Lakeside Villas 2,600,000 2,687,000 C,H
Golf and
Lakeside Villas 1,350,000 1,347,000 C,H
Golf and
Lakeside Villas 6,020,000 6,330,000 C,H
Greenbriar 9,585,000 9,729,000 E,K
Gulfstream 3,448,591 3,729,000 E,K
Hamilton Gardens 6,274,674 6,691,000 D,J
Highland Ridge 15,000,000 16,056,000 E,K,Q
Highpointe 3,250,000 4,319,000 B,N
Highpointe 8,900,000 6,201,000 A,N,O
King's Village 17,542,043 19,544,000 E,K
-47-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
----------------- --------- -------- -------- -------- --------- --------- -------- ---------
Lake Park Turlock, CA 104 Jun-99 Oct-15 Sep-35 7.250% -- --
Lakepointe Atlanta, GA 360 Nov-87 Jul-05 Jun-17 6.000% -- --
Lakes Kansas City, MO 400 Dec-86 Dec-06 Dec-06 4.870% -- --
Lakes Edge at
Walden Miami, FL 400 Jun-99 Jun-13 May-35 6.900% -- --
Lenox Park Gainesville, GA 292 Jul-99 Aug-21 Jul-41 6.800% -- --
Lewis Place Gainesville, FL 112 Jun-99 Jun-16 Jun-41 7.000% -- --
Lexington Square Clovis,CA 130 Aug-98 Sep-17 Aug-40 6.375% -- --
Lexington Trails Houston, TX 200 Nov-00 May-07 May-22 9.000% -- --
Loveridge Pittsburg, CA 148 Nov-86 Jun-04 Nov-06 7.500% -- --
Mansion Independence, MO 550 May-86 Jan-11 Apr-25 7.250% Jan-06 7.500%
Millpond Village East Windsor, CT 360 Dec-00 - Dec-31 7.550% -- --
Newport Village Tacoma, WA 402 Feb-87 Sep-11 Aug-29 7.250% -- --
North Glen Atlanta, GA 284 Sep-86 Jul-05 Jun-17 7.500% -- --
Northpointe
Village Fresno, CA 406 Aug-98 Sep-17 Aug-40 7.500% -- --
Oaks at Hampton Dallas, TX 250 Apr-00 Mar-27 Mar-40 7.200% -- --
Ocean Air Norfolk, VA 434 Apr-98 Jan-16 Nov-30 7.250% -- --
Orchard Hills Tacoma, WA 176 Dec-86 Sep-11 Aug-29 7.250% -- --
Orchard Mill Atlanta, GA 238 May-89 Jul-05 Jun-17 7.500% -- --
Park Centre Alexandria, VA 326 Nov-02 Apr-11 Apr-34 6.375% -- --
Park Sequoia San Jose, CA 81 Oct-00 Mar-17 Mar-37 7.500% -- --
Parks at
Westmoreland DeSoto, TX 250 Jul-00 Jul-17 Jul-40 7.200% -- --
Pelican Cove St. Louis, MO 402 Feb-87 Oct-10 Oct-20 7.250% -- --
Phoenix Stockton, CA 186 Apr-98 Nov-16 Oct-29 7.125% -- --
Reflections Casselberry, FL 336 Nov-00 Dec-05 Dec-25 9.000% -- --
Running Brook Miami, FL 186 Sep-00 Jan-27 Dec-42 7.400% -- --
Shannon Lake Atlanta, GA 294 Jun-87 Jul-05 Jun-17 7.000% -- --
Sherwood Lake Tampa, FL 149 Apr-01 Nov-17 Sep-37 7.450% -- --
Silvercrest Clovis,CA 100 Sep-98 Oct-17 Sep-40 7.125% -- --
South Congress Austin, TX 172 May-00 Oct-16 Sep-36 7.500% -- --
Standiford Modesto, CA 250 Sep-99 Apr-16 Aug-36 7.125% -- --
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
--------------- ------------ ------------ ---------
Lake Park 3,638,000 3,894,000 E,K
Lakepointe 15,100,000 13,377,000 C,H
Lakes 13,650,000 11,797,000 D,J,Q
Lakes Edge at
Walden 14,850,000 15,128,000 E,K
Lenox Park 12,906,803 13,052,000 C,H
Lewis Place 3,969,472 3,986,000 C,H
Lexington Square 3,797,470 3,614,000 D,J
Lexington Trails 4,500,000 4,500,000 B,R
Loveridge 8,550,000 9,468,000 D,J
Mansion 19,450,000 20,820,000 E,K
Millpond Village 14,169,461 15,940,000 E,K
Newport Village 13,000,000 13,915,000 E,K,Q
North Glen 12,400,000 13,731,000 E,K
Northpointe
Village 13,116,371 14,643,000 E,K
Oaks at Hampton 9,535,000 10,136,000 C,H
Ocean Air 10,000,000 10,704,000 E,K
Orchard Hills 5,650,000 6,048,000 E,K,Q
Orchard Mill 10,500,000 11,627,000 E,K
Park Centre 15,000,000 15,000,000 C,I
Park Sequoia 6,709,372 7,463,000 E,K
Parks at
Westmoreland 9,535,000 11,966,000 C,I
Pelican Cove 18,000,000 19,268,000 E,K
Phoenix 3,139,578 3,373,000 E,K
Reflections 10,700,000 14,218,000 E,K,Q
Running Brook 8,495,000 9,281,000 C
Shannon Lake 12,000,000 12,402,000 A,G
Sherwood Lake 3,993,982 4,510,000 C,H
Silvercrest 2,250,573 2,389,000 E,K
South Congress 6,251,374 6,976,000 E,K
Standiford 9,434,155 10,015,000 E,K
-48-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
---------------- --------- -------- -------- -------- --------- --------- -------- ----------
Stonecreek Watsonville, CA 120 Apr-98 May-17 Apr-40 7.125% -- --
Sycamore Woods Antioch, CA 186 May-99 May-17 May-36 6.875% -- --
Tallwood Virginia Beach, VA 120 Sep-99 Nov-17 Oct-41 7.250% -- --
Thomas Lake Eagan, MN 216 Sep-86 Jan-10 Dec-27 7.500% -- --
Village Green Merced, CA 128 Aug-00 Jan-17 Jan-37 7.500% -- --
Village Green Merced, CA * Aug-00 - Aug-14 7.500% -- --
Walnut Creek Austin, TX 98 May-00 Oct-16 Sep-36 7.500% -- --
Walnut Creek Austin, TX * May-00 - May-14 7.500% -- --
Walnut Park
Plaza Philadelphia, PA 224 Apr-00 - Oct-18 7.500% -- --
Williams Run Dallas, TX 252 Dec-00 Jan-11 Nov-40 7.650% -- --
Willow Creek Ames, IA 138 Feb-87 Jul-08 Jun-22 7.250% -- --
------
Subtotal - Revenue Bonds Secured
by Stabilized Properties 14,337
------
Lease-Up Portfolio
------------------
Arbors at
Creekside Austin, TX 176 Jun-01 Jun-18 May-41 7.450% -- --
Armstrong Farm Jeffersonville, IN 168 Oct-00 Oct-17 Oct-40 7.500% -- --
Bay Colony League City, TX 248 Aug-00 Jul-17 Jul-42 7.500% -- --
Chapel Ridge at
Claremore Claremore, OK 104 Oct-00 Oct-17 Oct-42 7.500% -- --
Chapel Ridge at
Little Rock Little Rock, AR 128 Aug-99 Aug-15 Aug-39 7.125% -- --
Columbia at
Bells Ferry Cherokee Co., GA 272 Apr-00 Apr-17 Apr-42 7.400% -- --
Falcon Creek Indianapolis, IN 131 Sep-98 Sep-16 Aug-38 7.250% -- --
Forest Hills Garner, NC 136 Dec-98 Jun-16 Jun-34 7.125% -- --
Grace Townhomes Ennis, TX 112 May-00 Jun-17 Jun-42 7.500% -- --
Grandview Forest Durham, NC 92 Dec-00 Feb-18 Jan-43 8.500% Feb-03 7.500%
Greenbridge at
Buckingham Richardson, TX 242 Nov-00 Mar-17 Nov-40 7.400% -- --
Jubilee
Courtyards Florida City,FL 98 Sep-98 Oct-25 Sep-40 7.125% -- --
Lake Jackson Lake Jackson, TX 160 Dec-98 Jan-18 Jan-41 7.000% -- --
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
--------------- ------------ ------------ ---------
Stonecreek 8,706,043 9,243,000 E,K
Sycamore Woods 9,301,229 9,557,000 E,K
Tallwood 6,170,519 6,642,000 E,K
Thomas Lake 12,975,000 14,368,000 E,K
Village Green 3,060,797 3,408,000 E,K
Village Green 471,404 558,000 E,K
Walnut Creek 3,214,992 3,588,000 E,K
Walnut Creek 273,232 372,000 E,K
Walnut Park
Plaza 5,160,000 6,063,000 E,K
Williams Run 12,650,000 13,586,000 C,H
Willow Creek 6,100,000 6,530,000 E,K
------------ -----------
Subtotal - Revenue
Bonds Secured
by Stabilized
Properties $567,836,184 $600,163,000
------------ ------------
Lease-Up Portfolio
Arbors at
Creekside 8,600,000 9,460,000 D,J
Armstrong Farm 8,242,806 9,131,000 C,I
Bay Colony 10,083,089 11,184,000 D,J
Chapel Ridge at
Claremore 4,097,280 4,540,000 A,G
Chapel Ridge at
Little Rock 5,532,543 5,877,000 E,K
Columbia at
Bells Ferry 12,963,840 14,203,000 E,K
Falcon Creek 5,644,393 6,467,000 E,K,M
Forest Hills 5,778,074 6,167,000 D,J
Grace Townhomes 5,215,067 5,786,000 D,J
Grandview Forest 5,483,907 6,072,000 D,J
Greenbridge at
Buckingham 19,735,000 20,502,000 C,I
Jubilee
Courtyards 4,006,332 4,252,000 E,K
Lake Jackson 10,133,171 10,500,000 E,K
-49-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
----------------- --------- -------- -------- -------- --------- --------- -------- ----------
Lakemoor Durham, NC 160 Dec-99 Jan-17 Dec-41 7.250% -- --
Lakewood Terrace Belton, MO 152 Aug-01 Feb-19 Aug-41 7.400% -- --
Madalyn Landing Palm Bay, FL 304 Nov-98 Dec-17 Nov-40 7.000% -- --
Magnolia Arbors Covington, GA 250 Apr-01 May-18 Apr-43 7.500% -- --
Marsh Landing Portsmouth, VA 250 May-98 Jul-17 Jul-30 7.250% -- --
Midtown Square Columbus, GA 144 Jun-01 Jun-21 May-43 7.400% -- --
Mountain Ranch Austin, TX 196 Dec-98 Jan-18 Jan-41 7.125% -- --
Newark Commons New Castle, DE 220 May-00 May-18 May-43 7.300% -- --
Princess Anne Virginia Beach,
House VA 186 Apr-00 Apr-25 Apr-42 7.500% -- --
Red Hill Villas Round Rock, TX 168 Dec-00 Dec-17 Dec-40 7.400% -- --
San Marcos San Marcos, TX 156 May-00 Mar-17 Mar-42 7.375% -- --
Silverwood Lakewood, WA 107 Dec-01 Nov-18 Nov-38 7.200% -- --
Southwest Trails Austin, TX 160 Aug-00 Jun-17 Jun-42 7.350% -- --
Summerlake Davie, FL 108 Mar-00 Apr-27 Mar-42 7.400% -- --
Woods Edge Charlottesville, 97 Nov-00 Nov-17 Nov-40 7.500% -- --
VA
-----
Subtotal - Revenue Bonds Secured
by properties in lease-up stage 4,725
-----
Construction Bond Portfolio
---------------------------
Allapattah
Gardens Miami, FL 128 Nov-02 Nov-19 Nov-44 7.150% -- --
Belmont Heights
Estates Tampa, FL 201 Jun-01 Jun-18 Jun-43 8.150% Mar-03 7.600%
Bluffview Denton, TX 250 May-01 May-18 May-41 7.600% -- --
Blunn Creek Austin, Tx 280 Aug-01 Jul-18 Jul-41 7.300% -- --
Chapel Ridge at
Jackson Jackson, TN 124 Dec-02 Jan-20 Dec-42 6.750% -- --
Chapel Ridge at Oklahoma City,
Yukon OK 148 Sep-02 Nov-02 Sep-03 7.000% -- --
Circle S Austin, TX 200 Feb-02 Dec-18 Jan-42 7.500% Apr-03 7.200%
Clarkridge
Villas Dallas, TX 256 Sep-02 Aug-19 Sep-42 7.000% -- --
Clearwood Villas Houston, TX 276 May-02 Apr-19 May-42 7.000% -- --
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
--------------- ------------ ------------ ---------
Lakemoor 8,960,356 9,634,000 C,I
Lakewood Terrace 7,650,000 8,358,000 E,K
Madalyn Landing 12,859,503 13,284,000 E,K
Magnolia Arbors 12,500,000 13,842,000 E,K
Marsh Landing 5,895,278 6,435,000 E,K
Midtown Square 5,600,000 6,118,000 A,G
Mountain Ranch 9,041,675 9,595,000 C,I
Newark Commons 14,300,000 15,413,000 E,K
Princess Anne
House 7,500,000 8,305,000 C,I
Red Hill Villas 9,900,000 10,816,000 C,I
San Marcos 7,208,142 7,874,000 D,J
Silverwood 3,300,000 3,508,000 C,H
Southwest Trails 6,486,332 7,054,000 D,J
Summerlake 5,582,422 6,118,000 D,J
Woods Edge 4,848,121 5,371,000 D,J
----------- -----------
Subtotal - Revenue
Bonds Secured
by properties
in lease-up stage $227,147,331 $245,866,000
------------- ------------
Construction Bond Portfolio
---------------------------
Allapattah
Gardens 4,850,000 4,850,000 C,L
Belmont Heights
Estates 7,850,000 8,808,000 D,J
Bluffview 10,700,000 12,006,000 C,I
Blunn Creek 15,000,000 16,167,000 C,I
Chapel Ridge at
Jackson 5,000,000 5,000,000 C,L
Chapel Ridge at
Yukon 7,000,000 7,235,000 C
Circle S 9,300,000 9,886,000 C,H,L
Clarkridge
Villas 14,600,000 15,089,000 C,L
Clearwood Villas 15,000,000 15,503,000 E,K,L
-50-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
----------------- --------- -------- -------- -------- --------- --------- -------- ----------
Cobb Park Ft. Worth, TX 172 Jul-01 Aug-18 Jul-41 7.400% -- --
Cobblestone Acworth, GA 172 May-02 May-19 May-42 6.900% -- --
Colonial Park Margate, FL 160 Jun-02 Jun-19 Jun-44 7.500% Sept-03 7.000%
Ecumenical Homes Dayton, OH 50 Dec-02 Jul-19 Jun-44 6.875% -- --
Ecumenical Homes Dayton, OH * Dec-02 - Mar-07 6.875% -- --
Ecumenical Homes Dayton, OH * Dec-02 - Jun-14 9.000% -- --
Ecumenical Homes Dayton, OH * Dec-02 - Jun-14 6.875% -- --
Emerald Bay Houston, TX 248 Sep-02 Aug-19 Sep-42 5.500% Feb-04 7.000%
Green Crest Houston, TX 192 Nov-02 Nov-19 Nov-42 7.000% -- --
Grove Merced, CA 204 Dec-02 Dec-20 Dec-44 4.000% Mar-03 7.000%
Grove Merced, CA * Dec-02 - Dec-07 4.000% Mar-03 7.000%
Grove Merced, CA * Dec-02 - Jun-16 4.000% Mar-03 8.750%
Heatherwilde Pflugerville, TX 256 Oct-02 Nov-19 Oct-42 5.500% Mar-04 6.750%
Heatherwilde Pflugerville, TX * Oct-02 Nov-19 Oct-42 5.500% Mar-04 7.000%
Hickory Falls Villa Rica, GA 220 Dec-02 Jan-20 Dec-45 5.000% Apr-04 6.500%
Hickory Trace Dallas, TX 180 Nov-02 Dec-19 Nov-42 7.000% -- --
Hidden Grove Miami, FL 222 Sep-00 Oct-17 Oct-42 7.400% -- --
Hillside Dallas, TX 236 Dec-01 Nov-18 Dec-41 7.900% Mar-03 7.000%
Inverness Centre Ft. Wayne, IN 192 Aug-02 Mar-20 Aug-42 6.835% -- --
Ironwood
Crossing Ft. Worth, TX 280 Nov-02 Oct-27 Nov-42 5.500% Jul-04 7.000%
Johnston Mill Columbus, GA 336 Apr-02 Mar-19 Mar-42 6.900% Apr-04 6.950%
Kensington Court Kansas City, MO 192 Dec-02 Jan-20 Dec-42 6.850% -- --
Knollwood Villas Denton, TX 264 May-01 May-18 May-41 7.600% -- --
Laguna Pointe Pompano Beach, FL 188 Jun-02 Dec-19 Jun-44 7.500% Aug-04 7.000%
Lakeline Leander, TX 264 Nov-01 Aug-18 Aug-43 8.100% Mar-03 7.700%
Lansing Heights Lansing, KS 130 May-02 Mar-27 Mar-45 6.800% -- --
Lansing Heights Lansing, KS * May-02 - Dec-10 6.800% -- --
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
--------------- ------------ ------------ ---------
Cobb Park 7,500,000 8,194,000 A,G,L
Cobblestone 11,500,000 11,716,000 E,K,L
Colonial Park 8,200,000 8,475,000 E,K,L
Ecumenical Homes 2,793,000 2,793,000 C,L
Ecumenical Homes 556,000 556,000 C
Ecumenical Homes 165,000 165,000 C,L
Ecumenical Homes 86,000 86,000 C,L
Emerald Bay 10,570,000 10,924,000 C
Green Crest 12,500,000 12,500,000 C,L
Grove 8,270,000 8,270,000 C,L
Grove 3,055,000 3,055,000 C
Grove 1,475,000 1,475,000 C
Heatherwilde 13,500,000 13,500,000 C,H
Heatherwilde 1,500,000 1,500,000 C,H
Hickory Falls 12,350,000 12,350,000 C,L
Hickory Trace 11,920,000 11,920,000 C
Hidden Grove 8,594,129 9,396,000 C,I,L
Hillside 12,500,000 12,919,000 A,F,L
Inverness Centre 5,950,000 6,004,000 D,J,L
Ironwood
Crossing 15,000,000 15,000,000 C
Johnston Mill 16,000,000 16,418,000 C,I,L
Kensington Court 10,000,000 10,000,000 C,L
Knollwood Villas 13,750,000 15,429,000 C,I
Laguna Pointe 13,300,000 13,746,000 C,L
Lakeline 21,000,000 22,701,000 C,H,L
Lansing Heights 8,320,500 8,354,000 C
Lansing Heights 231,500 232,000 C
-51-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
----------------- --------- -------- -------- -------- --------- --------- -------- -----------
Magnolia Commons Vicksburg, MS 192 Oct-02 Oct-19 Sep-32 6.750% -- --
Matthew Ridge Houston, TX 240 May-02 Apr-19 May-42 7.150% -- --
Meridian Hollywood, FL 160 Apr-02 May-19 Apr-44 7.500% Jul-03 7.000%
Oak Hill Athens, GA 220 Oct-02 Nov-19 Oct-42 6.500% -- --
Oak Hollow Dallas, TX 150 Dec-01 Nov-18 Dec-41 7.900% Mar-03 7.000%
Oaks at
Brandlewood Savannah, GA 324 May-02 Jun-19 May-42 7.000% -- --
Palm Terrace Auburn, CA * Sep-02 - Sep-03 9.500% -- --
Palm Terrace Auburn, CA 80 Aug-01 Aug-18 Jan-44 8.400% Feb-03 7.400%
Palm Terrace Auburn, CA * Aug-01 - Apr-03 9.500% -- --
Pleasant Valley
Villas Austin, TX 280 Aug-02 Aug-19 Sep-42 6.750% -- --
River's Edge Green Island, NY 190 Nov-01 Jun-16 Nov-43 7.700% Jun-03 7.200%
Riverside
Meadows Austin, TX 248 Dec-01 Nov-20 Dec-41 7.500% May-03 7.000%
Rosemont San Antonio, TX 280 Dec-02 Jan-20 Dec-44 6.750% -- --
Southern Oaks Dallas, TX 256 Dec-02 Jan-20 Dec-44 6.750% -- --
Waterford Place
Waterford Place II Loveland, CO 164 Oct-02 Aug-27 Aug-45 6.500% -- --
Colorado
West Meadows Springs, CO 216 Dec-01 Aug-18 Nov-41 7.250% -- --
West Oaks Houston, TX 168 Feb-02 Dec-18 Jan-42 7.500% Feb-04 7.150%
Westlake Village Jackson, NJ * Nov-01 - Feb-04 8.000% -- --
Westlake Village Jackson, NJ 150 Nov-01 May-19 Nov-41 7.200% -- --
White Rock San Antonio, TX 336 Dec-01 Dec-18 Dec-41 7.750% May-03 7.550%
Willow Creek II North Port, FL 104 Jun-02 Jun-19 Jun-44 7.000% -- --
------
Subtotal - Revenue Bonds secured
by properties in construction 9,779
------
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
--------------- ------------ ------------ ---------
Magnolia Commons 8,700,000 8,700,000 C,L
Matthew Ridge 10,968,000 11,578,000 E,K,L
Meridian 8,255,000 8,532,000 E,K,L
Oak Hill 8,300,000 8,300,000 C,L
Oak Hollow 8,625,000 8,914,000 A,F,L
Oaks at
Brandlewood 12,725,000 13,151,000 D,J,L
Palm Terrace 1,000,000 1,403,000 C,L
Palm Terrace 4,460,000 4,873,000 A,F,L
Palm Terrace 1,542,381 2,163,000 A,F,L
Pleasant Valley
Villas 15,000,000 14,949,000 C,H,L
River's Edge 15,000,000 15,946,000 C
Riverside
Meadows 11,500,000 11,885,000 A,F
Rosemont 14,990,000 14,990,000 C
Southern Oaks 14,990,000 14,990,000 C
Waterford Place
Waterford Place II 2,102,000 2,102,000 C
West Meadows 13,000,000 13,915,000 A,F,L
West Oaks 10,150,000 10,715,000 A,F,L
Westlake Village 575,000 679,000 C,L
Westlake Village 6,425,000 6,830,000 D,J,L
White Rock 20,345,000 21,564,000 C,H,L
Willow Creek II 4,130,000 4,268,000 C,H
------------- -----------
Subtotal - Revenue
Bonds secured
by properties
in construction $512,668,510 $532,669,000
------------- ------------
-52-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
----------------- --------- -------- -------- -------- --------- --------- -------- ---------
Rehabilitation Bond Portfolio
Briarwood Fort Smith, AR * Aug-02 - Jun-13 6.250% -- --
Briarwood Fort Smith, AR * Aug-02 Jun-03 May-23 6.250% -- --
Briarwood Fort Smith, AR 128 Aug-02 Jun-19 Feb-39 6.250% -- --
Bryte Gardens W. Sacramento, CA 108 Apr-02 Mar-18 Mar-39 7.000% -- --
Community Arms Pasadena, CA 133 Aug-02 - Sep-14 7.000% -- --
Community Arms Pasadena, CA * Aug-02 Jan-18 Oct-38 7.000% -- --
Creekside
Landing Memphis, TN 248 Dec-02 Jan-20 Dec-39 6.800% -- --
Faircliff Plaza Washington, DC 80 Mar-02 Mar-19 Mar-39 7.900% Mar-03 7.200%
Georgia King Newark, NJ 422 May-02 - Aug-38 8.000% Aug-03 7.000%
Georgia King Newark, NJ * May-02 - Oct-25 7.000% -- --
Lincoln Park Newark, NJ 80 May-02 - May-28 7.750% Feb-03 7.250%
Mecca Vineyards Indio, CA 268 Nov-01 May-18 May-38 7.750% Feb-03 7.250%
Mecca Vineyards Indio, CA * Nov-01 - Jul-14 7.250% -- --
Merchandise Mart St. Louis, MO 213 Oct-01 Oct-19 Sep-41 8.000% Mar-03 7.500%
Oakwood Manor Little Rock, AR 200 Jun-01 Dec-17 Nov-37 7.650% -- --
Oakwood Manor Little Rock, AR * Jun-01 - Nov-11 7.650% -- --
Ocean Ridge Federal Way, WA 192 Dec-01 Nov-18 Nov-38 6.950% -- --
Pheasant Ridge Bellevue, NE 264 Sep-02 Apr-19 Mar-39 7.400% Sep-03 6.750%
Stonebridge Florrisant, MO 100 May-02 Oct-18 Oct-38 7.000% -- --
Valley View &
Summertree Little Rock, AR 240 Oct-01 Jun-18 Jun-38 8.000% Apr-03 7.450%
Valley View &
Summertree Little Rock, AR * Oct-01 - Feb-14 7.450% -- --
Viewcrest
Villages Bremerton, WA 300 May-02 Oct-18 Oct-38 8.000% Apr-03 7.150%
------
Subtotal - Revenue Bonds secured
by properties undergoing
rehabilitation 2,976
-------
Subtotal - Tax-Exempt First
Mortgage Revenue Bonds 31,817
-------
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
--------------- -------------- ------------ ---------
Rehabilitation Bond
Briarwood 645,635 609,000 C
Briarwood 680,000 627,000 C
Briarwood 2,835,000 2,616,000 C
Bryte Gardens 5,358,800 5,538,000 C,H
Community Arms 996,958 1,049,000 C
Community Arms 6,245,000 6,454,000 C
Creekside
Landing 5,000,000 5,000,000 C
Faircliff Plaza 7,000,000 7,441,000 C,H
Georgia King 16,075,000 18,987,000 C,I
Georgia King 8,835,121 9,224,000 C,I
Lincoln Park 4,900,000 5,245,000 D,J
Mecca Vineyards 13,040,000 13,958,000 A,F
Mecca Vineyards 1,424,193 1,606,000 A,F
Merchandise Mart 25,000,000 27,683,000 C,I,L
Oakwood Manor 5,007,621 5,659,000 C,I
Oakwood Manor 440,000 497,000 C,I
Ocean Ridge 6,675,000 6,849,000 A,F
Pheasant Ridge 9,000,000 8,969,000 D,J
Stonebridge 5,270,000 5,447,000 D,J
Valley View &
Summertree 8,655,000 10,223,000 A,F
Valley View &
Summertree 523,063 599,000 A,F
Viewcrest
Villages 8,723,200 9,209,000 D,J
------------ ----------
Subtotal - Revenue
Bonds secured
by properties
undergoing
rehabilitation $ 142,329,591 $ 153,489,000
------------- -------------
Subtotal -
Tax-Exempt First $1,449,981,616 $1,532,187,000
Mortgage Revenue Bonds -------------- --------------
-53-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
----------------- --------- -------- -------- -------- --------- --------- -------- -----------
Taxable First Mortgage Bonds
----------------------------
Chapel Ridge at
Jackson Jackson, TN * Dec-02 Jan-20 Sep-22 8.250% -- --
Circle S Austin, TX * Feb-02 - Oct-23 8.750% -- --
Clearwood Villas Houston, TX * May-02 - Jan-06 9.000% -- --
Cobb Park Ft. Worth, TX * Jul-01 - Nov-10 9.500% -- --
Colonial Park Margate, FL * Jun-02 - Mar-12 8.750% -- --
Creekside
Landing Memphis, TN * Dec-02 Jan-20 Aug-20 8.250% -- --
Emerald Bay Houston, TX * Sep-02 Aug-19 Dec-19 9.000% -- --
Greenbriar Concord, CA * May-99 - May-36 9.000% -- --
Greenbridge at
Buckingham Richardson, TX * Nov-00 - Feb-07 10.000% -- --
Hillside Dallas, TX * Dec-01 - Oct-09 9.250% -- --
Inverness Centre Ft. Wayne, IN * Aug-02 Mar-20 Jan-29 8.000% -- --
Ironwood
Crossing Ft. Worth, TX * Nov-02 Jun-05 May-21 8.750% -- --
Johnston Mill Columbus, GA * Apr-02 - Sep-12 8.000% -- --
Lake Park Turlock Park, CA * Jun-99 - Sep-35 9.000% -- --
Lakeline Leander, TX * Dec-01 - Nov-09 9.650% Mar-03 9.250%
Lakes Edge at
Walden Miami, FL * Jun-99 - Aug-10 11.000% -- --
Magnolia Arbors Covington, GA * Apr-01 May-08 Jul-18 8.950% -- --
Mecca Vineyards Indio, CA * Nov-01 - Apr-07 9.000% -- --
Meridian Hollywood, FL * Apr-02 - Dec-13 8.750% -- --
Midtown Square Columbus, GA * Jun-01 Jun-08 Feb-14 8.950% -- --
Oaks at
Brandlewood Savannah, GA * May-02 - Mar-17 8.750% -- --
Oaks at Hampton Dallas, TX * Apr-00 - May-10 9.000% -- --
Oakwood Manor Little Rock, AR * Jun-01 - Jan-09 9.500% -- --
Ocean Ridge Federal Way, Wa * Dec-01 - Sep-23 8.750% -- --
Parks at
Westmoreland DeSoto, TX * Jul-00 - Nov-09 9.000% -- --
Pheasant Ridge Bellevue, NE * Sep-02 Apr-19 Aug-19 8.500% -- --
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
--------------- -------------- ------------ ---------
Taxable First Mortgage
Bonds Chapel Ridge
at Jackson 900,000 900,000 A,L
Circle S 1,925,000 1,982,000 A,L
Clearwood Villas 125,000 132,000 A,L
Cobb Park 285,000 319,000 A,L
Colonial Park 375,000 386,000 A,L
Creekside
Landing 1,100,000 1,100,000 A
Emerald Bay 1,330,000 1,409,000 A
Greenbriar 1,910,078 2,134,000 A
Greenbridge at
Buckingham 350,000 412,000 A
Hillside 400,000 435,000 A,F,L
Inverness Centre 750,000 706,000 A,L
Ironwood
Crossing 1,970,000 1,970,000 A
Johnston Mill 500,000 471,000 A,L
Lake Park 322,375 397,000 A
Lakeline 550,000 599,000 A,L
Lakes Edge at
Walden 1,179,109 1,812,000 A
Magnolia Arbors 1,000,000 1,053,000 A
Mecca Vineyards 360,000 381,000 A,F
Meridian 375,000 386,000 A,L
Midtown Square 235,000 248,000 A,L
Oaks at
Brandlewood 1,200,000 1,236,000 A,L
Oaks at Hampton 490,942 556,000 A
Oakwood Manor 666,583 855,000 A
Ocean Ridge 2,325,000 2,394,000 A
Parks at
Westmoreland 436,175 482,000 A
Pheasant Ridge 1,900,000 1,900,000 A,L
-54-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
Stated Date of Future
Date Call Maturity Interest Future Interest
Property Location Units Closed Date Date Rate1 Rate Rate2
----------------- --------- -------- -------- -------- --------- --------- -------- ----------
Pleasant Valley
Villas Austin, TX * Aug-02 Aug-19 Sep-42 8.500% -- --
Princess Anne Virginia Beach,
House VA * Apr-00 - Jan-06 9.500% -- --
Red Hill Villas Round Rock, TX * Dec-00 - Jul-10 9.500% -- --
Riverside
Meadows Austin, TX * Dec-01 - May-09 8.750% -- --
Silverwood Lakewood, WA * Dec-01 - Aug-17 8.750% -- --
Viewcrest
Villages Bremerton, WA * May-02 Oct-18 Feb-21 8.750% -- --
White Rock San Antonio, TX * Dec-01 - Aug-08 9.500% -- --
Williams Run Dallas, TX * Dec-00 - Jul-04 9.250% -- --
------
Subtotal - Taxable Bonds -
------
Total First Mortgage Bonds 31,817
======
Other Tax-Exempt Subordinate Bonds
Draper Lane Silver Spring, MD 406 Feb-01 Mar-06 Mar-40 10.000% -- --
Museum Tower Philadelphia, PA 286 Nov-00 - Dec-26 8.250% -- --
------
Total Subordinate Bonds 692
------
Total Revenue Bonds
32,509
======
Outstanding
Principal Amount Fair
at Value at
Property 12/31/2002 12/31/2002 Notes
--------------- --------------- ------------ ---------
Pleasant Valley
Villas 1,470,000 1,470,000 A,L
Princess Anne
House 105,667 140,000 A
Red Hill Villas 397,001 447,000 A
Riverside
Meadows 200,000 206,000 A,F
Silverwood 525,000 541,000 A
Viewcrest
Villages 2,180,800 2,245,000 A
White Rock 430,000 481,000 A,L
Williams Run 99,113 218,000 A
-------------- --------------
Subtotal -
Taxable Bonds $ 28,367,843 $ 30,403,000
-------------- --------------
Total First
Mortgage Bonds $1,478,349,459 $1,562,590,000
-------------- --------------
Other Tax-Exempt
Subordinate Bonds
Draper Lane 11,000,000 11,000,000 C,I
Museum Tower 6,000,000 6,000,000 C,H
------------- -----------
Total Subordinate $ 17,000,000 $ 17,000,000
Bonds
Total Revenue
Bonds $1,495,349,459 $1,579,590,000
============== ==============
-55-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 The stated interest rate represents the coupon rate of the Revenue
Bond at December 31, 2002.
2 Represents a future interest rate, generally after the property is no
longer in construction or rehabilitation.
3 The Revenue Bonds are deemed to be available-for-sale debt securities
and, accordingly, are carried at their estimated fair values.
A. Owned by the Company, not including its consolidated subsidiaries.
B. Owned by CM Holding, a consolidated subsidiary of the Company (See Merger).
C. Owned by CharterMac Equity Issuer Trust, a consolidated subsidiary of the
Company (see Merger).
D. Owned by CharterMac Origination Trust I, a consolidated subsidiary of the
Company (see Merger).
E. Owned by CharterMac Owner Trust I, a consolidated subsidiary of the Company
(see Merger).
F. Held by Merrill Lynch as collateral under the LIHTC Guaranty Program.
G. Held by Merrill Lynch as collateral under the Credit Enhancement Program.
H. Held by Merrill Lynch as collateral for secured borrowings (see Financing
Arrangements).
I. Held by Merrill Lynch as collateral in connection with the Merrill Lynch
P-FLOATS/RITES Program (see Financing Arrangements).
J. Held as collateral in connection with the TOP (see Private Label Tender
Option Program).
K. Transferred to CharterMac Owner Trust I in connection with the TOP (see
Private Label Tender Option Program).
L. In the event the construction or rehabilitation of the Underlying Property
is not completed in a timely manner, the Company may "put" the Revenue
Bonds to the construction lender at par. The put is secured by a letter of
credit issued by the construction lender to the Company.
M. The obligor of this Revenue Bond is a partnership in which an affiliate of
the Manager is the partner that owns a controlling interest(see Note 10).
N. The original owner of the Underlying Property and obligor of the Revenue
Bond has been replaced with an affiliate of the Manager.
O. The minimum pay rate of the bond is the cash flow of the property.
P. The Revenue Bond is currently awaiting approval from the Issuer for
modification. The Company is confident that the modification will occur and
has therefore shown the terms of the Revenue Bond as per a forbearance
agreement which mirrors the terms of the Revenue Bond modification.
Q. The Company received participating interest during 2002.
R. The Company has deemed this Revenue Bond impaired and has written it down
to its estimated fair value of the underlying property (see Bond
Impairment section herein Note 2)
-56-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Reconciliation of Revenue Bonds: 2002 2001 2000
----------- ----------- ----------
Balance at beginning of period $1,137,715 $845,405 $587,892
Acquisitions 457,060 295,962 304,740
Proceeds from repayments of bonds (108,630) (24,227) (22,400)
Periodic principal repayments of (4,986) (1,584) (379)
bonds
Carrying amount of bonds in
excess (less than) of proceeds 4,273 (681) 719
from the repayment
Loss on impairment of assets (920) (400) --
Net change in fair value of bonds 95,126 23,135 (25,291)
Accretion of deferred income and
purchase accounting adjustment (48) 105 124
-------- --------- -------
Balance at close of period $1,579,590 $1,137,715 $845,405
========= ========== =======
The weighted average interest rates recognized on the face amount of the
portfolio of Revenue Bonds for the years ended December 31, 2002, 2001 and 2000
were 7.32%, 7.40% and 7.74%, respectively, based on weighted average face
amounts of approximately $1,266,968,000, $965,865,000 and $710,544,000,
respectively.
The amortized cost basis of the Company's portfolio of Revenue Bonds at December
31, 2002 and 2001 was $1,484,202,610 and $1,137,453,098, respectively. The net
unrealized gain on Revenue Bonds in the amount of $95,387,390 at December 31,
2002 consisted of gross unrealized gains and losses of $100,964,090 and
$5,576,700, respectively. The net unrealized loss on Revenue Bonds in the amount
of $261,902 at December 31, 2001 consisted of gross unrealized gains and losses
of $20,202,713 and $19,940,811, respectively.
The principal and interest payments on each Revenue Bond are payable only from
the cash flows of the Underlying Properties, including proceeds from a sale of
an Underlying Property or the refinancing of the mortgage loan securing such
Revenue Bonds. None of the Revenue Bonds constitutes a general obligation of any
state or local government, agency or authority. The structure of each Mortgage
Loan mirrors the structure of the corresponding Revenue Bond that it secures. In
order to protect the tax-exempt status of the Revenue Bonds, the owners of the
Underlying Properties are required to enter into certain agreements to own,
manage and operate such Underlying Properties in accordance with requirements of
the Internal Revenue Code of 1986, as amended.
No single Revenue Bond provided interest income that exceeded 10% of the
Company's total revenue for the years ended December 31, 2002, 2001 or 2000.
Based on the face amount of Revenue Bonds at December 31, 2002, approximately
29.6% are located in Texas, 12.5% of the Underlying Properties are located in
California, 11.2% are located in Florida, and 10.5% are located in Georgia. No
other state comprises more than 10% of the total face amount at December 31,
2002. Based on the face amount of Revenue Bonds at December 31, 2001,
approximately 23% of the Underlying Properties were located in California, 14%
were located in Florida, and 17% were located in Texas. No other state comprised
more than 10% of the total face amount at December 31, 2001.
Revenue Bonds generally bear a fixed base interest rate and, to the extent
permitted by existing regulations, may or may not also provide for contingent
interest and other features. Terms are expected to be five to 35 years, although
the Company may have the right to cause repayment prior to maturity through a
mandatory redemption feature (five to seven years with up to six month's
notice). In some cases, the bonds call for amortization or "sinking fund"
payments, generally at the completion of rehabilitation or construction, of
principal based on thirty to forty year level debt service amortization
schedules.
Revenue Bonds are generally not subject to optional prepayment during the first
5-10 years of the Company's ownership of the bonds and may carry prepayment
penalties thereafter beginning at 5% of the outstanding principal balance,
declining by 1% per annum. Certain Revenue Bonds may be purchased at a discount
from their face value. Up to 15% of the Total Market Value of the Company (as
defined in its trust agreement) may be invested in Revenue Bonds secured by
Underlying Properties in which affiliates of the Manager have a controlling
interest, equity interest or security interest. The 15% limit is not applicable
to properties to which the Manager or its affiliates have taken title for the
benefit of the Company and only applies to Revenue Bonds acquired after the
Merger. In selected circumstances and generally only in connection with the
acquisition of tax-exempt Revenue Bonds, the Company may acquire a small amount
of taxable bonds (i) which the Company may be required to acquire in order to
satisfy state regulations with respect to the issuance of tax-exempt bonds and
(ii) to fund certain costs associated with the issuance of Revenue Bonds, that
under current law cannot be funded by the Revenue Bond itself.
Certain Revenue Bonds provide for "participating interest" which is equal to a
percentage of net property cash flow of the net sale or refinancing proceeds.
Both the stated and participating interest on the Revenue Bonds are exempt from
federal income taxation. During the years ended December 31, 2002, 2001 and
2000, participating interest was collected amounting to approximately $3.1
million, $1.5 million and $1.7 million, respectively. Revenue Bonds that contain
provisions for contingent interest are referred to as "participating"; Revenue
Bonds lacking this provision are "non-participating".
From time to time the Company has advanced funds to owners of certain Underlying
Properties in order to preserve the underlying asset including completion of
construction and/or when Underlying Properties have experienced operating
difficulties including past due real estate taxes and/or deferred maintenance.
Promissory notes and/or second mortgages typically secure such ad-
-57-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
vances. As of December 31, 2002, the face amount of such advances was
approximately $6.2 million, with rates ranging from 8% to 13% and a carrying
value of $190,000 (net of purchase accounting adjustments). Included in such
amounts were advances to obligors which are affiliates of the Manager at an
aggregate face amount of approximately $5.0 million, with rates ranging from 8%
to 10%.
2002 Transactions
Revenue Bonds and other investments acquired or made during 2002 are summarized
below:
Weighted Weighted
Aggregate Average Average
Face Purchase Construction Permanent
Amount Price Rate Interest Rate
------ --------- ------------ -------------
Non-participating Revenue Bonds
Construction/rehabilitation
properties $457,059,800 $466,921,529 6.940% 6.981%
Other Investments
Bridge and mezzanine loans 4,375,000 N/A 8.257%
Revenue Bond and notes repaid during 2002 are summarized below:
Face Realized
Amount Cost Gains
------------ ------------- -------------
Participating Revenue Bonds
Stabilized $81,825,000 $82,749,336 $917,326
Non-participating Revenue
Bonds Stabilized 36,175,000 39,142,679 2,967,679
Notes
Stabilized 7,350,000 7,350,000 --
2001 Transactions
Revenue Bonds and other investments acquired or made during 2001 are summarized
below:
Weighted Weighted
Aggregate Average Average
Face Purchase Construction Permanent
Amount Price Rate Interest Rate
------ --------- ------------ -------------
Non-participating Revenue Bonds
Construction/rehabilitation
properties $284,962,381 $291,053,618 7.900% 7.530%
Subordinated non-participating
Revenue Bonds 11,000,000 11,260,970 N/A 10.000%
Other Investments
Bridge and mezzanine loans 13,897,017 N/A 8.782%
Revenue Bond and notes repaid and RITES terminated during 2001 are summarized
below:
Face Realized
Amount Cost (Losses)
------------ ------------- -------------
Participating Revenue Bonds
Stabilized $17,775,000 $18,735,343 $(761,859)
Non-participating Revenue Bonds
Stabilized 6,255,000 6,400,979 (145,979)
Construction/rehabilitation 5,000 8,766 (3,766)
(RITES)
Notes
Stabilized 2,540,000 2,540,000 --
-58-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 Bond Modifications
On June 1, 2001, the Company agreed to a modification of the terms of the
Revenue Bond secured by the Loveridge Apartments Project. The stated interest
rate was reduced from 8% to 7.5% and the call date was extended to June 1, 2004.
As of December 31, 2002, this bond had a carrying value and fair value of
approximately $6.85 million and $9.47 million, respectively.
Bond Impairment
During the second quarter of 2001, the borrowers of Lexington Trails failed to
make regular interest payments. As a result, the Company determined the bond was
impaired, and wrote down the bond to its estimated fair value of approximately
$5.5 million and took a loss on impairment of $400,000. During 2002, the Company
took an additional write down of approximately $920,000 on the Lexington Trails
Revenue Bond. 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 of the bond to
$4.5 million, the estimated value of the underlying property.
NOTE 3 - Investment in ARCap
On October 18, 2001, the Company, through CM Corp., purchased 739,741 units of
Series A Convertible Preferred Membership Interests in ARCap Investors, LLC at
the price of $25.00 per unit, with a preferred return of 12.00%.
ARCap Investors, LLC was formed in January, 1999 by REM/CAP and Apollo Real
Estate Investors to invest exclusively in subordinated CMBS. Since then, ARCap
has changed its focus and has begun to provide portfolio management services for
third parties.
Summarized financial information for ARCap as of December 31, 2002 and the year
then ended is as follows:
($'s in millions)
Investment securities - trading $ 799
Other assets 24
-----------
Total assets $ 823
===========
Repurchase agreements and long-term debt $ 391
Other liabilities 207
Members' equity 225
-----------
Total liabilities and equity $ 823
===========
Total revenues $ 79
Total expenses 48
-----------
Net income $ 31
===========
NOTE 4 - Deferred Costs
The components of deferred costs are as follows:
December 31,
------------
2002 2001
---- ----
Deferred bond selection costs (1) $ 34,810 $ 25,356
Deferred financing costs 8,030 6,788
Deferred costs relating to the issuance
of preferred shares of subsidiary
(see Note 7) 10,445 8,377
Deferred costs relating to acquisition
of Related 2,483 --
Other deferred costs 1,376 332
------- --------
57,144 40,853
Less: Accumulated amortization (8,451) (6,187)
------- -------
$ 48,693 $ 34,666
======= =======
(1) This primarily represents the 2% bond selection fee paid to the Manager
(See Note 9).
-59-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Financing Arrangements
P-FLOATS/RITES Program
To raise additional capital to acquire Revenue Bonds, the Company has
securitized certain Revenue Bonds through the Merrill Lynch Pierce Fenner &
Smith Incorporated ("Merrill Lynch") P-FLOATS/RITES program. Under this program,
the Company transfers certain Revenue Bonds to Merrill Lynch. Merrill Lynch
deposits each Revenue Bond into an individual special purpose trust together
with a credit enhancement guarantee ("Guarantee"). Two types of securities are
then issued by each trust, (1) Puttable Floating Option Tax-Exempt Receipts
("P-FLOATS"), a short-term senior security which bears interest at a floating
rate that is reset weekly and (2) Residual Interest Tax Exempt Securities
("RITES"), a subordinate security which receives the residual interest payment
after payment of P-FLOAT interest and ongoing transaction fees. The P-FLOATS are
sold to third party investors and the RITES are generally sold back to the
Company. The Company has the right, with 14 days notice to the trustee, to
purchase the outstanding P-FLOATS and withdraw the underlying Revenue Bonds from
the trust. When the Revenue Bonds are deposited into the P-FLOAT Trust, the
Company receives the proceeds from the sale of the P-FLOATS less certain
transaction costs. In certain other cases, Merrill Lynch may directly buy the
Revenue Bonds from local issuers, deposit them in the trust, sell the P-FLOAT
security to investors and then the RITES to the Company.
For financial reporting purposes, due to the repurchase right, the Company
accounts for the net proceeds received upon the transfer of its Revenue Bonds
through the P- P-FLOATS/RITES program as secured borrowings and, accordingly,
continues to account for the Revenue Bonds as assets. When Merrill Lynch
purchases Revenue Bonds directly and sells the RITES to the Company, the RITES
are included in other assets and accounted for at fair value as
available-for-sale debt securities.
In order to facilitate the securitization, the Company has pledged certain
additional Revenue Bonds as collateral for the benefit of the credit enhancer or
liquidity provider. At December 31, 2002, the total carrying amount of such
additional Revenue Bonds, cash and cash equivalents and temporary investments
pledged as collateral was approximately $180 million.
During the year 2002, the Company transferred six Revenue Bonds with an
aggregate face amount of approximately $91 million to the P-FLOATS/RITES program
and received proceeds of approximately $90.7 million. Additionally, the Company
repurchased eight Revenue Bonds with an aggregate face value of approximately
$67 million.
The Company's cost of funds relating to its secured borrowings under the Merrill
Lynch P-FLOATS/RITES program (calculated as interest expense as a percentage of
the weighted average amount of the secured borrowings) was approximately 2.4%,
3.7% and 5.0%, annualized, for the years ended December 31, 2002 and 2001 and
2000, respectively.
Private Label Tender Option Program
The Company also utilizes its TOP to raise additional capital to acquire Revenue
Bonds. As of December 31, 1999, the maximum amount of capital that could be
raised under the TOP was $400 million. On December 7, 2000, the Company refined
the structure of the TOP for the primary purpose of segregating Revenue Bonds
issued by governmental entities in California from the remainder of the Revenue
Bonds under the TOP and to increase the maximum amount of capital available
under the program to $500 million.
As of December 31, 2002, the Company has contributed 83 issues of Revenue Bonds
in the aggregate par amount of approximately $704 million to CharterMac
Origination Trust I (the "Origination Trust"), a wholly owned, indirect
subsidiary of the Company. The Origination Trust then contributed 56 of its
Revenue Bonds, with an aggregate par amount of approximately $505 million, to
CharterMac Owner Trust I (the "Owner Trust") which is controlled by the Company.
The Owner Trust contributes selected bonds to specific "Series Trusts" in order
to segregate Revenue Bonds issued by governmental entities selected by state of
origin. As of December 31, 2002, four such Series Trusts were created: two
California only series and two National (non-state specific) series.
Each Series Trust issues two equity certificates: (i) a Senior Certificate,
which has been deposited into another Delaware business trust (a "Certificate
Trust") which issued and sold certificates with a floating interest rate
("Floater Certificates") representing proportional interests in the Senior
Certificate to new investors and (ii) a Residual Certificate representing the
remaining beneficial ownership interest in each Series Trust, which has been
issued to the Origination Trust. At December 31, 2002, the two California only
and two National Series Trusts had Floater Certificates with an outstanding
amount of $115 million and $341.5 million, respectively.
The Revenue Bonds remaining in the Origination Trust (aggregate principal amount
of approximately $199 million) are an additional collateral pool for the Owner
Trust's obligations under the Senior Certificate. In addition, the Owner Trust
obtained a municipal bond insurance policy from MBIA to credit enhance
Certificate distributions for the benefit of the holders of the Floater
Certificates and has also arranged for a liquidity facility, issued by a
consortium of highly rated European banks, with respect to the Floater
Certificates. The Company owns no beneficial interest in, and does not control,
the Certificate Trusts.
The effect of the TOP structure is that a portion of the interest received by
the Owner Trust on the Revenue Bonds it holds is distributed through the Senior
Certificate to the holders of the Floater Certificates with the residual
interest remitted to the Origination Trust (and thus to the benefit of the
Company) via the Residual Certificate. The effect of the December 7, 2000,
refinement of the TOP structure was to segregate the California related Floater
Certificates as they generally will pay distributions at lower rates than
National (non-state specific) Floater Certificates and thus the yield on the
Residual Certificates owned by the Origination Trust is increased.
-60-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For financial accounting and reporting purposes, the Owner Trust, which is
controlled by the Company, is consolidated. Income earned by the Owner Trust is
allocated to the minority interest in an amount equal to the distributions
through the Senior Certificate to the holders of the Floater Certificates.
The Company's cost of funds relating to the TOP (calculated interest expense
plus recurring fees as a percentage of the weighted average amount of the
outstanding Senior Certificate) was approximately 2.4%, 3.5% and 5.4% for the
years ended December 31, 2002, 2001 and 2000, respectively.
The following table shows the components of the financing arrangements.
Amount Financed
Financing Arrangement December 31, 2002 December 31, 2001
--------------------- ----------------- -----------------
P-FLOATS/RITES $215,159 $191,796
Private Label Tender
Offer Program 456,500 350,000
------- -------
Total $671,659 $541,796
======= =======
NOTE 6 -- Notes Payable
In connection with the acquisition of PWF, the Company entered into a loan
commitment (the "PWF acquisition loan"). The PWF Acquisition Loan has a term of
five years with an interest rate of LIBOR plus 2.25%. The loan is interest only
for the first twelve months. Beginning in January 2003 and through the remaining
loan term, quarterly straight-line principal amortization on the Initial Advance
is paid based on a ten-year amortization period. Additionally, after receiving
the Final Advance, additional quarterly straight-line principal amortization
payments on the Final Advance will be made based on the remaining years of the
amortization period for the Initial Advance.
At December 31, 2002, there was approximately $27.3 million outstanding on this
loan, included in notes payable in the accompanying consolidated financial
statements.
PWF has a $100 million secured, revolving mortgage warehouse facility, subject
to annual renewal during December of each year. CM Corp. is a guarantor of this
warehouse facility. The interest rate for each warehouse advance is the Fed
Funds rate plus 1.25%, which at December 31, 2002 was 2.48%. At December 31,
2001 there were no outstanding borrowings under the facility. At December 31,
2002, the amount outstanding was approximately $41.3 million. At December 31,
2002 the Company was in compliance with all covenants of the facility.
The $100 million facility replaced PWF's $50 million multi-family revolving
warehouse facility, which expired on May 31, 2002. At December 31, 2001, the
facility was temporarily increased to $160 million and had outstanding
borrowings of $29.3 million at an interest rate of 30-day LIBOR plus 1.00%,
which resets daily, with a LIBOR floor of 3%. At December 31, 2001, the interest
rate was 4.0%. Borrowings under the line of credit are collateralized by PWF's
ownership interests in the original mortgage notes. This facility was repaid
during the first quarter of 2002.
PWF was the guarantor for a $35 million loan and security agreement for Larson,
which expired on May 31, 2002. The interest rate for the agreement was the lower
of 30 day LIBOR plus 209 basis points or the 30 day Treasury Bill rate plus 205
basis points. At December 31, 2001, there were no outstanding borrowings under
the agreement.
NOTE 7 - Preferred Shares of Subsidiary
Since June 1999, the Company, through a consolidated subsidiary, has issued
multiple series of "Cumulative Preferred Shares".
Liquidation
Preferred Date of Mandatory Mandatory Number Preference Total Face Dividend
Series Issuance Tender Repurchase of Shares per Share Amount Rate
------ -------- ------ ---------- --------- --------- ------ ----
Series A 6/29/99 6/30/09 6/30/49 45 $2,000,000 $90,000,000 6.625%
Series A-1 7/21/00 6/30/09 6/30/49 48 500,000 24,000,000 7.100%
Series A-2 10/9/01 6/30/09 6/30/49 62 500,000 31,000,000 6.300%
Series A-3 6/4/02 10/31/14 10/31/52 60 500,000 30,000,000 6.800%
Series B 7/21/00 11/30/10 11/30/50 110 500,000 55,000,000 7.600%
Series B-1 10/9/01 11/30/10 11/30/50 37 500,000 18,500,000 6.800%
Series B-2 6/4/02 10/31/14 10/31/52 50 500,000 25,000,000 7.200%
In connection with the offerings of these Cumulative Preferred Shares, the
Company caused 100% of the ownership of the Origination Trust to be transferred
to CharterMac Equity Issuer Trust (the "Issuer"), a Delaware business trust and
an indirectly-owned subsidiary in which the Company owns 100% of the common
equity. The Issuer then issues the Cumulative Preferred Shares and, as a result,
the Issuer became the direct and indirect owner of the entire outstanding issue
of Revenue Bonds held by the Origination Trust and Owner Trust and its
directly-owned and indirectly-owned subsidiaries (see discussion of Private
Label Tender Option
-61-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Program, above). In addition to contributing the ownership of the Origination
Trust, the Company also contributed certain additional Revenue Bonds to the
Issuer.
Each series of Cumulative Preferred Shares has an annual preferred dividend
payable quarterly in arrears upon declaration thereof by the Board of Trustees,
but only to the extent of tax-exempt net income for the particular quarter. All
series of Cumulative Preferred Company's Shares are subject to mandatory tender
by the holders thereof for remarketing and purchase on their respective
mandatory tender dates and each remarketing date thereafter at their respective
liquidation preference per share plus an amount equal to all distributions
accrued but unpaid.
Holders of Cumulative Preferred Shares may elect to retain their shares upon
remarketing, with a distribution rate to be determined immediately prior to the
remarketing date by the remarketing agent. Each holder of Cumulative Preferred
Shares will be required to tender its shares to the Issuer for mandatory
repurchase on the mandatory repurchase date, unless the Company decides to
remarket the shares on such date. Cumulative Preferred Shares are not
convertible into Common Shares of the Company.
The Series A, A-1, A-2 and A-3 Cumulative Preferred Shares rank, with respect to
payment of distributions and amounts upon liquidation, dissolution or winding-up
of the Company, senior to all classes or series of Convertible CRA Shares,
Series B, B-1 and B-2 Cumulative Preferred Shares and Common Shares of the of
the Company. The Series B, B-1 and B-2 Subordinate Cumulative Preferred Shares
rank, with respect to payment of distributions and amounts upon liquidation,
dissolution or winding-up of the Company, senior to the Company's Common Shares
and the Company's Convertible CRA Shares and junior to the Issuer's Series A,
A-1, A-2 and A-3 Cumulative Preferred Shares.
Since issuance of the Cumulative Preferred Shares, all quarterly distributions
have been declared at each stated annualized dividend rate for each respective
series and all distributions due have been paid.
For financial accounting and reporting purposes, Cumulative Preferred Shares are
classified as "Preferred shares of subsidiary (subject to mandatory repurchase)"
in the accompanying consolidated balance sheets. Net income earned by the Issuer
and its two subsidiaries is allocated to the holders of Cumulative Preferred
Shares in an amount equal to the distributions to such holders. Such allocation
of income is classified as "Income allocated to preferred shareholders of
subsidiary" in the accompanying consolidated statements of income.
NOTE 8 - Income Taxes
The income tax provision at December 31, 2002, consisted of the following
components:
2002
----
Current:
Federal $ 1,303
State and Local 520
-------
Total current $ 1,823
Deferred (539)
-------
Total provision for income taxes $ 1,284
=======
Until December 30, 2001, PWF elected for both Federal and state income tax
purposes to be treated as an S corporation. As an S corporation, the net
earnings of PWF were taxed directly to its stockholders rather than PWF.
Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities that existed at December 31, 2002.
The Company's effective tax rate is 45.8%, due to State income taxes, net of the
Federal benefit.
The components of the deferred tax (asset), liability are as follows:
2002 2001
---- ----
Allowance for loan loss reserves $ (752) $ (1,363)
Originated mortgage service rights 12,314 11,614
Deferred guarantee fees (1,456) --
Deferred construction service fees (1,477) (1,302)
Other Deferred costs 2,161 1,165
Valuation Allowance -- 137
-------- --------
$ 10,790 $ 10,251
======== ========
NOTE 9 - Convertible Community Reinvestment Act Preferred Share Offerings
On May 10, 2000, the Company completed a private placement of approximately
$26.4 million, net of underwriters discount, of Convertible Community
Reinvestment Act Preferred Shares ("Convertible CRA Shares") to three financial
institutions (1,946,000 Convertible CRA Shares priced at $14.13 per share). On
December 14, 2000, the Company completed an additional $9,100,000 pri-
-62-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
vate placement of approximately $8.7 million, net of underwriters discount, of
Convertible CRA Shares to three additional financial institutions (644,000
Convertible CRA Shares priced at $14.13 per share). On May 24, 2001, the Company
bought back 707,636 Convertible CRA Shares, issued May 10, 2000, at $12.70 per
share for a total purchase price of approximately $9.0 million. As of December
31, 2002, the Company had outstanding, 3,835,002 Convertible CRA Shares, which
are convertible at the holders option into 3,717,301 Common Shares.
During July and November 2002, the Company issued approximately 1.4 million and
576,000 Series A Convertible CRA Shares, respectively. The shares were priced at
$17.43 and $17.37 respectively, raising net proceeds for the two issuances of
approximately $32.5 million. These Series A CRA Shares are convertible on a one
to one basis. As of December 31, 2002, there were 3,835,002 Convertible CRA
Shares outstanding, which are convertible at the holders option into 3,717,301
Common Shares.
The Convertible CRA Shares enable financial institutions to receive certain
regulatory benefits in connection with their investment. The Company has
developed a proprietary method for specially allocating these regulatory
benefits to specific financial institutions that invest in the Convertible CRA
Shares. Other than the preferred allocation of regulatory benefits, the
preferred investors receive the same economic benefits as Common Shareholders of
the Company, including receipt of the same dividends per share as those paid to
Common Shareholders. The Convertible CRA Shares have no voting rights, except on
matters relating to the terms of the Convertible CRA Shares or to amendments to
the Company's Trust Agreement which would adversely affect the Convertible CRA
Shares. The Company's earnings are allocated pro rata among the Common Shares
and the Convertible CRA Shares, and the Convertible CRA Shares rank on parity
with the Common Shares with respect to rights upon liquidation, dissolution or
winding up of the Company.
The investors, at their option, have the ability to convert their Convertible
CRA Shares into Common Shares at a predetermined conversion price. Upon
conversion, the investors will no longer be entitled to a special allocation of
the regulatory benefit. The conversion price is the greater of (i) the Company's
book value per Common Share as set forth in the Company's most recently issued
annual or quarterly report filed with the SEC prior to the respective
Convertible CRA Share issuance date or (ii) 110% of the closing price of a
Common Share on the respective Convertible CRA Share's pricing date. The
conversion price for each Convertible CRA Share offering is indicated on the
following table:
Issuance Date Conversion Price Conversion Ratio
------------- ---------------- ----------------
May 10, 2000 $15.33 0.9217
December 14, 2000 $14.60 0.9678
July 15, 2002 -- 1.0000
November 21, 2002 -- 1.0000
NOTE 10 - Related Parties
The Manager is entitled to subcontract its obligations under the Management
Agreements to an affiliate. In accordance with the foregoing, the Manager has
assigned its rights and obligations to Related.
Pursuant to the terms of the Management Agreement, the Manager is entitled to
receive the fees and other compensation set forth below:
Fees/Compensation* Amount
------------------ ------
Bond Selection Fee 2.00% of the face amount of each asset
invested in or acquired by CharterMac or its
subsidiaries.
Special Distributions/Investment
Management Fee 0.375% per annum of the total invested
assets of CharterMac or its subsidiaries.
Loan Servicing Fee 0.25% per annum based on the outstanding
face amount of revenue bonds and other
investments owned by CharterMac or its
subsidiaries.
Operating Expense Reimbursement For direct expenses incurred by the Manager
in an amount not to exceed $778,622 per
annum (subject to increase based on
increases in CharterMac's and its
subsidiaries' assets and to annual increases
based upon increases in the Consumer Price
Index).
Incentive Share Options The Manager may receive options to acquire
additional Common Shares pursuant to the
Share Option Plan only if CharterMac's
distributions in any year exceed $0.9517 per
Common Share and the Compensation Committee
of the Board of Trustees determines to grant
such options.
Liquidation Fee 1.50% of the gross sales price of the assets
sold by CharterMac in connection with a
liquidation of CharterMac assets supervised
by the Manager.
* The Manager is also permitted to earn miscellaneous compensation which may
include, without limitation, construction fees, escrow interest, property
management fees, leasing commissions and insurance brokerage fees. The payment
of any such compensation is generally limited to the competitive rate for the
services being performed. A bond placement fee of 1.0% to 1.5% of the face
amount of each asset invested in or acquired by CharterMac or its subsidiaries
is payable to the Manager by the borrower, and not by CharterMac or its
subsidiaries.
-63-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Affiliates of the Manager may provide certain financial guarantees to facilitate
leveraging by CharterMac, for which they could be paid market rate fees. In
addition, affiliates of the Manager may provide certain financial guarantees to
the owner (or partners of the owners) of the underlying properties securing
CharterMac's revenue bonds, for which they could be paid market rate fees.
The terms of each of the management agreements is one year. The management
agreements may be renewed, subject to evaluation of the performance of the
Manager by CharterMac's Board of Trustees. Both agreements may be terminated (i)
without cause by the Manager; or (ii) for cause by a majority of CharterMac's
Board of Trustees, in each case without penalty and each 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 years ended December 31, 2002, 2001 and 2000 were as
follows:
Year Ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Bond selection fees $ 11,104 $ 7,853 $ 5,996
Special distribution/
Investment Management
fee 4,872 3,621 2,743
Bond servicing fees 3,792 2,535 1,956
Expense reimbursement 768 556 432
-------- -------- --------
$ 20,536 $ 14,565 $ 11,127
======== ======== ========
In December 2001, the Company completed a credit enhancement transaction with
Merrill Lynch Capital Services, Inc. ("MLCS") pursuant to which CM Corp.
initially will receive an annual fee of approximately $1.2 million in return 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 originated by
CreditRe Mortgage Capital, LLC, an affiliate of Credit Suisse First Boston and
the Related Companies, L.P. The Related Companies, L.P. has provided CM Corp.
with an indemnity covering 50% of any losses that are incurred by CM Corp. as
part of this transaction.
As of December 31, 2002, the obligors of certain Revenue Bonds (see footnote M
to table in Note 2) are local partnerships in which investment partnerships,
whose general partners are affiliates of the Manager, own a controlling
partnership interest. With respect to one of the above Revenue Bonds, the
Company owns the RITES (see Note 5). These affiliate entities could have
interests that do not coincide with, and may be adverse to, the interests of the
Company. Negotiations, if any, with respect to modifications of Revenue Bonds
between the Company and obligors who are affiliates may be affected by these
conflicts as the Manager determines the appropriate terms and conditions of
modifications or otherwise opts for some other remedy including foreclosure.
As of December 31, 2002, the owner of the Underlying Property and obligor of the
Highpointe Revenue Bond was an affiliate of the Manager who has not made an
equity investment. This entity has assumed the day-to-day responsibilities and
obligations of the Underlying Property. Buyers are being sought who would make
equity investments in the Underlying Property and assume the nonrecourse
obligations for the Revenue Bond or otherwise buy the property and payoff all or
most of the Revenue Bond obligation.
On April 11, 2000, Related entered into an agreement to purchase $500,000 of the
outstanding face amount of the Walnut Park bonds, in $100,000 increments
annually beginning April 1, 2001. Related Capital Company has agreed, pursuant
to an Intercreditor Agreement, that its right to payment on the purchased bonds
is subordinate to the right to payment on the bonds held by the Company.
On July 18, 2002, the Company entered into two agreements with an unrelated
third party (the "Primary Guarantor") to guarantee an agreed-upon internal rate
of return ("IRR") for a pool of 11 multi-family properties owned by RCGCP for
which the Company will receive two guarantee fees totaling approximately $5.9
million.
In connection with the transaction, the Company posted $18.2 million of Revenue
Bonds as collateral to the Primary Guarantor, which will be reduced to
approximately $1.4 million over a period of up to 20 years 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
provided by TRCLP. If the Company's acquisition of Related is completed, then
this guarantee will no longer be in force. 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.
-64-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - ATEBT Merger
On November 2, 1999, the Company and ATEBT, whose manager was an affiliate of
the Manager of the Company, entered into an Agreement and Plan of Merger
providing for the merger of ATEBT into and with the Company as the surviving
trust in the merger (the "ATEBT Merger"). The ATEBT Merger was approved by the
ATEBT shareholders on September 27, 2000 and consummated on November 14, 2000.
On the ATEBT Merger consummation date, ATEBT had total assets of approximately
$29,700,000 and net assets of approximately $28,300,000. ATEBT had four Revenue
Bonds financing properties in four states, with an aggregate outstanding face
amount of $23,775,000, and with individual interest rates of 9.0%.
Pursuant to the Merger Agreement, each share of beneficial ownership in ATEBT
issued and outstanding was converted into 1.43112 Common Shares of the Company.
Following the ATEBT Merger, previous ATEBT shareholders own 2,115,722 Common
Shares (representing approximately 9.3% of the then outstanding Common Shares)
of the Company.
The ATEBT Merger was accounted for as a purchase, with the value of the
Company's Common Shares issued, plus transaction costs allocated to the net
assets acquired, based on their relative fair values. The excess of the purchase
price over the fair value of the net assets acquired, $1,482,986, was recorded
as goodwill. Interest income on the acquired Revenue Bonds is recorded from the
acquisition date.
NOTE 12 - Earnings Per Share, Profit and Loss Allocations and Distributions
Pursuant to the Company's Trust Agreement and the Management Agreement with the
Manager, the Manager is entitled, in its capacity as the general partner of the
Company, 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 payment of the special
distribution, distributions are made to the shareholders in accordance with
their percentage interests.
Income is allocated first to the Manager in an amount equal to the special
distribution. 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.
Net income per share is computed in accordance with SFAS No. 128, Earnings Per
Share. Basic income per share is calculated by dividing income allocated to
Common and Convertible CRA Shareholders ("Shareholders") (See Note 9) by the
weighted average number of Common and Convertible CRA Shares outstanding during
the period. The Convertible CRA shareholders are included in the calculation of
shares outstanding as they share the same economic benefits as Common
Shareholders, including receipt of the same dividends per share as 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 stock equivalents. The dilutive effect of outstanding stock
options is calculated using the treasury stock method. Because each Convertible
CRA Share is convertible into one or less than one common share, the potential
conversion would be antidilutive.
-65-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2002
------------------------------------
Income Shares* Per Share
Numerator Denominator Amount
--------- ----------- --------
Net income allocable to shareholders
(Basic EPS) $ 55,905 42,697,195 $ 1.31
======
Effect of Dilutive securities-223,509
stock options -- 70,944
-------- ----------
Diluted net income allocable to shareholders
(Diluted EPS) $ 55,905 42,768,139 $ 1.31
======== ========== ======
For the Year Ended December 31, 2001
------------------------------------
Income Shares* Per Share
Numerator Denominator Amount
--------- ----------- ---------
Net income allocable to shareholders
(Basic EPS) $ 35,010 30,782,161 $ 1.14
======
Effect of Dilutive securities-228,262
stock options -- 55,179
-------- ----------
Diluted net income allocable to shareholders
(Diluted EPS) $ 35,010 30,837,340 $ 1.14
======== ========== ======
For the Year Ended December 31, 2000
------------------------------------
Income Shares Per Share
Numerator Denominator Amount
--------- ----------- ---------
Net income allocable to shareholders
(Basic EPS) $ 27,074 22,140,596 $ 1.22
======
Effect of Dilutive securities-297,830
stock options -- 11,663
-------- ----------
Diluted net income allocable to shareholders $ 27,074 22,152,259 $ 1.22
(Diluted EPS) ======== ========== ======
*includes Convertible CRA Shares
NOTE 13 - Capital Stock and Share Option Plan
The Company has adopted an incentive share option plan (the "Incentive Share
Option Plan"), the purpose of which is to (i) attract and retain qualified
persons as trustees and officers and (ii) to provide incentive and more closely
align the financial interests of the Manager and its employees and officers with
the interests of the shareholders by providing the Manager with substantial
financial interest in the Company's success. The Compensation Committee of the
Company's Board of Trustees administers the Incentive Share Option Plan.
Pursuant to the Incentive Share Option Plan, if the Company's distributions per
Common Share in the immediately preceding calendar year exceed $0.9517 per
Common Share, the Compensation Committee has the authority to issue options to
purchase, in the aggregate, that number of Common Shares which is equal to three
percent of the shares (including Common Shares and Convertible CRA Shares)
outstanding as of December 31 of the immediately preceding calendar year,
provided that the Compensation Committee may only issue, in the aggregate,
options to purchase a maximum number of Common Shares over the life of the
Incentive Shares Option Plan equal to 10% of the Common Shares outstanding on
October 1, 1997 (2,058,748 Common Shares).
Subject to the limitations described in the preceding paragraph, if the
Compensation Committee does not grant the maximum number of options in any year,
then the excess of the number of authorized options over the number of options
granted in such year will be added to the number of authorized options in the
next succeeding year and will be available for grant by the Compensation
Committee in such succeeding year.
All options granted by the Compensation Committee have an exercise price equal
to or greater than the fair market value of the Common Shares on the date of the
grant. The maximum option term is ten years from the date of grant. All Common
Share options granted pursuant to the Incentive Share Option Plan may vest
immediately upon issuance or in accordance with the determination of the
Compensation Committee. Since 1999, the Company has made distributions in excess
of $0.9517, thus allowing the Compensation Committee to issue options. Three
percent of the Common Shares outstanding as of December 31, 2001, 2000 and 1999
is equal to a maximum option grant of 1,234,807, 1,044,777 and 680,950 Common
Shares, respectively. The 10% cap has been reached, therefore 2,058,748 options
are available to be issued.
On May 1, 2000, options to purchase 297,830 Common Shares were granted to
officers of the Company and certain employees of an affiliate of the Manager,
none of who are employees of the Company. The exercise price of these options is
$11.5625 per share. The term of each option is ten years. The options vest in
equal installments on May 1, 2001, 2002 and 2003. The Company has adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" for its
share options issued to non-employees. Accordingly, compensation cost is accrued
based on the estimated fair value of the options issued, and amortized over the
vesting period. Because vesting of the options is contingent upon the recipient
continuing to provide services to the Company until the vesting date, the
Company estimates the fair value of the non-employee options at each period-end
up to the vesting date, and adjusts expensed amounts accordingly. The fair value
of each option grant is estimated using the Black-Scholes option-pricing model.
The options granted on May 1, 2000 had an estimated fair value at December 31,
2002, 2001 and 2000 of $681,038, $445,752 and
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$268,047, respectively. At December 31, 2002, the fair value, was calculated
using the Black-Scholes model, used the following assumptions: dividend yield of
7.37%, estimated volatility of 20%, swap rate of 3.788% and expected lives of
7.4 years. On May 1, 2001, one-third, or 99,276, of the options vested, of which
69,568 were exercised. On May 1, 2002 an additional 99,276 options vested, of
which 4,753 were exercised, leaving a balance of 223,509. The Company recorded
compensation cost of $379,206, $168,936 and $109,952 during the years ended
December 31, 2002, 2001 and 2000, respectively, relating to these option grants.
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 twelve months ended December 31, 2002, so were not taken into
account in the calculation of diluted shares. At December 31,2002, these options
had a fair value of $33,600 based on the Black-Scholes pricing model, using he
following assumptions: dividend yield of 7.37%, estimated volatility of 20%,
swap rate of 4.22% and expected lives of 9.7 years. The Company recorded
compensation cost of $3,222 for the year ended December 31, 2002, relating to
these options.
The following table shows the number of options outstanding granted, exercised
and exercisable and the exercise price of those options.
Year Ended December 31,
--------------------------------------------------------------
2002 2001 2000
------------------- ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- --------- ---------- --------- ---------- ----------
Options outstanding at
beginning of year 228,262 $11.5625 297,830 $11.5625 -- $ --
Options granted during the
year 40,000 $ 17.56 -- $ -- 297,830 $11.5625
Options exercised during 4,753 $11.5625 69,568 $11.5625 $ --
the year --------- --------- ---------
Options outstanding at end 263,509 $11.5625 228,262 $11.5625 297,830 $ --
of year ========= ========= =========
Options exercisable at end 124,231 $11.5625 29,708 $11.5625 -- $ --
of year
Weighted-average fair value
of options granted during
the year $33,600 $ -- $268,047
The following table summarizes information about stock options outstanding at
December 31, 2002.
Options Outstanding Options Exercisable
------------------------------------------------------------------ -----------------------------
Number Weighted-Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 12/31/02 Life Price 12/31/02 Price
-------------- --------------- --------------- --------------- --------------- -------------
$11.5625 223,509 7.4 $11.5625 124,231 $11.5625
$17.56 40,000 9.7 $17.56 -- $ --
Other
Two of the Company's independent trustees are entitled to receive annual
compensation for serving as trustees in the aggregate amount of $17,500 payable
in cash (maximum of $7,500 per year) and/or Common Shares valued at their fair
market value on the date of issuance. The third independent trustee is entitled
to receive annual compensation in the aggregate amount of $30,000 payable in
cash (maximum of $20,000 per year) and/or Common Shares. As of December 31, 2002
and 2001, 1,830 and 2,001 Common Shares, respectively, having an aggregate value
on the date of issuance of $30,000 each year, were issued to the independent
trustees as compensation for services rendered during the years ended December
31, 2001 and 2000. The independent trustees also received an aggregate of 5,535
shares, worth $97,500 at the time of issuance, as payment for their work on the
special committee analyzing the proposed acquisition of Related. An additional
1,728 shares, with an aggregate value of $30,000 at issuance, were issued to the
independent trustees in January 2003 as compensation for their 2002 services.
Effective May 3, 2000, the Company implemented a dividend reinvestment and
Common Share purchase plan (the "Plan"). Under the Plan, Common Shareholders may
elect to have their distributions from the Company automatically reinvested in
additional Common Shares at a purchase price equal to the average of the high
and low market price from the previous day's trading. If a Common Shareholder
participates in the Plan, such shareholder may also purchase additional Common
Shares through quarterly voluntary cash payments with a minimum contribution of
$500. There are no commissions for Common Shares purchased under
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Plan. Participation in the Plan is voluntary and a Common Shareholder may
join or withdraw at any time. The opportunity for participation in the Plan
began with the distributions paid in August 2000.
The Board of Trustees has authorized the implementation of a Common Share
repurchase plan, enabling the Company to repurchase, from time to time, up to
1,500,000 of its Common Shares. The repurchases will be made in the open market
and the timing is dependant on the availability of Common Shares and other
market conditions. As of both December 31, 2002 and 2001, the Company had
acquired 8,400 of its Common Shares for an aggregate purchase price of $103,359
(including commissions and service charges). Repurchased Common Shares are
accounted for as treasury shares of beneficial interest.
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 14 - Selected Quarterly Financial Data (unaudited)
(Dollars in thousands)
(Unaudited)
2002 Quarter Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
------------ --------- -------------- -------------
Revenues:
Interest income:
Revenue bonds $ 22,920 $ 22,025 $ 22,819 $ 24,917
Temporary investments 220 575 303 195
Promissory notes 163 160 166 220
Mortgage banking fess 1,656 1,394 594 2,066
Mortgage servicing fees 1,853 2,009 2,050 2,059
Other income 1,991 1,897 2,152 2,009
---------- --------- -------- --------
Total revenues 28,803 28,060 28,084 31,466
---------- --------- -------- --------
Expenses:
Interest expense 3,991 3,014 3,850 4,968
Recurring fees relating
to the Private Label
Tender Option Program 727 751 811 892
Bond servicing 766 878 875 1,011
General and Administrative 5,599 5,953 4,166 5,258
Depreciation and amortization 2,240 1,760 2,024 2,867
Loss on impairment of assets -- -- 532 388
---------- --------- -------- --------
Total expenses 13,323 12,356 12,258 15,384
---------- --------- -------- --------
Income before gain (loss) on
repayment of Revenue Bonds,
gain on sale of loans and
equity in earnings of ARCap 15,480 15,704 15,826 16,082
Equity in earnings of ARCap 547 563 555 554
Gain on sale of loans 3,287 3,119 1,465 2,812
Gain (loss) on repayment of
Revenue Bonds 3,757 222 -- (94)
---------- --------- -------- --------
Income before allocation to
preferred shareholders of
subsidiary and minority interest 23,071 19,608 17,846 19,354
Income allocated to preferred
shareholders of subsidiary (3,764) (4,053) (4,724) (4,725)
Income allocated to minority
interest (302) 49 (124) (119)
---------- --------- -------- --------
Income before (provision)
benefit for income taxes 19,005 15,604 12,998 14,510
(Provision) benefit for
income taxes (181) (1,457) 656 (302)
---------- --------- -------- --------
Net income $ 18,824 $ 14,147 $ 13,654 $ 14,208
========== ========= ======== ========
Allocation of net income to:
Special distribution
to Manager $ 1,088 $ 1,240 $ 1,294 $ 1,250
========== ========= ======== ========
Manager $ 18 $ 13 $ 12 $ 13
========== ========= ======== ========
Common shareholders $ 16,866 $ 12,350 $ 11,439 $ 11,861
Convertible CRA
shareholders 852 544 909 1,084
---------- --------- -------- --------
Total shareholders $ 17,718 $ 12,894 $ 12,348 $ 12,945
========== ========= ======== ========
Net income per share:
Basic $ 0.45 $ 0.30 $ 0.28 $ 0.29
========== ========= ======== ========
Diluted $ 0.45 $ 0.30 $ 0.28 $ 0.29
========== ========= ======== ========
Weighted average shares
outstanding:
Basic 38,781,464 43,035,102 44,209,982 44,676,079
========== ========== ========== ==========
Diluted 38,845,985 43,107,175 44,282,733 44,752,197
========== ========== ========== ==========
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Dollars in thousands)
(Unaudited)
2001 Quarter Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
------------ --------- -------------- -------------
Revenues:
Interest income:
Revenue Bonds $ 16,341 $ 16,360 $ 18,819 $ 19,980
Temporary investments 224 391 270 394
Promissory notes 257 233 168 526
Other income 35 507 50 70
-------- -------- -------- ---------
Total revenues 16,857 17,491 19,307 20,970
-------- -------- -------- ---------
Expenses:
Interest expense 3,414 3,890 3,010 3,327
Recurring fees relating
to the Private
Label Tender Option Program 564 570 623 734
Bond servicing 542 595 618 699
General and Administrative 742 730 523 760
Depreciation and amortization 199 202 222 242
Loss on impairment of assets -- 400 -- --
-------- -------- -------- ---------
Total Expenses 5,461 6,387 4,996 5,762
-------- -------- -------- ---------
Income before gain (loss) on
repayment of Revenue Bonds
and equity in earnings of ARCap 11,396 11,104 14,311 15,208
Equity in earnings of ARCap -- -- -- 456
Gain (loss) on repayment
of Revenue Bonds 102 -- -- (1,014)
-------- -------- -------- ---------
Income before allocation to
preferred shareholders of
subsidiary 11,498 11,104 14,311 14,650
Income allocated to preferred
shareholders of subsidiary (2,962) (2,962) (2,962) (3,692)
-------- -------- -------- ---------
Net Income $ 8,536 $ 8,142 $ 11,349 $ 10,958
======== ======== ======== =========
Allocation of income to:
Special distribution
to manager $ 828 $ 866 $ 899 $ 1,028
======== ======== ======== =========
Manager $ 77 $ 73 $ 105 $ 100
======== ======== ======== =========
Common shareholders $ 6,850 $ 6,548 $ 10,166 $ 8,994
Convertible CRA shareholders 781 655 180 836
-------- -------- -------- ---------
Total shareholders $ 7,631 $ 7,203 $ 10,346 $ 9,830
======== ======== ======== =========
Net income per share:
Basic $ 0.30 $ 0.24 $ 0.31 $ 0.28
======== ======== ======== =========
Diluted $ 0.30 $ 0.24 $ 0.31 $ 0.28
======== ======== ======== =========
Weighted average shares outstanding
Basic 25,289,651 29,607,203 32,986,483 35,113,134
========== ========== ========== ==========
Diluted 25,350,314 29,664,418 33,038,075 35,174,365
========== ========== ========== ==========
NOTE 15 - Commitments and Contingencies
PW Funding Inc.
Through PWF, the Company originates and services multifamily mortgage loans for
Fannie Mae, Freddie Mac and FHA. PWF and its subsidiaries' mortgage lending
business is subject to various governmental and quasi-governmental regulation.
PWF and/or its subsidiaries, collectively, are licensed or approved to service
and/or originate and sell loans under Fannie Mae, Freddie Mac, Ginnie Mae and
FHA programs. FHA and Ginnie Mae are agencies of the Federal government and
Fannie Mae and Freddie Mac are federally-chartered investor-owned corporations.
These agencies require PWF and its subsidiaries to meet minimum net worth and
capital requirements and to comply with other requirements. Mortgage loans made
under these programs are also required to meet the requirements of these
programs. In addition, under Fannie Mae's DUS program, PWF has the authority to
originate loans without a prior review by Fannie Mae and is required to share in
the losses on loans originated under this program.
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The DUS program is Fannie Mae's principal loan program. Under the Fannie Mae DUS
Product Line, the Company originates, underwrites and services mortgage loans on
multifamily residential properties and sells the project loans directly to
Fannie Mae. The Company assumes responsibility for a portion of any loss that
may result from borrower defaults, based on the Fannie Mae loss sharing
formulas, Levels I, II or III. At December 31, 2002, all of the Company's loans
consisted of Level I loans. For such loans, the Company is responsible for the
first 5% of the unpaid principal balance and a portion of any additional losses
to a maximum of 20% of the original principal balance. Level II and Level III
loans carry a higher loss sharing percentage. Fannie Mae bears any remaining
loss.
Under the terms of the Master Loss Sharing Agreement between Fannie Mae and the
Company, the Company is responsible for funding 100% of mortgagor delinquency
(principal and interest) and servicing (taxes, insurance and foreclosure costs)
advances until the amounts advanced exceed 5% of the unpaid principal balance at
the date of default. Thereafter, for Level I loans, the Company may request
interim loss sharing adjustments which allow the Company to fund 25% of such
advances until final settlement under the Master Loss Sharing Agreement. No
interim loss sharing adjustments are available for Level II and Level III loans.
The Company maintains an allowance for loan losses for loans originated under
the Fannie Mae DUS product line at a level that, in management's judgment, is
adequate to provide for estimated losses. At December 31, 2002, that reserve was
approximately $4.2 million, which the Company believes represents its maximum
liability at this time. Unlike loans originated for Fannie Mae, PWF does not
share the risk of loss for loans it originates for Freddie Mac or FHA.
Credit Enhancement Transaction
In December 2001, the Company completed a credit enhancement transaction with
Merrill Lynch Capital Services, Inc ("MLCS"), as described above. Pursuant to
the terms of the transaction, CM Corp. assumes 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 CM Corp. with an
indemnity covering 50% of any losses that are incurred by CM Corp. as part of
this transaction. As the loans mature or prepay, the first loss exposure and the
fees paid to CM Corp. will both be reduced. The latest maturity date on any loan
in the portfolio occurs in 2009. The remainder of the real estate exposure after
the $46.9 million first loss position has been assumed by Fannie Mae and Freddie
Mac. In connection with the transaction, CharterMac has guaranteed the
obligations of CM Corp., and as security therefore, have posted collateral,
initially in an amount equal to 50% of the first loss amount, which may be
reduced to 40% if certain post closing conditions are met. The Company's maximum
exposure under the terms of this transaction is approximately $23.5 million.
CM Corp. performed due diligence on each property in the pool, including an
examination of loan-to-value and debt service coverage both on a current and
"stressed" basis. CM Corp. analyzed the portfolio on a "stressed" basis by
increasing capitalization rates and assuming an increase in the low floater bond
rate. As of December 31, 2002, the credit enhanced pool of properties are
performing according to their contractual obligations and the Company does not
anticipate any losses to be incurred on its guaranty. Should the Company's
analysis of risk of loss change in the future, a provision for probable loss
might be required; such provision could be material.
Fees related to the credit enhancement transaction for the year ended December
31, 2002, included in other income, were approximately $1,251,000. Income is
recognized monthly as the fees are received.
LIHTC Guarantee Transaction
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 owned by RCGCP.
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 probable losses might be required; such provision could be material.
In connection with the transaction, the Company posted $18.2 million of Revenue
Bonds as collateral to the Primary Guarantor, which will be reduced to $1.4
million over a period of up to 20 years 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
provided by TRCLP. If the Company's acquisition of Related is completed, then
this guarantee will no longer be in force. 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.
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Cancelable Leases
Minimum annual rentals under non-cancelable leases for office space are as
follows:
2003 $ 639,000
2004 536,000
2005 387,000
2006 350,000
2007 85,000
----------
$ 1,997,000
==========
Other
During December 2002, the Company entered into two transactions related to two
properties, Coventry Place and Canyon Springs. Pursuant to the terms of these
deals, the Company will provide credit support to the construction lender for
project completion and FMNA conversion and acquire subordinated bonds to the
extent the construction period bonds do not fully convert.
Up until the point of completion, the Company will guaranty the construction
lender reimbursement of any draw on its construction letter of credit up to 40%
of the stated amount of the Letter of Credit. Following completion, up until the
project loan converts to permanent loan status, the Company will guarantee the
full amount of the letter of credit.
The developer has also issued several guarantees to the construction lender,
each of which would be called upon before the Company's guarantees, and each of
which would be assigned to the Company should its guarantees are called.
Once the construction loans convert to permanent loans, the Company is obligated
to acquire subordinated loans for the amount by which each construction loan
exceeds the corresponding permanent loan, if any. The subordinated bonds will
bear interest at 10%. Under FNMA guidelines, the size of the subordinated bonds
will be limited to a 1.0x debt service coverage based on 75% of the cash flow
after the senior debt.
The Company's maximum exposure, related to these two transactions, is 40% of the
stated amount of the Letter of Credit of approximately $27 million.
Also, during December 2002, the Company entered into two transactions related to
properties known as Auburn Glenn and Cottonwood. Pursuant to the terms of the
transactions, a third party, unrelated lender will advance funds to the
developers, as needed, at a floating rate. At the completion of construction,
the Company is obligated to acquire the permanent Revenue Bonds at a
predetermined price and interest rate. These commitments create derivative
instruments under SFAS No. 133, which has been designated as a cash flow hedge
of the anticipated funding of the Revenue Bonds, and will be recorded at fair
value, with changes in fair value recorded in other comprehensive income until
the Revenue Bonds are funded. The Revenue Bonds are expected to be $18.8 million
for Auburn Glenn and $12.4 million for Cottonwood, which together represents the
Company's maximum liability.
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 material adverse impact on the Company's financial
position, results of operations or cash flows.
In connection with the PWF warehouse line, both the CharterMac and CM Corp.,
have entered into guarantees for the benefit of Fleet, guaranteeing the total
advances drawn under the line, up to the maximum of $100 million, together with
interest, fees, costs, and charges related to the PWF warehouse line.
The Company maintains, as of December 31, 2002, treasury notes of approximately
$3.0 million and a money market account of approximately $2.2 million, which is
included in restricted cash and securities in the consolidated balance sheet, to
satisfy the Fannie Mae collateral requirements of $5.2 million.
Due to the nature of the Companies' mortgage banking activities, the Company is
subject to supervision by certain regulatory agencies. Among other things, these
agencies require the Company to meet certain minimum net worth requirements, as
defined. The Company met these requirements for all agencies, as applicable, as
of December 31, 2002.
NOTE 16 - Acquisition of PW Funding, Inc.
On December 31, 2001, CM Corp. acquired 80% of the outstanding capital stock of
PWF, for approximately $34.9 million, of which, approximately $21.6 million was
financed and $7.6 million was paid in cash. Additionally, the Company repaid a
$5.7 million loan on behalf of PWF. It is anticipated that CM Corp. will acquire
the remaining 20% of the issued and outstanding capital stock of PWF over the
next 12 to 24 months. Under the agreement, the stockholders of PWF were granted
the right to put their remaining 20% stock interest to CM Corp. after an initial
period of 24 to 36 months. The agreement also grants CM Corp. the right to call
the remaining 20% stock interest of PWF from PWF's stockholders after the same
initial period of 24 to 36 months.
CharterMac is entitled to a cumulative preferential distribution from PWF's cash
available for distribution equal to 10% of its invested capital. The remaining
cash available for distribution will be distributed approximately 80% to
CharterMac and 20% to the other stockholders. CharterMac will also be entitled
to an additional cumulative priority return equal to 4.3% of its invested
capital prior to the purchase payments to PWF's stockholders on exercise of the
put or call options. The fee income generated by PWF will be taxable income.
However, CM Corp. incurs tax-deductible expenses which will be used to offset a
portion of this taxable income.
The acquisition of PWF was accounted for using the purchase method of
accounting, with approximately $7.9 million of the purchase price allocated to
mortgage service rights, based on their estimated fair value.
During 2002 and the first quarter of 2003, CM Corp. made additional payments to
the original shareholders of PWF of approximately $3.6 million ("the True-Up
payments") pursuant to the original acquisition agreement. The True-Up payments
were 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, and iv) forward
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
conversions of loans previously committed. The acquisition agreement stipulates
additional true-up payments to be made periodically for a period of up to three
years from the acquisition date.
NOTE 17 - 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 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 2002 and 2001, were 1.38% 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.
The Company adopted SFAS 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 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 December 31, 2002, these two interest rate swaps were recorded as a liability
with a combined fair market value of approximately $5.6 million, included in
interest rate derivatives on the consolidated balance sheets. Interest paid or
payable under the terms of the swaps, of approximately $3.5 million, is included
in interest expense.
The Company estimates that approximately $3.3 million of the net derivative loss
included in accumulated other comprehensive income will be reclassed into
interest expense within the next twelve months.
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
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. As of December 31, 2002, this interest rate cap was recorded
as an asset with a fair market value of $61,054 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 amount of $61,054 for the year ended December 31, 2002.
NOTE 18 - 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. Because the acquisition
of PWF took place on December 31, 2001, there was no impact on the Company's net
income, revenues or ex-
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CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
penses. Of the total assets for the Company at December 31, 2002 and 2001,
approximately $1.73 billion and $1.32 billion, respectively, are attributable to
the investing segment and approximately $124 million and $100 million,
respectively, are attributable to the operating segment.
The following table provides more information regarding the Company's segments
for the year ended December 31, 2002:
(Dollars in Thousands)
Investing Operating Total
--------- --------- -----
Revenues $ 98,208 $ 18,205 $ 116,413
Interest Revenues 94,683 3,409 98,092
Interest Expense 14,558 1,265 15,823
Depreciation and
Amortization Expense 1,131 7,760 8,891
Equity in the net
income of investees
accounted for by the
equity method 2,219 -- 2,219
Income tax expense or
benefit (214) 1,498 1,284
Total Assets 1,729,194 123,674 1,852,868
NOTE 19 - Subsequent Event
On February 28, 2003, the Company filed a preliminary proxy statement regarding
the proposed purchase of Related Capital Company. The acquisition will be
structured so that the ownership interests held by the Related principals in
both Related and the other entities which control other aspects of Related's
business will be contributed into a newly-formed, wholly-owned subsidiary of
CharterMac (the "CharterMac Sub"). The selling principals of Related include the
four executive managing partners (Stuart J. Boesky, Alan P. Hirmes, Marc D.
Schnitzer and Denise L. Kiley) and an affiliate of The Related Companies, L.P.
("TRCLP"), which is majority owned by Stephen M. Ross (the "Related
Principals"). Messrs. Boesky, Hirmes and Schnitzer and Ms. Kiley have managed
RCC over the past 15 years.
CharterMac will pay total consideration to the Related Principals of up to $338
million. The consideration will be paid as follows:
o The Initial Payment - $210 million consisting of $160 million in
special common units of the CharterMac Sub ("SCUs") and $50
million in cash (with the cash position being paid only to
TRCLP). The Initial Payment SCUs will be issued at $17.78 per
unit, which was the average closing price of CharterMac Common
Shares, for the 30 calendar days prior to this announcement (the
"Initial Payment SCUs");
o The Contingent Payment - Up to $128 million of additional SCUs
(the "Contingent Payment SCUs"), following the determination of
Related's adjusted audited earnings before interest, taxes,
depreciation and amortization, as well as certain other
adjustments, for the year ending December 31, 2002 ("Adjusted
Earnings"). The Contingent Payment SCUs will be issued in an
amount equal to 7.73x RCC 2002 Adjusted Earnings minus $210
million, subject to a cap of $338 million of total consideration.
The Contingent Payment SCUs are expected to be issued at the same
price as the Initial Payment SCUs, subject to a 17.5% symmetrical
collar.
In connection with the acquisition, CharterMac will establish a restricted share
program and will broadly issue to employees of Related, other than the Related
Principals, $15 million of CharterMac Common Shares. Following the completion of
the acquisition, TRCLP's economic interest in CharterMac will equal
approximately 19% and management and Related employees' economic interest in
CharterMac will equal approximately 11%.
On March 31, 2003, the Company entered into a $75 million secured revolving tax-
exempt bond warehouse line of credit with Fleet Securities, Inc. and Wachovia
Securities, Inc. (the "Facility"). The Facility has built in accordion feature
allowing up to a $25 million increase for a total of $100 million and a term of
two years, plus a one year extension at the Company's option. The Facility bears
interest at either 31, 60, 90, or 180-day reserve adjusted LIBOR, or prime plus
..25%.
On April 1, 2003, the Company closed on its sale of Tax-Exempt Multi-Family
Housing Trust Certificates Series 2003A (the "Trust"). Pursuant to the terms of
the Trust, the Company contributed 19 fixed-rate, tax-exempt multifamily housing
and senior housing revenue bonds collateralized by 16 different properties
totaling approximately $197 million in aggregate principal into a trust out of
which was sold $100 million in Class A Certificates to various institutional
investors. A wholly-owned indirect subsidiary of CharterMac retained the
subordinated Class B Certificates totaling approximately $97 million. CharterMac
has agreed that it will hold the Class B Certificates until the trust is
terminated. The Class A Certificates will accrue interest at the fixed rate of
3.25% per annum for two years. Distributions to the Class A Certificate holders
are expected to be made on the 15th day of each month, commencing on May 15,
2003. The Class A Certificates will be subject to mandatory tender for purchase
at a price equal to the outstanding Certificate Balance thereof plus accrued
interest thereon on March 15, 2005. If CharterMac does not exercise its option
to terminate the Trust on March 15, 2005, the Class A Certificates will be
subject to remarketing. The Class A Certificates will be subject to mandatory
tender for purchase and cancellation on the Final Distribution Date from
proceeds of the liquidation of the bonds on March 15, 2007.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Trustees and Officers
During 2002, the Board of Trustees held 23 meetings, the compensation committee
held one meeting and the audit committee held five meetings. The average
attendance in the aggregate of the total number of Board and committee meetings
was 80%.
The Trustees and Executive Officers of CharterMac are as follows:
Year First Became
Name Age Offices Held Officer/Trustee Term Expires
---- --- ------------ ----------------- ------------
Stephen M. Ross 62 Managing Trustee,
Chairman of the Board 1999 2003
Peter T. Allen 57 Managing Trustee 1997 2004
Charles L. Edson 68 Managing Trustee 2001 2005
Arthur P. Fisch 61 Managing Trustee 1997 2005
Stuart J. Boesky 45 Managing Trustee,
President, and Chief
Executive Officer 1997 2003
Alan P. Hirmes 48 Managing Trustee,
Executive Vice
President,
Secretary 1997 2005
Michael J. Brenner 57 Managing Trustee 2000 2004 1
Thomas W. White 65 Managing Trustee 2000 2005 1
Stuart A. Rothstein 37 Chief Financial Officer 2002 --
and Chief Accounting
Officer
1 In the event that the proposed acquisition of Related Capital Company is
consummated, Messrs. Brenner and White will resign from the Board of Trustees
and five additional independent trustees will be named.
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STEPHEN M. ROSS is Chairman of the board of trustees of CharterMac and is a
Member of the sole general partner of Related Charter. Mr. Ross is the founder,
Chairman, CEO and Managing General Partner of The Related Companies, LP
("TRCLP"). Mr. Ross began his career working for the accounting firm of Coopers
& Lybrand in Detroit as a tax attorney. Later, he moved to New York where he
worked for two large Wall Street investment banking firms in their real estate
and corporate finance departments before founding TRCLP in 1972. Mr. Ross
graduated from the University of Michigan School of Business Administration with
a Bachelor of Science degree and from Wayne State School of Law with a Juris
Doctor degree. He then received a Master of Law degree in Taxation from New York
University School of Law. Mr. Ross endowed the Stephen M. Ross Professor of Real
Estate at the University of Michigan. Mr. Ross is also on the board of directors
of Insignia Financial Group, Inc.
PETER T. ALLEN is a managing trustee (independent trustee) of CharterMac and is
President of Peter Allen & Associates, Inc., a real estate development and
management firm, in which capacity he has been responsible for the leasing,
refinancing and development of major commercial properties. Mr. Allen has also
been an Adjunct Professor of the Graduate School of Business at the University
of Michigan since 1981. Mr. Allen received a Bachelor of Arts Degree in
history/economics from DePauw University and a Masters Degree in Business
Administration with Distinction from the University of Michigan. Mr. Allen has
been an Independent trustee since 1997 and is a member of the Audit and
Compensation Committees. Mr. Allen also serves on the board of trustees of
American Mortgage Acceptance Company ("AMAC"), a company that is also advised by
an affiliate of Related Capital Company ("Related").
CHARLES L. EDSON is a managing trustee (independent trustee) of CharterMac. Mr.
Edson, as senior counsel of the law firm Nixon Peabody LLP, is no longer engaged
in the practice of law. From 1968 to 2002 his practice included service as
counsel to several governmental, trade and public interest entities and groups
on housing and legislative matters. He still serves as the Co-Editor-in-Chief
for the Housing and Development Reporter, a news and information service
published by The West Group. Mr. Edson is an Adjunct Professor of Law at
Georgetown University Law Center where he teaches a seminar on federally
assisted housing programs. During his career, he has served as the Transition
Director for the Department of Housing and Urban Development on President
Carter's transition staff and has also held the position of Chief in the Public
Housing Section at the Office of General Counselor at the Department of Housing
and Urban Development. Mr. Edson received a Bachelor of Arts, magna cum laude,
from Harvard College and a Juris Doctor degree from Harvard Law School.
ARTHUR P. FISCH is a managing trustee (independent trustee) of CharterMac and is
an attorney in private practice specializing in real property and securities law
since October 1987, with Arthur P. Fisch, P.C. and Fisch & Kaufman. From
1975-1987, Mr. Fisch was employed by E.F. Hutton & Company, serving as First
Vice President in the Direct Investment Department from 1981-1987 and associate
general counsel from 1975-1980 in the legal department. As First Vice President,
he was responsible for the syndication and acquisition of residential real
estate. Mr. Fisch received a B.B.A. from Bernard Baruch College of the City
University of New York and a Juris Doctor degree from New York Law School. Mr.
Fisch is admitted to practice law in New York and Pennsylvania. Mr. Fisch has
been an Independent trustee since 1997 and is a member of the Audit and
Compensation Committees. Mr. Fisch also serves on the board of trustees of AMAC.
STUART J. BOESKY is a managing trustee, President and Chief Executive Officer of
CharterMac, and President, Chief Executive Officer and a Member of the sole
general partner of Related Charter. Mr. Boesky is also Chairman of PW Funding,
Inc. Mr. Boesky is a Senior Managing Director and one of the principals of
Related, the financial services affiliate of TRCLP, where his primary areas of
responsibility are the creation, design, and implementation of Related's debt
and equity finance programs and management of all debt product origination and
loan servicing. Mr. Boesky practiced real estate and tax law with the law firm
of Shipley & Rothstein from 1984-1986, when he joined Related. From 1983-1984,
he practiced law with the Boston office of Kaye, Fialkow, Richman and Rothstein.
Previously, Mr. Boesky was a consultant at the accounting firm of Laventhol &
Horwath. Mr. Boesky graduated with high honors from Michigan State University
with a Bachelor of Arts degree and from Wayne State School of Law with a Juris
Doctor degree. He then received a Master of Laws degree in Taxation from Boston
University School of Law. Mr. Boesky is Chairman of the Board of Trustees of
AMAC. Mr. Boesky is a regular speaker at industry conferences and on television.
Mr. Boesky is also a member of the board of directors of the National
Association of Affordable Housing Lenders. Biographical information with respect
to Mr. Boesky is listed in the "Trustees and Officers" section above.
ALAN P. HIRMES is a managing trustee, the Executive Vice President and the
Secretary of CharterMac, and is a Senior Vice President and a Member of the sole
general partner of Related Charter. Mr. Hirmes is also a principal and a Senior
Managing Director of Related, where he is responsible for overseeing the
finance, accounting and investor services departments and the joint venture
development program. Mr. Hirmes has been a Certified Public Accountant in New
York since 1978. Prior to joining Related in October 1983, Mr. Hirmes was
employed by Weiner & Co., certified public accountants. Mr. Hirmes graduated
from Hofstra University with a Bachelor of Arts degree. Mr. Hirmes also serves
on the board of trustees of AMAC.
MICHAEL J. BRENNER is a managing trustee, and is the Executive Vice President
and Chief Financial Officer of TRCLP. Prior to joining TRCLP in 1996, Mr.
Brenner was a partner with Coopers & Lybrand, having served as managing partner
of its Industry Programs and Client Satisfaction initiatives from 1993-1996,
managing partner of the Detroit group of offices from 1986-1993 and Chairman of
its National Real Estate Industry Group from 1984-1986. Mr. Brenner graduated
summa cum laude from the University of Detroit with a Bachelors degree in
Business Administration and from the University of Michigan with a Masters of
Business Administration, with distinction.
THOMAS W. WHITE is a managing trustee. Mr. White retired as a Senior Vice
President of Fannie Mae in the multi-family activities department, where he was
responsible for the development and implementation of policies and procedures
for all Fannie Mae multi-family programs, including the delegated underwriting
and servicing program, prior approval program and negotiated swap and negotiated
cash purchases product lines. He was also responsible for asset management of
multi-family loans in portfolio or Mortgage-Backed Securities. Mr. White joined
Fannie Mae in November 1987 as director of multi-family product management. He
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was elected Vice President for multi-family asset acquisition in November 1998
and assumed his position of Senior Vice President in November 1990. Prior to
joining Fannie Mae, he served as an investment banker with Bear Stearns, Inc. He
also was the executive vice president of the National Council of State Housing
Agencies; chief underwriter for the Michigan State Housing Development
Authority; and served as a state legislator in the state of Michigan. In July
2001, CM Corp. hired Mr. White as a consultant.
STUART A. ROTHSTEIN is an Executive Vice President and Chief Financial Officer
of CharterMac and is an Executive Vice President and Chief Financial Officer of
the general partner of Related Charter. Prior to joining Related in September
2002, Mr. Rothstein was Chief Financial Officer at Spieker Properties, a San
Francisco-based office real estate investment trust (REIT) with over $7 billion
in real estate assets and $850 million in revenues. At Spieker Properties, Mr.
Rothstein was responsible for developing and implementing all aspects of the
company's corporate financial strategy, including executing over $4.0 billion in
capital raising transactions, which included public and private debt and equity
offerings and structured transactions. Mr. Rothstein's past experience also
includes a position as manager with Price Waterhouse. Mr. Rothstein graduated
from Pennsylvania State University with a Bachelor of Science degree in
Accounting and received his Masters in Business Administration from Stanford
Graduate School of Business. Mr. Rothstein is a Certified Public Accountant in
the State of New York.
Committees of the Board of Trustees
The Board of Trustees has standing Audit and Compensation Committees. The Audit
Committee's duties include the review and oversight of all transactions with
affiliates of CharterMac, the periodic review of CharterMac's financial
statements and meetings with CharterMac's independent auditors. The Audit
Committee is comprised of Messrs. Allen, Fisch and Edson and had five meetings
during CharterMac's fiscal year ended December 31, 2002. The Audit Committee
must have at least three members, all of whom must be Independent Trustees.
The Compensation Committee's duties include the determination of compensation,
if any, of CharterMac's executive officers and of the Manager and the
administration of CharterMac's Incentive Share Option Plan (the "Share Option
Plan"). The Compensation Committee is comprised of Messrs. Allen and Fisch and
they held one meeting during CharterMac's fiscal year ended December 31, 2002.
The Compensation Committee must have at least two members, each of whom must be
Independent Trustees.
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Related Charter, LP
The directors and executive officers of Related Charter LLC, the sole general
partner of Related Charter, are set forth below. These officers of the sole
general partner of Related Charter may also provide services to CharterMac on
behalf of Related Charter. The executive officers of Related Charter, LLC are
the exact same as the executive officers of CM Corp.
Year First Became
Name Age Offices Held Officer/Member
---- --- ------------ --------------
Stuart J. Boesky 45 Member, President, and 1997
Chief Executive Officer
Alan P. Hirmes 48 Member, 1997
Executive Vice
President,
Secretary
Stephen M. Ross 62 Member, 1999
Chairman of the Board
Stuart A. Rothstein 37 Executive Vice President 2002
and Chief Financial
Officer
Denise L. Kiley 43 Senior Vice President 1997
Marc D. Schnitzer 42 Senior Vice President 1997
James D. Spound 42 Executive Vice President 1998
Steven B. Wendel 40 Senior Vice President 1999
John Sorel 42 Senior Vice President 1999
Gary Parkinson 53 Controller 2000
Teresa Wicelinski 37 Secretary 1998
Biographical information with respect to Messrs. Boesky, Hirmes, Ross and
Rothstein is set forth above.
DENISE L. KILEY is a Senior Vice President of the sole general partner of
Related Charter and a Managing Director and principal of RCC and Director of its
Asset Management Division. Ms. Kiley is responsible for overseeing due diligence
and asset management of multi-family residential properties invested in Related
sponsored corporate, public and private equity and debt funds. Prior to joining
Related in 1990, Ms. Kiley was a First Vice President with Resources Funding
Corporation where she was responsible for acquiring, financing, and asset
managing multi-family residential properties. Previously, she was an auditor
with Price Waterhouse. Ms. Kiley is a member of the National Association of Home
Builders and the National Housing and Rehabilitation Association. She received a
Bachelor of Science Degree in accounting from the Carroll School of Management
at Boston College.
MARC D. SCHNITZER is a Senior Vice President of the sole general partner of
Related Charter and a Managing Director and principal of Related. Mr. Schnitzer
directs Related's tax credit group, which has invested in excess of $4.5 billion
in affordable housing tax credit properties since 1987, and is responsible for
structuring and marketing Related's institutional tax credit offerings. Mr.
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Schnitzer is a frequent speaker at industry conferences sponsored by the
National Council of State Housing Agencies, the National Housing and
Rehabilitation Association and the National Association of Homebuilders. He is a
member of the Executive Committee of the Board of Directors of the National
Multi-Housing Council and a Vice President and member of the Executive Committee
of the Affordable Housing Tax Credit Coalition. Mr. Schnitzer joined Related in
1988 after receiving his Masters of Business Administration degree from The
Wharton School of the University of Pennsylvania in 1987. From 1983 to 1986, Mr.
Schnitzer was a Financial Analyst with First Boston Corporation, an
international investment bank. Mr. Schnitzer received a Bachelor of Science
degree in business administration, summa cum laude, from the Boston University
School of Management in 1983.
JAMES D. SPOUND is an Executive Vice President of the sole general partner of
Related Charter with primary responsibility for revenue bond acquisitions. He
joined Related from First Union Capital Markets, in February 1998, where he was
a Vice President specializing in affordable housing finance. From 1992 to 1996,
Mr. Spound served as an investment banker in the Housing Finance Department at
Merrill Lynch & Co., where he was a Vice President at the time of his departure.
Previously, Mr. Spound was also a Senior Consultant at Kenneth Leventhal &
Company where he focused on debt restructurings in the real estate industry. In
addition, he served for three years as a Project Manager at New York City's
Economic Development Corporation where he was responsible for underwriting and
administering incentive loans to support the City's economic development goals.
Mr. Spound received a Bachelor of Arts degree from Brown University and a
Masters of Science in Management from the Sloan School at MIT.
STEVEN B. WENDEL is a Senior Vice President of Related Charter and a Senior Vice
President of Related, focusing on taxable mortgage financing for multi-family
properties. Prior to joining Related in June, 1999, Mr. Wendel was a Managing
Director of the commercial loan origination and securitization program at
ContiFinancial Corporation, which originated approximately $2.6 billion of
commercial loans. From 1989-1992, Mr. Wendel was a senior associate of the
structured finance/MBA rotational program at Coopers & Lybrand. From 1987-1989,
he was a consultant at Martin E. Segal Company, and from 1984-1987, he was a
pricing analyst at Metropolitan Life Insurance Company. Mr. Wendel received his
Bachelor of Arts in economics from the University of Pennsylvania and his
Masters in Business Administration from the Stern School of Business
Administration at New York University.
GARY PARKINSON is the Controller of the sole general partner of Related Charter.
Mr. Parkinson has been a Certified Public Accountant in New York since 1987.
Prior to joining Related in September 2000, Mr. Parkinson was employed by
American Real Estate Partners, L.P. from July 1991 to September 2000, Integrated
Resources, Inc. from August 1988 to July 1991 and Ernst & Young from September
1984 to August 1988. Mr. Parkinson graduated from Northeastern University and
The Johnson Graduate School of Business at Cornell University.
TERESA WICELINSKI is the Secretary of the sole general partner of Related
Charter. Ms. Wicelinski joined Related in June 1992, and prior to that date was
employed by Friedman, Alprin & Green, certified public accountants. Ms.
Wicelinski graduated from Pace University with a Bachelor of Arts Degree in
Accounting.
PW Funding, Inc.
On December 24, 2001, CM Corp. acquired approximately 80% of the outstanding
capital stock of PW Funding, Inc. ("PWF"), a mortgage banking firm specializing
in multi-family housing.
PW Funding has its own management team, the executive officers of
which are listed below:
Year First Became
Name Age Office Held Officer/Trustee
---- --- ----------- -----------------
Stuart J. Boesky 45 Chairman 2001
Raymond J. Reisert, Jr. 61 Chief Executive Officer 1991
William T. Hyman 45 Executive Vice President 1991
Larry N. Volk 55 Executive Vice President & 1993
Secretary
Katherine B. Schnur 40 Executive Vice President 2001
Peter J. Reisert 32 Senior Vice President 1997
Lawrence Cohen 45 Controller 2002
Biographical information with respect to Mr. Boesky is listed in the "Trustees
and Officer's" section above
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RAYMOND J. REISERT, JR. is the Chief Executive Officer of PWF, a member of the
Board of Directors and serves on the PWF Loan Committee. He is also actively
involved in the company's strategic and financial planning and PWF's working
relationships with Fannie Mae and Freddie Mac. Mr. Reisert started PWF as an FHA
Lender and directed its entry into the Fannie Mae Delegated Underwriting and
Servicing Product Line ("DUS") as one of the original lenders in that program.
During his tenure, PWF acquired Larson Financial Resources, a major Freddie Mac
Program Plus and Insurance Company Correspondent. Prior to joining PWF, Mr.
Reisert was a Managing Director in PaineWebber's Municipal Securities Group.
Prior to joining PaineWebber, Mr. Reisert was Vice President of Finance and
Treasurer of United Health Services. Mr. Reisert started his career at Coopers &
Lybrand in the Consulting Division where he specialized in economic feasibility
and financial planning studies. Mr. Reisert received a Bachelors in Business
Administration from Iona College and a Masters in Business Administration from
New York University. Mr. Reisert is a member of the Executive Board of American
Seniors Housing Association, the National Multi-family Housing Council, The DUS
Lenders' Advisory Council and the Mortgage Bankers Association of America
("MBAA"). Mr. Reisert also serves on the MBAA's Commercial Board of Governors
and is the current chair of the Multi-family Steering Committee. Mr. Reisert is
the father of Peter Reisert.
WILLIAM T. HYMAN was named Executive Vice President of Underwriting and National
Origination at PWF in 2001. Mr. Hyman has been with PWF since 1989 and was PWF's
Chief Underwriter from 1993 until he was named Chief Operating Officer in 2000.
During his tenure as Chief Underwriter, Mr. Hyman was responsible for the
approval of mortgage loans totaling in excess of $800 million. Mr. Hyman was
also responsible for the management of the Firm's multi-family loan processing
and underwriting activities. In 1993, he was appointed Chief Underwriter for the
Fannie Mae Delegated Underwriting and Servicing Program. In addition to his
Fannie Mae responsibilities, Mr. Hyman developed the underwriting standards and
procedures for the Firm's Conduit Program. Prior to joining PWF, Mr. Hyman was a
Vice President with L.F. Rothschild & Co.'s corporate finance department. Prior
to that, Mr. Hyman was with PaineWebber Incorporated as an associate in the
municipal finance healthcare group. Mr. Hyman holds a Bachelor of Arts degree
with a major in architecture from Yale University and a Masters degree in
business administration from Washington University in St. Louis. Mr. Hyman
served on the Fannie Mae DUS Business Model Task Force in 2000 and currently
serves on the DUS Advisory Council Subcommittee for Product Development.
LARRY N. VOLK is Executive Vice President, General Counsel and Corporate
Secretary of PWF and Assistant to the President. Mr. Volk has been with PWF
since early 1993 and served in his current capacity since early 2001. Mr. Volk
has been actively engaged in commercial mortgage finance since 1981. Mr. Volk
served on both the business side and as general counsel for various New York
State agencies during the 1980's. Prior to joining PWF, Mr. Volk spent three
years in Washington, D.C. serving the U.S. Department of Housing and Urban
Development in the office of the Assistant Secretary for Housing-Federal Housing
Commissioner. He was also a founding partner of a Washington-based investment
banking firm, and then Policy and Program Director for the trade association of
state housing finance agencies. Mr. Volk is a graduate of Clarkson College of
Technology, was valedictorian of his class at Albany Law School, and holds an
MBA from Rensselaer Polytechnic Institute.
KATHERINE B. SCHNUR is Executive Vice President of operations for PWF. She is
responsible for servicing, closing, personnel and administrative and information
management functions for PWF and its subsidiaries. Ms. Schnur joined LFR's
servicing department in June 1988. In January 1992, Ms. Schnur was promoted to
the position of Vice President, Loan Administration. In 1994, Ms. Schnur became
the Vice President, Loan Closing and Underwriting and was promoted to Senior
Vice President in August, 1995. In January 1997, Ms. Schnur helped create the
Specialty Finance Department. In April 2001, Ms. Schnur was promoted to Chief
Operating Officer. Prior to joining LFR, she was a manager in the Corporate
Sales Division with Blue Cross/Blue Shield of New Jersey where she had
responsibility for computer software and managing the sales support staff. Ms.
Schnur has been an active member of both the New Jersey Mortgage Bankers
Association and the Mortgage Bankers Association of America, and has chaired or
vice-chaired a number of committees. She was chosen to participate in the MBA of
America's inaugural class of Future Leaders in 1997. She is past president and
Board member of Children on the Green in Morristown, NJ. Ms. Schnur holds a
Bachelor of Arts in Psychology and Economics from Lafayette College.
PETER J. REISERT is Senior Vice President of Capital Markets, New Product
Development, and Corporate Marketing and Advertising of PWF. Mr. Reisert
coordinates PWF's new product development with CharterMac, The Related
Companies, Fannie Mae and Freddie Mac. He also runs PWF's pricing and trading
desk where he is responsible for the trading of securities including mortgages
(Fannie Mae DUS/MBS, FHA Whole Loans and Ginnie Mae securities), discount notes
and US Treasuries. During his tenure, Mr. Reisert formalized trading and pricing
procedures and developed relationships with numerous institutional investors.
Mr. Reisert is a current member of the PWF loan committee. Mr. Reisert served on
PWF's Board of Directors prior to its sale to CharterMac in 2001. Prior to
joining PWF, Mr. Reisert was employed by Arbor National Mortgage where he worked
on the mortgage-trading desk in a variety of roles. He earned a Bachelor of Arts
degree from Providence College and a Masters degree in business administration
from Hofstra University. In 2002, Mr. Reisert was chosen to participate in the
Mortgage Banker's Association of America's Future Leader's leadership program.
Mr. Reisert is the son of Raymond Reisert.
LAWRENCE COHEN is Senior Vice President and Controller of PWF. Mr. Cohen joined
PWF in May 2000. As Controller, Mr. Cohen is responsible for directing the
accounting and financial management activities, including preparation of
financial statements and the business plan. Mr. Cohen is responsible for
negotiating credit lines and letters of credit for financings under the FHA,
Fannie Mae, Freddie Mac, Ginnie Mae and Conduit loan programs. Mr. Cohen manages
PWF's working capital position and the investment of PWF's own, as well as its
clients', funds. Prior to joining PWF, Mr. Cohen held key financial positions
with Value Line Inc., Kaplan Educational Centers and Primedia Inc. Mr. Cohen
received a Bachelor of Arts in Accounting from Queens College.
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Management Agreements
CM Corp. and Related Charter provide CharterMac services pursuant to management
agreements between (i) CM Corp. and CharterMac and (ii) Related Charter and
CharterMac. Collectively, CM Corp. and Related Charter are referred to as the
"Manager". Pursuant to these agreements, the Manager is obligated to use its
best efforts to seek out and present to CharterMac, whether through its own
efforts or those of third parties retained by it, suitable and a sufficient
number of investment opportunities which are consistent with the investment
policies and objectives of CharterMac and consistent with such investment
programs as the Board of Trustees may adopt from time to time in conformity with
CharterMac's Trust Agreement.
Although the Board of Trustees has continuing exclusive authority over the
management of CharterMac, the conduct of its affairs and the management and
disposition of CharterMac's assets, the Board of Trustees has initially
delegated to the Manager, subject to the supervision and review of the Board of
Trustees and consistent with the provisions of the Trust Agreement, the power
and duty to: (i) manage the day-to-day operations of CharterMac; (ii) acquire,
retain or sell CharterMac's assets; (iii) seek out, present and recommend
investment opportunities consistent with CharterMac's investment policies and
objectives, and negotiate on behalf of CharterMac with respect to potential
investments or the dispositions thereof; (iv) when appropriate, cause an
affiliate to serve as the mortgagee of record for mortgage investments of
CharterMac and in that capacity hold escrow on behalf of mortgagors in
connection with the servicing of mortgages; (v) obtain for CharterMac such
services as may be required in acquiring and disposing of investments,
disbursing and collecting the funds of CharterMac, paying the debts and
fulfilling the obligations of CharterMac, and handling, prosecuting and settling
any claims of CharterMac, including foreclosing and otherwise enforcing
mortgages and other liens securing investments; (vi) obtain for CharterMac such
services as may be required for property management, mortgage brokerage and
servicing, and other activities relating to the investment portfolio of
CharterMac; (vii) evaluate, structure and negotiate prepayments or sales of
CharterMac's mortgage investments and mortgage securities; (viii) monitor
operations and expenses of CharterMac; and (ix) from time to time, or as
requested by the Board of Trustees, make reports to CharterMac as to its
performance of the foregoing services.
The terms of each of the management agreements is one year. Both of the
management agreements may be renewed, subject to evaluation of the performance
of the Manager by CharterMac's Board of Trustees. Both agreements may be
terminated (i) without cause by the Manager; or (ii) for cause by a majority of
CharterMac's Board of Trustees, in each case without penalty and each upon 60
days prior written notice to the non-terminating party.
The Manager is entitled to subcontract its obligations under the Management
Agreements to an affiliate. In accordance with the foregoing, the Manager has
assigned its rights and obligations to Related Capital.
Pursuant to the terms of the Management Agreement, the Manager is entitled to
receive the fees and other compensation set forth below:
Fees/Compensation* Amount
------------------ ------
Bond Selection Fee 2.00% of the face amount of each asset
invested in or acquired by CharterMac or its
subsidiaries.
Special Distributions/Investment 0.375% per annum of the total invested
Management Fee assets of CharterMac or its subsidiaries.
Loan Servicing Fee 0.25% per annum based on
the outstanding face amount of revenue bonds
and other investments owned by CharterMac or
its subsidiaries.
Operating Expense Reimbursement For direct expenses incurred by the Manager
in an amount not to exceed $778,622 per
annum (subject to increase based on
increases in CharterMac's and its
subsidiaries' assets and to annual increases
based upon increases in the Consumer Price
Index).
Incentive Share Options The Manager may receive options to acquire
additional Common Shares pursuant to the
Share Option Plan only if CharterMac's
distributions in any year exceed $0.9517 per
Common Share and the Compensation Committee
of the Board of Trustees determines to grant
such options.
Liquidation Fee 1.50% of the gross sales price of the assets
sold by CharterMac in connection with a
liquidation of CharterMac assets supervised
by the Manager.
* The Manager is also permitted to earn miscellaneous compensation which may
include, without limitation, construction fees, escrow interest, property
management fees, leasing commissions and insurance brokerage fees. The payment
of any such compensation is generally limited to the competitive rate for the
services being performed. A bond placement fee of 1.0% to 1.5% of the face
amount of each asset invested in or acquired by CharterMac or its subsidiaries
is payable to the Manager by the borrower, and not by CharterMac or its
subsidiaries.
Affiliates of the Manager may provide certain financial guarantees to facilitate
leveraging by CharterMac, for which they could be paid market rate fees. In
addition, affiliates of the Manager may provide certain financial guarantees to
the owner (or partners of the owners) of the underlying properties securing
CharterMac's revenue bonds, for which they could be paid market rate fees.
-81-
The Manager may engage in other business activities related to real estate,
mortgage investments or other investments whether similar or dissimilar to those
made by CharterMac, or act as manager to any other person or entity having
investment policies whether similar or dissimilar to those of CharterMac. Before
the Manager, the officers and directors of the Manager and all persons
controlled by the Manager and its officers and directors may take advantage of
an opportunity for their own account or present or recommend it to others, they
are obligated to present such investment opportunity to CharterMac if (i) such
opportunity is of a character which could be taken by CharterMac, (ii) such
opportunity is compatible with CharterMac's investment objectives and policies
and (iii) CharterMac has the financial resources to take advantage of such
opportunity.
The Trust Agreement and Management Agreement provide that CharterMac will
indemnify the Manager and its affiliates under certain circumstances.
Related Charter has been designated the "Tax Matters Partner" to manage
administrative tax proceedings conducted at CharterMac's level by the IRS with
respect to company matters. Related Charter will also serve as the general
partner of CharterMac for tax purposes.
Item 11. Executive Compensation
Trustees and Management
CharterMac has three executive officers and eight Trustees (three of whom are
Independent Trustees). CharterMac does not pay or accrue any fees, salaries or
other forms of compensation to its officers other than options which may be
received under the Share Option Plan. Independent Trustees receive compensation
for serving as Independent Trustees. Mr. Edson receives compensation at the rate
of $30,000 per year, payable $20,000 in cash (or, at Mr. Edson's option, Common
Shares) and Common Shares having an aggregate value of $10,000, based on the
fair market value at the date of issuance, in addition to an expense
reimbursement for attending meetings of the Board of Trustees. Messrs. Allen and
Fisch receive compensation at the rate of $17,500 per year payable $7,500 in
cash (or, at Messrs. Allen's or Fisch's option, Common Shares) and Common Shares
having an aggregate value of $10,000, based on the fair market value at the date
of issuance, in addition to an expense reimbursement for attending meetings of
the Board of Trustees. In addition, Messrs. Fisch, Allen and Edson each are
receiving compensation for serving on the special committee of the Board of
Trustees in connection with the proposed acquisition of a Related. For the year
ended December 31, 2002, Mr. Fisch, who served as Chairman of the special
committee, received in total $75,000, of which $37,500 was in cash and $37,500
was in Common Shares. Messrs. Allen and Edson each received in total $60,000, of
which $30,000 was in cash and $30,000 was in Common Shares. CharterMac has
agreed to pay the members of the special committee the same compensation in
2003, prorated from the period January 1, 2003 until the proposed acquisition is
consummated.
The Manager, at its expense, provides all personnel necessary to conduct
CharterMac's regular business. The Manager receives various fees for advisory
and other services performed under the Management Agreement. An affiliate of the
Manager pays all salaries, bonuses and other compensation (other than options
which may be received under the Share Option Plan) to the officers of CharterMac
and the general partner of the Manager. Certain members and officers of the sole
general partner of the Manager and certain officers of CharterMac receive
compensation from the Manager and its affiliates for services performed for
various affiliated entities, which may include services performed for
CharterMac. Such compensation may be based in part on the performance of
CharterMac; however, the Manager believes that any compensation attributable to
services performed for CharterMac is immaterial.
Share Option Plan
The Share Option Plan was adopted to attract and retain qualified individuals to
serve as trustees, officers and/or employees of CharterMac, its subsidiaries,
the Manager and any successor manager, as well as to harmonize the financial
interests of such individuals with the interests of the Company's shareholders
generally (i.e., by providing them with substantial financial interests in the
Company's success). The Compensation Committee, which is comprised of Messrs.
Allen and Fisch, administers the Share Option Plan. Pursuant to the Share Option
Plan, if CharterMac's distributions per Common Share in the immediately
preceding calendar year exceed $0.9517 per Common Share, the Compensation
Committee has the authority to issue options to purchase, in the aggregate, that
number of Common Shares which is equal to three percent of the Common Shares
outstanding as of December 31 of the immediately preceding calendar year (or in
the initial year, as of October 1, 1997), provided that the Compensation
Committee may only issue, in the aggregate, options to purchase a maximum number
of Common Shares over the life of the Share Option Plan equal to 2,058,683
Common Shares (i.e., 10% of the Common Shares outstanding on October 1, 1997.)
Subject to the limitations described in the preceding paragraph, if the
Compensation Committee does not grant the maximum number of options in any year,
then the excess of the number of authorized options over the number of options
granted in such year will be added to the number of authorized options in the
next succeeding year and will be available for grant by the Compensation
Committee in such succeeding year.
All options granted by the Compensation Committee will have an exercise price
equal to or greater than the fair market value of the Common Shares on the date
of the grant. The maximum option term is ten years from the date of grant. All
Common Share options granted pursuant to the Share Option Plan may vest
immediately upon issuance or in accordance with the determination of the
Compensation Committee. No options were granted for the years ended December 31,
1997 or December 31, 1998. In 1999, CharterMac distributed $0.995 per Common
Share. On May 1, 2000 the compensation committee issued 297,830 options to
employees of affiliates of the Manager.
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In 2000, 2001 and 2002, CharterMac distributed $1.07, $1.14 and $1.26 per share,
respectively, thus enabling the Compensation Committee to issue options under
the Share Option Plan for each of those years. In 2002, the compensation
committee issued 40,000 options to Mr. Rothstein. The following table sets forth
information concerning the grant of share options to Mr. Rothstein during the
last fiscal year:
Percentage
of
total
options
granted Potential realized
to value at assumed
employees Per annual rates of
in Share stock appreciation
Options fiscal exercise Expiration at the end of 10
Name Title Granted 1 year price Date years 2
---- ----- ------- ---------- -------- ---------- ------------------
5% 10%
------ -------
Stuart A. Chief 40,000 100% $17.56 9/18/12 $429,356 $1,099,732
Rothstein Financial
Officer
1 Options become exercisable one-third on each of the first three
anniversaries of the date of grant.
2 Assumed annual rates of share price appreciation, as determined by the
rules of the Commission, for illustrative purposes only. Actual share
prices will vary from time to time based upon market factors and the
Company's financial performance. No assurance can be given that such rates
will be achieved.
Report of the Compensation Committee
The Compensation Committee is comprised of two Independent Trustees (Messrs.
Allen and Fisch). The role of the Compensation Committee is to administer the
policies governing the Share Option Plan. Because CharterMac does not pay
salaries and bonuses to the officers of CharterMac or the general partner of the
Manager, the Compensation Committee does not determine executives' salary
levels. Subject to the restrictions contained in the Share Option Plan, option
compensation is intended to be set at a level competitive with the amounts paid
to the management of similarly sized companies in similar industries. The
Committee also evaluates the performance of management when determining the
number of options to be issued.
CharterMac's grants of share options are structured to link the compensation of
the officers of CharterMac and the officers of the general partner of the
Manager (and its affiliates) with CharterMac's performance. Through the
establishment of the Share Option Plan, CharterMac has aligned the financial
interests of its executives (and the executives of the Manager) with the results
of CharterMac's performance, which is intended to enhance shareholder value. The
Compensation Committee may only grant options if certain performance levels are
met and is limited in the number of options which may be granted each year (See
"Share Option Plan" above). The amount of options which may be granted will be
set at levels that the Compensation Committee believes to be consistent with
others in CharterMac's industry, with such compensation contingent upon
CharterMac's level of annual and long-term performance.
Section 162 (m) was added to the Internal Revenue Code as part of the Omnibus
Budget Reconciliation Act of 1993. Section 162 (m) limits the deduction for
compensation paid to the Chief Executive Officer and the other executive
officers to the extent that compensation of a particular executive exceeds
$1,000,000 (less the amount of any "excess parachute payments" as defined in
Section 280G of the Code) in any one year. However, under Section 162(m), the
deduction limit does not apply to certain "performance-based" compensation
established by an independent compensation committee which conforms to certain
restrictive conditions stated under the Code and related regulations. It is
CharterMac's goal to have compensation paid to its five most highly compensated
officers qualify as performance based compensation deductible for federal income
tax purposes under Section 162 (m). Given the fact that CharterMac is externally
managed and the only compensation that currently may be paid to its executives
are options pursuant to the Share Option Plan, it is unlikely that Section 162
(m) will present any concerns.
-83-
COMPENSATION COMMITTEE
Peter T. Allen
Arthur P. Fisch
AUDIT COMMITTEE
Audit Committee Charter
On June 14, 2000, the Board of Trustees adopted the following Audit Committee
Charter. The Audit Committee Charter will be reviewed, updated and approved by
the Board of Trustees each year:
Role and Independence
The audit committee, of the Board of Trustees of Charter Municipal Mortgage
Acceptance Company (the "Company"), assists the Board in fulfilling its
responsibility for oversight of the quality and integrity of the accounting,
auditing and reporting practices of the Company and other such duties as
directed by the Board. The membership of the Company's audit committee (the
"Committee") shall consist of at least three Trustees who are generally
knowledgeable in financial and auditing matters, including at least one member
with accounting or related financial management expertise. Each member shall be
free of any relationship that, in the opinion of the Board, would interfere with
his or her individual exercise of independent judgment, and shall meet the
director independence requirements for serving on the Committee as set forth in
the corporate governance standards of the American Stock Exchange. The Committee
is expected to maintain free and open communication (including private executive
sessions at least annually) with the independent accountants, the internal
auditors, if any, and the management of the Company. In discharging this
oversight role, the Committee is empowered to investigate any matter brought to
its attention, with full power to retain outside counsel or other experts for
this purpose.
The Board of Trustees shall appoint one member of the Committee as chairperson.
He or she shall be responsible for leadership of the Committee, including
preparing the agenda, presiding over the meetings, making Committee assignments
and reporting to the Board of Trustees. The chairperson will also maintain
regular liaison with the CEO, CFO, and the lead independent audit partner.
Responsibilities
The Committee's primary responsibilities include:
Recommending to the Board the independent accountant to be selected or retained
to audit the financial statements of the Company. In so doing, the Committee
will request from the auditor a written affirmation, consistent with
Independence Standards Board Standard 1, that the auditor is in fact
independent, discuss with the auditor any relationships that may impact the
auditor's independence, and recommend to the board any actions necessary to
oversee the auditor's independence.
Overseeing the independent auditor relationship by discussing with the auditor
the nature and rigor of the audit process, receiving and reviewing audit
reports, and providing the auditor full access to the Committee (and the Board)
to report on any and all appropriate matters.
Reviewing the audited financial statements and discussing them with management
and the independent auditor. These discussions shall include consideration of
the quality of the Company's accounting principles as applied in its financial
reporting, including review of estimates, reserves and accruals, review of
judgmental areas, review of audit adjustments whether or not recorded and such
other inquiries as may be appropriate. Based on the review, the Committee shall
make its recommendation to the Board as to the inclusion of the Company's
audited financial statements in the Company's annual report on Form 10-K.
Reviewing with management and the independent auditor the quarterly financial
information prior to the Company's filing of Form 10-Q. This review may be
performed by the Committee or its chairperson.
Discussing with management, the internal auditors, if any, and the external
auditors the quality and adequacy of the Company's internal controls.
Discussing with management the status of pending litigation, taxation matters
and other areas of oversight to the legal and compliance area as may be
appropriate.
Reporting Committee activities to the full Board and issuing annually a report
to be included in the proxy statement (including appropriate oversight
conclusions) for submission to the shareholders.
The Committee's job is one of oversight. Management is responsible for the
preparation of the Company's financial statements and the independent auditors
are responsible for auditing those financial statements. The Committee and the
Board recognize that management (including the internal audit staff, if any) and
the independent auditors have more resources and time, and more detailed
knowledge and information regarding the Company's accounting, auditing, internal
control and financial reporting practices
-84-
than the Committee does; accordingly the Committee's oversight role does not
provide any expert or special assurances as to the financial statements and
other financial information provided by the Company to its shareholders and
others.
Audit Committee Report
The Audit Committee of CharterMac's Board of Trustees has issued the following
report with respect to the audited financial statements of the Company for the
fiscal year ended December 31, 2002:
o The Audit Committee has reviewed and discussed with CharterMac's management
the Company's fiscal 2002 audited financial statements;
o The Audit Committee has discussed with Deloitte & Touche LLP (CharterMac's
independent auditors) the matters required to be discussed by Statement on
Auditing Standards No. 61 as amended by SAS No. 90;
o The Audit Committee has received the written disclosures and letter from
the independent auditors required by Independence Standards Board Standard
No. 1 (which related to the auditors' independence from the Company and its
related entities) and has discussed with the auditors their independence
from CharterMac;
Based on the review and discussions referred to in the three items above, the
Audit Committee recommended to the Board of Trustees that the audited financial
statements be included in CharterMac's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.
Submitted by the Audit Committee of CharterMac's Board of Trustees:
Charles L. Edson -- Chairman
Peter T. Allen
Arthur P. Fisch
-85-
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 31, 2003, no person was known by CharterMac to be the
beneficial owner of more than 5% of the outstanding Common Shares of CharterMac.
As of March 31, 2003, the members of the sole general partner of the
Manager own, in the aggregate, 100% of the voting stock of the sole general
partner of the Manager.
As of March 31, 2003, Trustees and senior officers of CharterMac and
members and senior officers of the sole general partner of the Manager own
directly or beneficially Common Shares of CharterMac as follows:
Amount and Nature of Percent of
Name Title Beneficial Ownership Class11
---- ----- --------------------------- -----------
Stephen M. Ross Chairman of the Board of 255,487 Common Shares 1 2 3 *
CharterMac and Member of
Related Charter
Alan P. Hirmes Managing Trustee, 65,459 Common Shares 1 3 4 *
Executive VP and
Secretary, of CharterMac
and Member and Senior VP
of Related Charter
Stuart J. Boesky Managing Trustee, 73,415 Common Shares 1 3 5 *
President and CEO of
CharterMac and Member,
President and CEO of
Related Charter
Peter T. Allen Managing Trustee of 5,332 Common Shares *
CharterMac
Arthur P. Fisch Managing Trustee of 5,758 Common Shares *
CharterMac
Thomas W. White Managing Trustee of 972 Common Shares *
CharterMac
Charles L. Edson Managing Trustee of 2,584 Common Shares *
CharterMac
Michael J. Brenner Managing Trustee of 20,787 Common Shares 6 *
CharterMac
Stuart A. CFO & CAO of CharterMac 0 Common Shares *
Rothstein and SVP & CFO of Related
Charter
James D. Spound Executive VP of Related 41,576 Common Shares 7 *
Charter
Marc D. Schnitzer Senior VP of Related 20,855 Common Shares 4 *
Charter
Denise L. Kiley Senior VP of Related 20,855 Common Shares 4 *
Charter
John J. Sorel Senior VP of Related 3,373 Common Shares 8 *
Charter
Steven B. Wendel Senior VP of Related 1,000 Common Shares *9 *
Charter
All Senior Officers and Trustees of CharterMac 475,117 Common Shares 1 3 10 1.05%
and Related Charter as a group (14 persons)
*Less than 1% of the outstanding Common Shares.
------------------
1 11 of these Common Shares are owned by Related Charter, of which a majority
is owned by Messrs. Ross, Hirmes, and Boesky.
2 Includes 9,033 options to purchase Common Shares (which are exercisable
within 60 days)
3 21,157 of these Common Shares are owned by Related AMI Associates, Inc., of
which a majority is owned by Messrs. Ross, Hirmes and Boesky .
4 Includes 7,226 options to purchase Common Shares (which are exercisable
within 60 days)
5 Includes 14,188 options to purchase Common Shares (which are exercisable
within 60 days)
6 Includes 20,787 options to purchase Common Shares (which are exercisable
within 60 days)
7 Includes 41,576 options to purchase Common Shares (which are exercisable
within 60 days)
8 Includes 3,373 options to purchase Common Shares (which are exercisable
within 60 days)
9 Includes 1,000 options to purchase Common Shares (which are exercisable
within 60 days)
10 Includes 111,635 options to purchase Common Shares (which are exercisable
within 60 days)
11 Based on the Common Shares outstanding as of December 31, 2002 (41,160,218)
plus the Common Shares issuable upon the conversion of (i) all options to
purchase Common Shares which are exercisable within 60 days (111,635) and
(ii) all CRA Preferred Shares (3,835,002).
-86-
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
CharterMac's officers and trustees, and persons who own more than 10% of a
registered class of CharterMac's equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission (the
"Commission"). These persons are required by regulation of the Commission to
furnish CharterMac with copies of all Section 16(a) forms they file.
CharterMac believes that during the fiscal year ended December 31, 2002,
CharterMac's officers, trustees and greater than 10% beneficial owners complied
with all applicable Section 16(a) filing requirements. There were not any Form
5's filed with the SEC for the year ended December 31, 2002.
Item 13. Certain Relationships and Related Transactions
General
CharterMac has invested in, and may in the future invest in, Revenue Bonds
secured by properties in which either direct or indirect affiliates of Related
Capital own equity interests in the borrower. The Trust Agreement contains a
limitation, equal to 15% of CharterMac's total market value, on the aggregate
amount of Revenue Bonds CharterMac may hold where the borrowers under such
Revenue Bonds are either direct or indirect affiliates of Related and Related
generally has a controlling economic interest ("15% Affiliates"). The Trust
Agreement also requires that CharterMac obtain a fairness opinion from an
independent adviser before investing under any circumstance in Revenue Bonds
involving 15% Affiliates. For purposes of the foregoing limitations, a borrower
in which Related Capital or its affiliates own a partnership or joint venture
interest merely to facilitate an equity financing on behalf of one of RCC's
investment funds is not deemed a 15% Affiliate under the Trust Agreement by
virtue of such relationship ("Non-15% Affiliate" and, together with the 15%
Affiliates, the "RCC Affiliates"). A typical Non-15% Affiliate borrower would be
structured as a limited partnership as follows: the general partner would be an
unaffiliated third party with a 1% general partnership interest and the 99%
limited partner would itself be a limited partnership in which an affiliate of
Related would own a 1% general partnership interest and one or more Fortune 500
companies would own a 99% limited partnership interest.
Every transaction entered into between CharterMac and an RCC Affiliate raises a
potentially ongoing inherent conflict of interest. In addition to the initial
determination to invest in Revenue Bonds secured by properties owned by an RCC
Affiliate, such conflicts of interest with respect to these Revenue Bonds
include, among others, decisions regarding (i) whether to waive defaults of such
RCC Affiliate, (ii) whether to foreclose on a loan, and (iii) whether to permit
additional financing on a property securing a CharterMac investment other than
financing provided by CharterMac. Although not required by the Trust Agreement,
the Board of Trustees has adopted a policy to address certain of such conflicts,
requiring the approval of a majority of the independent trustees in the event
that CharterMac is required to take any of the following actions with respect to
a Revenue Bond secured by a property in which an RCC Affiliate of the Manager
owns an equity interest: (i) modification of any material rights and obligations
respecting the RCC Affiliate, (ii) CharterMac's waiver of material rights under
the affiliated loan documents, (iii) the advancement of a material amount of
additional funds to an affiliate borrower and (iv) forbearing to exercise any of
CharterMac's rights or collect any material costs due to us from an affiliate
borrower.
Indemnification Rights with respect to Credit Enhancement and Yield Guarantee
Transactions
On December 31, 2001, CharterMac completed a credit enhancement transaction with
Merrill Lynch Capital Services, Inc. ("MLCS") pursuant to which CM Corp.
initially will receive an annual fee of approximately $1.2 million in return 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 originated by
CreditRe Mortgage Capital, LLC, an affiliate of Credit Suisse First Boston and
TRCLP. TRCLP has provided CM Corp. with an indemnity covering 50% of any losses
that are incurred by CM Corp. as part of this transaction. As the loans mature
or prepay, the first loss exposure and the fees paid to CM Corp. will both be
reduced. The latest maturity date on any loan in the portfolio occurs in 2009.
Fannie Mae and Freddie Mac have assumed the remainder of the real estate
exposure after the $46.9 million first loss position. In connection with the
transaction, CharterMac has guaranteed the obligations of CM Corp., and as a
security therefore, has posted collateral, initially in an amount equal to 50%
of the first loss amount, which may be reduced to 40% if certain post closing
conditions are met. TRCLP is an affiliate of Related Capital.
CM Corp. performed due diligence on each property in the pool, including an
examination of loan-to-value and debt service coverage both on a current and
"stressed" basis. CM Corp. analyzed the portfolio on a "stressed" basis by
increasing capitalization rates and assuming an increase in the low floater bond
rate. As of December 31, 2001, the credit enhanced pool of properties are
performing according to their contractual obligations and the Company does not
anticipate any losses to be incurred on its guaranty.
On July 18, 2002, CM Corp. 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 owned 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. 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.
-87-
In connection with the transaction, the Company posted $18.2 million of Revenue
Bonds as collateral to the Primary Guarantor, which will be reduced to
approximately $1.4 million over a period of up to 20 years 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
provided by TRCLP. If the Company's acquisition of Related is completed, then
this guarantee will no longer be in force. 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.
Proposed Acquisition of Related
In December 2002, CharterMac announced that it had entered into an agreement to
acquire 100% of the ownership interests of RCC and substantially all of the
businesses operated by Related, one of the nation's leading full-service
financial services providers for the multi-family housing industry. The
acquisition will enable CharterMac to terminate its outside management agreement
with Related Charter, an affiliate of Related, and to become a self-advised and
self-managed company.
The acquisition, together with other related proposals to amend CharterMac's
trust agreement and its share option plan in connection with the acquisition,
are subject to approval by CharterMac's common shareholders, as well as other
customary closing conditions. The complete terms of the proposed acquisition and
the opinion from Dresdner Kleinwort Wasserstein will be set forth in the proxy
statement to be mailed to shareholders following any required regulatory review.
The transaction will be voted upon by CharterMac shareholders at a special
shareholder meeting.
On February 28, 2003, the Company filed a preliminary proxy regarding this
proposed acquisition of Related.
-88-
Share Performance Graph
The following share performance graph compares CharterMac's performance to the
S&P 500 and the Russell 2000 stock index. CharterMac is currently one of the
companies included in the Russell 2000 stock index, an index that measures the
performance of small market capitalization companies. The graph assumes a $100
investment on December 31, 1997. All stock price performance figures includes
the reinvestment of dividends.
[GRAPHIC OMMITED]
Cumulative Total Return
12/97 12/98 12/99 12/00 12/01 12/02
----- ----- ----- ----- ----- -----
CHARTERMAC 100 $102.08 $107.16 $133.01 $173.10 $199.10
S&P 500 100 128.58 155.64 141.46 124.65 97.10
RUSSELL 2000 100 97.45 118.17 114.60 117.45 93.39
-89-
Item 14. 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 annual 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.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Sequential
Page
----------
(a)1. Financial Statements
Independent Auditors' Report 32
Consolidated Balance Sheets as of December 31, 2002 and 2001 33
Consolidated Statements of Income for the years ended December 31, 2002,
2001 and 2000 34
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2002, 2001 and 2000 35
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000 37
Notes to Consolidated Financial Statements 39
(a)2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant 98
All other schedules have been omitted because they are not applicable or
the required information is included in the financial statements and the
notes thereto.
(a)3. Exhibits
3.1(a) Certificate of Business Trust dated as of August 12, 1996 (incorporated
by reference to the Company's Registration Statement on Form 10, File No.
001-13237)
3.1(b) Certificate of Amendment of Certificate of Business Trust dated as of
April 30, 1997 (incorporated by reference to the Company's Registration
Statement on Form 10, File No. 001-13237)
-90-
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Sequential
Page
----------
3.1(c) Trust Agreement dated as of August 12, 1996 (incorporated by reference to
the Company's Registration Statement on Form 10, File No. 001-13237)
3.1(d) Amendment No. 1 to Trust Agreement dated as of April 30, 1997
(incorporated by reference to the Company's Registration Statement on
Form 10, File No. 001-13237)
3.1(e) Amended and Restated Trust Agreement dated as of September 30, 1997
(incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on March 19, 1998)
3.2 Amended and Restated Bylaws (incorporated by reference to the Company's
Annual Report on Form 10-K, filed with the Commission on March 30, 2000)
4.1 Specimen Copy of Share Certificate for shares of beneficial interest of
the Company (incorporated by reference to the Company's Amendment No. 1
on Form 10/A to the Company's Registration Statement on Form 10, File No.
001-13237)
10(a) Management Agreement dated as of October 1, 1997, between the Company and
Related Charter L.P. (incorporated by reference to the Company's Current
Report on Form 8-K, filed with the Commission on March 19, 1998)
10(b) Agreement and Plan of Merger dated as of October 1, 1997, by and among
the Company, Summit Tax Exempt Bond Fund, L.P., Summit Tax Exempt L.P. II
and Summit Tax Exempt L.P. III (incorporated by reference to the
Company's Current Report on Form 8-K, filed with the Commission on March
19, 1998)
10(c) Incentive Share Option Plan (incorporated by reference to the Company's
Current Report on Form 8-K, filed with the Commission on March 19, 1998)
10(d) Contribution Agreement between CharterMac and CharterMac Origination
Trust ("Origination Trust") dated as of May 21, 1998 (incorporated by
reference to Exhibit 10 (aaaw) in the Company's June 30, 1998 Quarterly
Report on Form 10-Q)
10(e) Contribution Agreement between Origination Trust and CharterMac Owner
Trust ("Owner Trust") dated as of May 21, 1998 (incorporated by reference
to Exhibit 10 (aaax) in the Company's June 30, 1998 Quarterly Report on
Form 10-Q)
10(f) Insurance Agreement among MBIA, CharterMac, Origination Trust, Owner
Trust, CharterMac Floater Certificate Trust ("Floater Certificate
Trust"), First Tennessee Bank National Association ("First Tennessee"),
Related Charter LP, and Bayerische Landesbank Girozentrale, New York
Branch ("Bayerische") dated as of May 21, 1998 (incorporated by reference
to Exhibit 10 (aaay) in the Company's June 30, 1998 Quarterly Report on
Form 10-Q)
-91-
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
Sequential
Page
----------
10(g) Liquidity Agreement among Owner Trust, Floater Certificate Trust, First
Tennessee, MBIA and Bayerische dated as of May 21, 1998 (incorporated by
reference to Exhibit 10 (aaaz) in the Company's June 30, 1998 Quarterly
Report on Form 10-Q)
10(h) Liquidity Pledge and Security Agreement among Origination Trust, Owner
Trust, Floater Certificate Trust, MBIA, First Tennessee and Bayerische
dated as of May 21, 1998 (incorporated by reference to Exhibit 10 (aaaaa)
in the Company's June 30, 1998 Quarterly Report on Form 10-Q)
10(i) Fee Agreement among Wilmington Trust Company, Floater Certificate Trust
and CharterMac dated as of May 21, 1998 (incorporated by reference to
Exhibit 10 (aaaab) in the Company's June 30, 1998 Quarterly Report on
Form 10-Q)
10(j) Certificate Placement Agreement (incorporated by reference to Exhibit 10
(aaaac) in the Company's June 30, 1998 Quarterly Report on Form 10-Q)
10(k) Remarketing Agreement (incorporated by reference to Exhibit 10 (aaaad) in
the Company's June 30, 1998 Quarterly Report on Form 10-Q)
10(l) CharterMac Equity Issuer Trust, 6 5/8% Series A Cumulative Preferred
Shares, Purchase Agreement, dated June 14, 1999 (incorporated by
reference to Exhibit 10 (aaaaz) in the Company's June 30, 1999 Quarterly
Report on Form 10-Q)
10(m) Agreement and Plan of Merger by and among Charter Municipal Mortgage
Acceptance Company, CM Holding Trust and American Tax Exempt Bond Trust
dated as of November 2, 1999 (incorporated by reference to Exhibit 99.2
in the Company's Current Report on Form 8-K dated November 2, 1999)
10(n) Contribution Agreement dated as of December 17, 2002 (incorporated by
reference to the Company's Preliminary Proxy Statement on Schedule 14A
filed on February 2, 2003)
12 Ratio of earnings to fixed charges and preferred share dividends of
subsidiary 103
21 Subsidiaries of the Company (filed herewith) 104
99.1 Amended and Restated Trust Agreement by and among J. Michael Fried,
Stuart J. Boesky, Alan P. Hirmes, Robert W. Grier and Andrew T.
Panaccione as Managing Trustees, Charter Municipal Mortgage Acceptance
Company and Wilmington Trust Company, as Registered Trustee dated June
22, 1999 relating to CharterMac Equity Issuer Trust (incorporated by
reference to Exhibit 99 in the Company's June 30, 1999 Quarterly Report
on Form 10-Q)
99.2 Agreement dated as of April 15, 1999 between Charter Municipal Mortgage
Acceptance Company and Melvyn I. Weiss, Esq. and Lawrence A. Sucharow,
Esq., as Class Counsel co-chairmen (incor-
-92-
Sequential
Page
----------
porated by reference to the Company's current report on Form 8-K
filed with the Commission on April 29, 1999).
(a)4. Additional Exhibits
99.3 Chief Executive Officer certification to 18 U.S.C. Section 1350, as
adopted to Section 906 of the Sarbanes-Oxley Act of 2002.* 105
99.4 Chief Financial Officer certification to 18 U.S.C. Section 1350, as
adopted to Section 906 of the Sarbanes-Oxley Act of 2002.* 106
(b) Reports on Form 8-K
Current report on Form 8-K relating to the Company's press release
announcing its intent to acquire Related Capital Company, dated and filed
December 20, 2002.
*Pursuant to Commission Release No. 33-8212, this certification will be
treated as "accompanying" this Annual Report on Form 10-K and not "filed"
as part of such report for purposes of Section 18 of the Exchange Act, or
otherwise subject to the liability of Section 18 of the Exchange Act and
this certification will not be declared to be incorporated by reference3
into any filing under the Securities Act of 1933, as amended, or the
Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
-93-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
(COMPANY)
Date: March 31, 2003 By:/s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee, President
and Chief Executive Officer
Date: March 31, 2003 By:/s/ Stuart J. Boesky
--------------------
Stuart A. Rothstein
Executive Vice President
and Chief Financial Officer
-94-
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Stuart
J. Boesky, Alan P. Hirmes and Stuart A. Rothstein, and each or either of them,
his true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report, and to cause
the same to be filed, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite or
desirable to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all acts and things that said attorneys-in-fact and agents, or either
of them, or their substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
--------------------- Managing Trustee, President
Stuart J. Boesky and Chief Executive Officer March 31, 2003
--------------------- Managing Trustee and
Stephen M. Ross Chairman of the Board March 31, 2003
---------------------
Michael J. Brenner Managing Trustee March 31, 2003
--------------------- Managing Trustee, Executive
Alan P. Hirmes Vice President and Secretary March 31, 2003
--------------------- Chief Financial Officer and
Stuart A. Rothstein Chief Accounting Officer March 31, 2003
---------------------
Peter T. Allen Managing Trustee March 31, 2003
---------------------
Arthur P. Fisch Managing Trustee March 31, 2003
---------------------
Thomas W. White Managing Trustee March 31, 2003
---------------------
Charles L. Edson Managing Trustee March 31, 2003
-95-
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Stuart
J. Boesky, Alan P. Hirmes and Stuart A. Rothstein, and each or either of them,
his true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report, and to cause
the same to be filed, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite or
desirable to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all acts and things that said attorneys-in-fact and agents, or either
of them, or their substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
Signature Title Date
/s/ Stuart J. Boesky Managing Trustee, President
-------------------- and Chief Executive Officer March 31, 2003
Stuart J. Boesky
/s/ Stephen M. Ross Managing Trustee and
-------------------- Chairman of the Board March 31, 2003
Stephen M. Ross
/s/ Michael J. Brenner
---------------------- Managing Trustee March 31, 2003
Michael J. Brenner
/s/ Alan P. Hirmes Managing Trustee, Executive
------------------ Vice President and Secretary March 31, 2003
Alan P. Hirmes
/s/ Stuart A. Rothstein Chief Financial Officer and
----------------------- Chief Accounting Officer March 31, 2003
Stuart A. Rothstein
/s/ Peter T. Allen
------------------ Managing Trustee March 31, 2003
Peter T. Allen
/s/ Arthur P. Fisch
------------------- Managing Trustee March 31, 2003
Arthur P. Fisch
/s/ Thomas M. White
------------------- Managing Trustee March 31, 2003
Thomas M. White
/s/ Charles L. Edson
-------------------- Managing Trustee March 31, 2003
Charles L. Edson
-95-
CERTIFICATION
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this annual report on Form 10-K of Charter
Municipal Mortgage Acceptance Company;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: March 31, 2003 By:/s/ Stuart J. Boesky
-------------- --------------------
Stuart J. Boesky
Chief Executive Officer
-96-
CERTIFICATION
I, Stuart A. Rothstein, hereby certify that:
1. I have reviewed this annual report on Form 10-K of Charter
Municipal Mortgage Acceptance Company;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: March 31, 2003 By:/s/ Stuart A. Rothstein
-------------- -----------------------
Stuart A. Rothstein
Chief Financial Officer
-97-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Summarized condensed financial information of registrant (not including its
consolidated subsidiaries)
CONDENSED BALANCE SHEETS
December 31,
----------------------------------------
2002 2001
------------------ -------------------
(Dollars in thousands)
ASSETS
Revenue Bonds-at fair value $ 166,477 $ 10,518
Investment in ARCap 19,054 18,950
Cash and cash equivalents 4,374 17,376
Interest receivable, net 1,041 65
Promissory notes receivable 11,984 3,057
Investment in subsidiaries 494,352 485,902
Deferred costs, net 34,683 23,150
Goodwill, net 1,639 1,984
Other assets 3,098 598
---------- ----------
Total assets $ 736,702 $ 561,600
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses
and other liabilities $ 2,121 $ 1,373
Deferred income 2,639 --
Due to Manager and affiliates 2,405 1,467
Due to subsidiaries 41,304 11,076
Distributions payable to common
shareholders 13,171 10,448
Distributions payable to Convertible
CRA Shareholders 1,125 565
---------- ----------
Total liabilities 62,765 24,929
---------- ----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity-Convertible CRA
share- holders (3,835,002 and
1,882,364 shares issued and
outstanding in 2002 and 2001,
respectively) 58,173 25,521
Beneficial owner's equity-manager 1,125 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 issued and 34,825,908
outstanding in 2002 and 2001,
respectively) 604,496 511,456
Treasury shares of beneficial
interest (8,400 shares) (103) (103)
Accumulated other comprehensive loss 10,246 (1,272)
---------- ----------
Total shareholders' equity 673,937 536,671
---------- ----------
Total liabilities and shareholders' equity $ 736,702 $ 561,600
========== ==========
See accompanying notes to financial statements
-98-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ --------------
(Dollars in thousands)
Revenues:
Interest income:
Revenue Bonds $ 4,701 $ 1 $ 2,972
Temporary investments 505 376 452
Promissory notes 452 820 1,002
Other income 262 444 --
Income from subsidiaries 59,637 40,920 28,308
---------- ---------- ----------
Total revenues 65,557 42,561 32,734
---------- ---------- ----------
Expenses:
Interest expense 3 412 22
Bond servicing 245 43 34
General and administrative 4,329 2,630 2,063
Amortization 876 727 479
---------- ---------- ----------
Total expenses 5,453 3,812 2,598
---------- ---------- ----------
Income before loss on repayment
of revenue bonds 60,104 38,749 30,136
Equity in earnings of ARCap 1,116 456 --
Loss on repayment of Revenue Bonds (387) (220) (45)
---------- ---------- ----------
Net income $ 60,833 $ 38,985 $ 30,091
=========== ========== ==========
Allocation of net income:
Special distribution to Manager $ 4,872 $ 3,621 $ 2,744
=========== ========== ==========
Manager $ 56 $ 354 $ 273
=========== ========== ==========
Common shareholders $ 52,516 $ 32,555 $ 25,501
Convertible CRA Shareholders 3,389 2,455 1,573
---------- ---------- ----------
Total for Shareholders $ 55,905 $ 35,010 $ 27,074
=========== ========== ==========
See accompanying notes to financial statements
-99-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ --------------
(Dollars in thousands)
Cash flows from operating
activities:
Net income $ 60,833 $ 38,985 $ 30,091
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Loss on repayments of
Revenue Bonds 387 200 45
Amortization 876 727 479
Amortization of goodwill 345 182 345
Amortization of bond selection
costs 1,781 2,511 935
Amortization of straight-lining
of interest income 2,617 -- --
Income from investment in
subsidiaries (59,637) (40,983) (28,307)
Equity in earnings of ARCap in
excess of distributions received (105) (456) --
Changes in operating assets
and liabilities:
Interest receivable (976) 101 34
Other assets (2,500) (181) 20
Accounts payable, accrued
expenses and other liabilities 748 783 404
Deferred income 22 -- --
Due from subsidiaries -- 4,308 116
Due to subsidiaries 30,229 -- 7,575
Due to Manager and affiliates 701 404 115
---------- ----------- ----------
Net cash provided by
operating activities 35,322 6,601 11,852
---------- ----------- --------
Cash flows from investing
activities:
Proceeds from repayments of
Revenue Bonds 200 -- 50
Periodic principal payments
to Revenue Bonds 353 85 --
Purchase of Revenue Bonds (16,101) (7,075) (2,405)
Proceeds from secured borrowings -- -- --
Investment in subsidiaries (82,009) (82,763) 23,825)
Increase in deferred bond
selection costs (10,702) (7,899) (6,499)
Net sale (purchase) of temporary
investments -- (18,493) 19,790
Increase in promissory notes (4,547) -- --
Increase in other assets -- -- (9)
Increase in deferred costs -- -- (545)
Loans made to properties (861) (11,971) (200)
Principal payments received
from loans made to properties 784 99 438
---------- ----------- ----------
Net cash (used in) investing
activities (112,883) (128,017) (13,205)
---------- ----------- ----------
(continued)
-100-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ --------------
(Dollars in thousands)
Cash flows from financing
activities:
Repayments of note payable $ -- $ 6,226 $ --
Increase in cash and cash
equivalents-restricted -- -- 972
Distributions paid to the Manager
and shareholders of the Company (53,741) (33,456) (24,344)
Distributions paid to
Convertible CRA Shareholders (2,700) (2,334) (810)
Increase in deferred costs
relating to the Private
Label Tender Option Program (921) (873) (2,301)
Increase in other deferred costs (2,955) -- 72
Issuance of Common Shares 92,353 168,264 --
Issuance of Convertible CRA Shares 32,523 -- 34,193
Retirement of Convertible CRA shares -- (8,987) --
---------- -------- ---------
Net cash provided by financing
activities 64,559 128,840 7,782
---------- -------- ---------
Net (decrease) increase in cash
and cash equivalents (13,002) 7,424 6,429
Cash and cash equivalents at
the beginning of the year 17,376 9,952 3,524
---------- -------- --------
Cash and cash equivalents
at the end of the year $ 4,374 $ 17,376 $ 9,953
========== ======== ========
Supplemental information:
Interest paid $ 3 $ 412 $ 22
========== ======== ========
Supplemental disclosure of
noncash activities:
Contribution of Revenue Bonds
to subsidiaries $ -- $ 8,345 $ --
========== ======== ========
Contribution of notes
receivables to
subsidiaries $ -- $ 12,498 $ --
========== ======== ========
Distribution of Revenue Bonds
from subsidiaries $ 128,693 $ -- $ --
========== ======== ========
Distribution of notes
receivables from
subsidiaries $ 4,503 $ -- $ --
========== ======== ========
See accompanying notes to financial statements
-101-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Introduction and Basis of Presentation
Basis of Financial Information
The accompanying condensed financial statements (the "Parent Company Financial
Statements") are for Charter Municipal Mortgage Acceptance Company (not
including its consolidated subsidiaries).
The Parent Company Financial Statements, including the notes thereto, should be
read in conjunction with the consolidated financial statements of the Company
and the notes thereto which are included in this Form 10-K.
2. Transactions with Subsidiaries
During the year ended December 31, 2002, the Company received distributions of
Revenue Bonds from its subsidiaries of approximately $129 million.
During 2000, in connection with the ATEBT merger, the Company issued Common
Shares valued, at the date of issuance, at $29,154,649 and contributed the net
assets from the merger to one of its subsidiaries.
During the year ended December 31, 2002, the Company made no contributions to
subsidiaries.
During the year ended December 31, 2001, the Company contributed Revenue Bonds
with an aggregate carrying value of approximately $8,217,000 to its
subsidiaries. Additionally, the Company contributed following items to its
subsidiaries:
Contributed Item Aggregate Carrying Value
---------------- ------------------------
Promissory Notes $7,166,402
Bridge and Pre-Development Loans $5,474,500
-102-
Exhibit 12
Ratio of Earnings to Combined Fixed Charges and Preference Dividends
(Dollars in thousands)
2002 2001 2000
---------- --------- ----------
Interest expense $ 15,823 $ 13,641 $ 14,291
Recurring fees related to TOPs program 3,181 2,491 2,198
Amortized capitalized costs related to
indebtedness 940 727 479
Preference security dividend requirements
of consolidated 17,266 12,578 8,594
---------- --------- ----------
Total fixed charges $ 37,210 $ 29,437 $ 25,562
========== ========= ==========
Net income before allocation to preferred
shareholders of subsidiary $ 79,879 $ 51,563 $ 38,685
Add: Total fixed charges 37,210 29,437 25,562
Less: Preference security dividend
requirements of consolidated subsidiaries (17,266) (12,578) (8,594)
---------- --------- ----------
Earnings $ 99,823 $ 68,422 $ 55,653
========== ========= ==========
Ratio of Earnings to Combined Fixed Charges
and Preference Dividends 3:1 2:1 2:1
For the purposes of computing the ratio of earnings to fixed charges and
preference dividends, earnings were calculated using income before minority
interest adding back total fixed charges less preference security dividend
requirements of consolidated subsidiaries. Fixed charges consist of interest
expense, recurring fees and amortization of capitalized costs related to
indebtedness and preference security dividend requirements of consolidated
subsidiaries. There were no periods in which earnings were insufficient to cover
combined fixed charges and preference dividends.
-105-
Exhibit 21
Subsidiaries of the Company
---------------------------
CM Holding Trust, a Delaware business trust
CharterMac Equity Issuer Trust, a Delaware business trust
CharterMac Corporation, a Delaware corporation
Subsidiaries of CharterMac Equity Issuer Trust, a Delaware business trust
-------------------------------------------------------------------------
CharterMac Origination Trust I, a Delaware business trust
CharterMac Owner Trust I, a Delaware business trust
Subsidiary of CharterMac Corporation
------------------------------------
PW Funding, Inc. a Delaware corporation
-106-
Exhibit 99.3
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 annual report of Charter Municipal Mortgage Acceptance
Company (the "Company") on Form 10-K for the year ending December 31, 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
March 31, 2003
A signed original of this written statement required by Section 906 has been
provided to Charter Municipal Mortgage Acceptance Company and will be
retained by Charter Municipal Mortgage Acceptance Company and furnished to
the Securities and Exchange Commission or its staff upon request.
Exhibit 99.4
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 annual report of Charter Municipal Mortgage Acceptance
Company (the "Company") on Form 10-K for the year ending December 31, 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 A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
March 31, 2003
A signed original of this written statement required by Section 906 has been
provided to Charter Municipal Mortgage Acceptance Company and will be
retained by Charter Municipal Mortgage Acceptance Company and furnished to
the Securities and Exchange Commission or its staff upon request.