SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
---------------------------------------------
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
---------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------------- ---------------
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------------- ---------------
(Unaudited)
ASSETS
Revenue bonds-at fair value $ 974,832,000 $ 845,405,056
Cash and cash equivalents 112,465,147 36,116,481
Interest receivable, net 7,460,685 5,202,999
Promissory notes receivable 12,784,201 9,909,933
Deferred costs, net 25,480,581 24,201,342
Goodwill, net 3,274,604 3,792,959
Other assets 729,196 607,095
----------------- ---------------
TOTAL ASSETS $1,137,026,414 $ 925,235,865
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Secured borrowings $ 109,759,504 $ 110,026,031
Interest rate swaps 4,253,036 0
Accounts payable, accrued expenses and
other liabilities 3,318,460 2,835,144
Due to Manager and affiliates 1,824,422 1,598,921
Distributions payable to preferred shareholders
of subsidiary 2,961,625 2,961,625
Distributions payable to convertible CRA
shareholders 545,885 558,250
Distributions payable to common shareholders 9,029,587 6,242,046
----------------- ---------------
TOTAL LIABILITIES 131,692,519 124,222,017
----------------- ---------------
Minority interest in subsidiary
(subject to mandatory redemption) 350,000,000 275,000,000
----------------- ---------------
Preferred shares of subsidiary (subject to
mandatory repurchase) 169,000,000 169,000,000
----------------- ---------------
SHAREHOLDERS' EQUITY:
Beneficial owners' equity - convertible CRA
shareholders (1,882,364 and 2,590,000
shares issued and outstanding in 2001 and
2000, respectively) 25,250,843 34,397,168
Beneficial owner's equity-manager 969,682 715,342
Beneficial owners' equity-other common
shareholders (50,000,000 shares authorized;
31,144,974 issued and 31,136,574 outstanding
and 22,706,739 shares issued and 22,698,339
outstanding in 2001 and 2000, respectively) 460,975,984 344,870,761
Treasury shares of beneficial interest (8,400 shares) (103,359) (103,359)
Accumulated other comprehensive loss (759,255) (22,866,064)
----------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 486,333,895 357,013,848
----------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,137,026,414 $ 925,235,865
================= ===============
See accompanying notes to consolidated financial statements
2
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2001 2000 2001 2000
---------------------------- -----------------------------
Revenues:
Interest income:
Revenue bonds $ 18,818,704 $ 14,392,775 $ 51,520,030 $ 38,288,343
Temporary investments 270,184 861,495 885,661 1,985,887
Promissory notes 168,411 266,637 658,179 749,481
Other income 50,042 0 556,574 0
------------ ------------ ------------ ------------
Total revenues 19,307,341 15,520,907 53,620,444 41,023,711
------------ ------------ ------------ ------------
Expenses:
Interest expense 1,229,917 998,044 3,979,959 2,975,803
Recurring fees relating to the
Private Label Tender Option
Program 623,288 619,086 1,757,563 1,575,542
Bond servicing 618,035 468,980 1,755,374 1,294,789
General and administrative 523,424 684,689 1,995,475 1,605,075
Amortization 221,900 139,650 623,019 376,579
Loss on impairment of
revenue bonds 0 0 400,000 0
------------ ------------ ------------ ------------
Total expenses 3,216,564 2,910,449 10,511,390 7,827,788
------------ ------------ ------------ ------------
Income before gain on repayment
of revenue bonds 16,090,777 12,610,458 43,109,054 33,195,923
Gain on repayment of revenue bonds 0 0 136,864 0
------------ ------------ ------------ ------------
Income before minority interests 16,090,777 12,610,458 43,245,918 33,195,923
Income allocated to preferred
shareholders of subsidiary (2,961,625) (2,651,081) (8,884,875) (5,632,331)
Minority interest in income of
subsidiary (1,779,855) (2,742,145) (6,333,499) (7,153,903)
------------ ------------ ------------ ------------
Net income $ 11,349,297 $ 7,217,232 $ 28,027,544 $ 20,409,689
============ ============ ============ ============
Allocation of net income to:
Special distribution to Manager $ 898,966 $ 706,003 $ 2,593,030 $ 1,942,184
============ ============ ============ ============
Manager $ 104,504 $ 65,112 $ 254,346 $ 184,674
============ ============ ============ ============
Common shareholders $ 10,165,756 $ 5,875,345 $ 23,563,730 $ 17,431,342
Convertible CRA shareholders 180,071 570,772 1,616,438 851,489
------------ ------------ ------------ ------------
Total for shareholders $ 10,345,827 $ 6,446,117 $ 25,180,168 $ 18,282,831
============ ============ ============ ============
Net income per share
Basic $ .31 $ .29 $ .86 $ .85
============ ============ ============ ============
Diluted $ .31 $ .29 $ .86 $ .85
============ ============ ============ ============
Weighted average shares
outstanding :
Basic 32,986,483 22,528,617 29,322,639 21,605,063
============ ============ ============ ============
Diluted 33,038,075 22,569,179 29,380,465 21,626,702
============ ============ ============ ============
See accompanying notes to consolidated financial statements
3
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
BENEFICIAL
OWNERS' BENEFICIAL
EQUITY - BENEFICIAL OWNERS' TREASURY
CONVERTIBLE OWNER'S EQUITY- SHARES OF
CRA EQUITY - OTHER BENEFICIAL
SHAREHOLDERS MANAGER SHAREHOLDERS INTEREST
------------- ------------- ------------- -------------
Balance at January 1, 2001 $34,397,168 $ 715,342 $ 344,870,761 $ (103,359)
Comprehensive income:
Net income 1,616,438 2,847,376 23,563,730 0
Other comprehensive gain (loss):
Net unrealized loss on
interest rate swaps
Net unrealized gain on
revenue bonds:
Net unrealized holding gain
arising during the period
Add: Reclassification
adjustment for net gain
included in net income
Total other comprehensive gain
Comprehensive income
Retirement of convertible
CRA Shares (8,986,977)
Issuance of common shares 0 0 116,360,793 0
Distributions (1,775,786) (2,593,036) (23,819,300) 0
------------- ------------- ------------- -------------
Balance at September 30, 2001 $ 25,250,843 $ 969,682 $ 460,975,984 $ (103,359)
============= ============= ============= =============
ACCUMULATED
OTHER
COMPRE-
COMPREHENSIVE HENSIVE
INCOME LOSS TOTAL
------------- ------------- -------------
Balance at January 1, 2001 $ (22,866,064) $ 357,013,848
Comprehensive income:
Net income $ 28,027,544 0 28,027,544
-------------
Other comprehensive gain (loss):
Net unrealized loss on
interest rate swaps (4,253,036)
Net unrealized gain on
revenue bonds:
Net unrealized holding gain
arising during the period 28,049,845
Add: Reclassification
adjustment for net gain
included in net income (1,690,000)
-------------
Total other comprehensive gain 22,106,809 22,106,809 22,106,809
-------------
Comprehensive income $ 50,134,353
=============
Retirement of convertible
CRA Shares (8,986,977)
Issuance of common shares 0 116,360,793
Distributions 0 (28,188,122)
------------- -------------
Balance at September 30, 2001 $ (759,255) $ 486,333,895
============= =============
See accompanying notes to consolidated financial statements
4
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,027,544 $ 20,409,689
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on disposition of bond related investment -- 35,073
Gain on repayment of revenue bonds (136,864) --
Loss on impairment of revenue bonds 400,000 --
Other amortization 623,019 376,579
Amortization of goodwill 354,729 258,431
Amortization of bond selection costs 2,031,440 571,557
Accretion of deferred income and purchase
accounting adjustment (93,176) (36,426)
Income allocated to preferred shareholders
of subsidiary 8,884,875 5,632,331
Changes in operating assets and liabilities:
Interest receivable (2,257,686) (993,510)
Other assets (263,148) (204,557)
Accounts payable, accrued expenses and
other liabilities 676,760 542,578
Due to Manager and
affiliates 316,613 452,273
------------- -------------
Net cash provided by operating activities 38,564,106 27,044,018
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of revenue bonds 21,645,000 191,874
Periodic principal payments of revenue bonds 1,091,568 --
Purchase of revenue bonds (123,487,381) (157,356,358)
Proceeds from repayment of other bond related
investment 5,000 5,000
Purchase of other bond related investments -- (9,009,000)
Increase in deferred bond selection costs (3,364,034) (3,670,261)
Net sale of temporary investments -- 8,936,000
Increase in other deferred costs -- (144,111)
Loans made to properties (5,565,000) (200,000)
Principal payments received from loans made to
properties 150,732 167,981
------------- -------------
Net cash used in investing activities (109,524,115) (161,078,875)
------------- -------------
(continued)
See accompanying notes to consolidated financial statements
5
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2001 2000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to the Manager and Common
shareholders (23,527,107) (18,183,373)
Distributions paid to preferred shareholders
of subsidiary (8,884,875) (4,471,875)
Distributions paid to Convertible CRA
shareholders (1,788,151) (294,680)
Proceeds from secured borrowings 96,500,090 --
Principal repayments of secured borrowings (96,766,617) (70,986)
Increase in minority interest in subsidiary 75,000,000 73,000,000
Increase in cash and cash equivalents - restricted -- (359,597)
Increase in deferred costs relating to the
Private Label Tender Option Program (568,481) (536,531)
Issuance of common shares 116,330,793 --
Retirement of convertible CRA shares (8,986,977) --
Issuance of preferred stock of subsidiary 79,000,000
Issuance of convertible CRA shares -- 25,782,922
Increase in deferred costs relating to
the issuance of preferred stock of subsidiary -- (2,880,811)
------------- -------------
Net cash provided by financing activities 147,308,675 150,985,069
------------- -------------
Net increase in cash and cash equivalents 76,348,666 16,950,212
Cash and cash equivalents at the
beginning of the period 36,116,481 8,653,503
------------- -------------
Cash and cash equivalents at the
end of the period $ 112,465,147 $ 25,603,715
============= =============
SUPPLEMENTAL INFORMATION:
Interest paid $ 3,701,212 $ 2,987,852
============= =============
See accompanying notes to consolidated financial statements
6
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
NOTE 1 - GENERAL
Charter Municipal Mortgage Acceptance Company (the "Company") is a Delaware
business trust principally engaged in the acquisition and ownership (directly or
indirectly) of tax-exempt multifamily housing revenue bonds ("Revenue Bonds")
and other investments that produce tax-exempt income, issued by various state or
local governments, agencies, or authorities. Revenue Bonds are primarily secured
by participating and non-participating first mortgage loans on underlying
properties ("Underlying Properties"). Effective July 1, 2001, the Company began
operation of a new wholly-owned, taxable subsidiary-Charter Mac Corporation ("CM
Corp"). CM Corp will own the taxable Revenue Bonds and other taxable investments
acquired by the Company. In addition CM Corp will provide management services
such as origination, bond placement, and construction and administration bond
services for the Company's and its subsidiaries' portfolios.
The Company is governed by a board of trustees comprised of three independent
managing trustees and four managing trustees who are affiliated with Related
Capital Company ("Related"), a nationwide, fully integrated real estate services
firm. As of October 1, 2001, the Company has engaged CM Corp and Related Charter
L.P., an affiliate of Related (collectively, "the Manager"), to manage its
day-to-day affairs. CM Corp has subcontracted to Related Charter L.P., which in
turn has subcontracted with Related, to perform these management services.
The consolidated financial statements include the accounts of the Company and
five majority owned subsidiary business trusts which it controls: CM Holding
Trust, Charter Mac Equity Issuer Trust, Charter Mac Origination Trust I, Charter
Mac Owner Trust I and Charter Mac Corporation. All intercompany accounts and
transactions have been eliminated in consolidation. Unless otherwise indicated,
the "Company", as hereinafter used, refers to Charter Municipal Mortgage
Acceptance Company and its consolidated subsidiaries.
The accompanying interim financial statements have been prepared without audit.
In the opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial statements of the interim periods. However, the operating results
for the interim periods may not be indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. It is suggested that these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2000.
The consolidated financial statements of the Company are prepared using the
accrual method of accounting in conformity with GAAP, which requires the Manager
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates in the financial statements include the
valuation of the Company's investments in Revenue Bonds and interest rate swaps.
Certain amounts in the 2000 financial statements have been reclassified to
conform to the 2001 presentation.
7
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
NEW PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board 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 is required to
implement SFAS 142 on January 1, 2002. The Company has determined that the
amount it has currently capitalized as goodwill from previous business
combinations (approximately $3.3 million at September 30, 2001) will meet the
criteria in SFAS 141 for recognition as an intangible asset apart from goodwill
and, accordingly, continue to be amortized over its expected useful life,
subject to impairment testing. Thus, management believes that implementation of
these statements will not have a material impact on the Company's financial
statements.
In August of 2001, the FASB issued SFAS No, 143, "Accounting for Asset
Retirement Obligations" (effective January 1, 2003) and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets" (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. 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 is in the process of evaluating the financial statement impact of the
adoption these two standards.
NOTE 2 - Revenue Bonds
The Company accounts for its investments in Revenue Bonds as available-for-sale
debt securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Accordingly, the Revenue Bonds are carried at their estimated fair
values, with unrealized gains and losses reported in other comprehensive income.
The weighted average interest rates recognized on the face amount of the
portfolio of Revenue Bonds for the nine months ended September 30, 2001 and 2000
were 7.37% and 7.53%, respectively, based on weighted average face amounts of
approximately $929,863,490 and $672,861,000, respectively.
The amortized cost basis of the Company's portfolio of Revenue Bonds at
September 30, 2001 and December 31, 2000 was $971,338,220 and $868,278,491,
respectively. The net unrealized gain on Revenue Bonds in the amount of
$3,493,780 at September 30, 2001 consisted of gross unrealized gains and losses
of $21,002,937 and $17,509,157, respectively. The net unrealized loss on Revenue
Bonds of $22,873,435 at December 31, 2000 consisted of gross unrealized gains
and losses of $6,835,510 and $29,708,945, respectively.
8
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
2001 TRANSACTIONS
WEIGHTED WEIGHTED
AGGREGATE AVERAGE AVERAGE
PURCHASE CONSTRUCTION PERMANENT
NON-PARTICIPATING REVENUE BONDS FACE AMOUNT PRICE INTEREST RATE INTEREST RATE
------------------------------------------------------------------------------------------------------------------
Construction/rehabilitation
properties $112,487,381 $114,725,212 8.148% 7.513%
Subordinated Bonds 11,000,000 11,252,500 10.000% 10.000%
During the nine months ended September 30, 2001, two Revenue Bonds were repaid,
one RITE was terminated and one note was repaid. One Revenue Bond (Greenway) had
a face amount of $12.85 million, and a carrying value of $12.7 million. The
Company recognized a gain on this transaction of $105,557. The RITE (Courtyard)
had a face amount and carrying value of $5,000. The Company recognized a gain of
$31,307 on this transaction. The second Revenue Bond (Country Lake), had a note
receivable associated with it. Both the Revenue Bond and note receivable were
repaid at par for $8,795,000. The Company received a $250,000 breakup fee
related to the Country Lake repayments, which is included in Other Income.
During the second quarter of 2001, one Revenue Bond, Lexington Trails, became
impaired. The Company has not received regular interest payments on this Revenue
Bond for May through September, totaling $183,750, which has been reserved. On
November 6, 2000, the trustee, for the benefit of the Company, foreclosed on the
Underlying Property. Bond payments are expected to commence in November. As a
result, the Company has written this Revenue Bond down to its estimated fair
value of approximately $5.5 million, causing a loss on impairment on this bond
of $400,000. Management estimated the fair value of this Revenue Bond using the
estimated fair value of the Underlying Property.
NOTE 3 - Deferred Costs
The components of deferred costs are as follows:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Deferred bond selection costs $19,624,580 $16,260,545
Deferred costs relating to the Private Label
Tender Option Program 6,483,747 5,915,266
Deferred costs relating to the issuance of preferred
shares of subsidiary 6,490,989 6,490,989
------------- ------------
32,599,316 28,666,800
Less: Accumulated amortization (7,118,735) (4,465,458)
------------- ------------
$25,480,581 $24,201,342
============= ============
9
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
NOTE 4 - Related Party Transactions
Pursuant to the management agreement and/or other servicing agreements with the
Company and its subsidiaries, the Manager receives (inclusive of fees paid
directly to the Manager by subsidiaries of the Company) certain fees for its
ongoing management and operations of the Company and subsidiaries as follows:
FEES COMPUTATION
---- -----------
I. Bond selection fees 2% of the face amount of each
asset invested in or acquired
II. Special distributions/
investment management fees .375% per annum of total invested assets.
III. Loan servicing fees .25% per annum of the outstanding
principal amount of Revenue Bonds.
IV. Liquidation fees 1.5% based on the gross sales price of
assets sold by the Company.
V. Expense reimbursement reimbursement of certain administrative
costs incurred by the Manager and its
affiliates on behalf of the Company, not
to exceed a cap indexed to the CPI.
Fees payable to the Manager which are based on Revenue Bonds or assets of the
Company include such Revenue Bonds or assets which are held either directly by
the Company or held by other entities to which the Company has transferred such
Revenue Bonds or assets to facilitate financing. In addition, the Manager
receives bond placement fees directly from the borrower in an amount equal to
1.0% to 1.5% of the principal amount of each Revenue Bond or other investment.
In addition, affiliates of the Manager are part of a joint venture that has
development services agreements with the owners of certain Underlying
Properties.
The term of each of the Company's management agreements is one year. The term of
each of the Company's subsidiaries' management agreements is five years;
provided that if the Company's management agreement with Related Charter L.P. is
terminated or not renewed, each of the management agreements with the
subsidiaries would terminate as of such date. Each management agreement may be
renewed, subject to evaluation of the performance of the Manager by the relevant
entity's board of trustees. Each management agreement may be terminated (i)
without cause by the Manager, or (ii) for cause by a majority of such entity's
independent trustees, in each case without penalty and each upon 60 days prior
written notice to the non-terminating party. If the Manager terminates an
entity's management agreement, such entity may not be able to find an adequate
replacement manager.
The costs, expenses and the special distributions incurred to the Manager and
its affiliates for the nine months ended September 30, 2001 and 2000 were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------ -------------- ------------
Bond selection fees $ 838,748 $ 1,758,294 $ 2,469,748 $ 3,327,126
Expense reimbursement 161,576 150,950 488,653 400,798
Bond servicing fees 618,036 468,984 1,755,375 1,294,790
Special distribution 898,969 706,003 2,593,027 1,942,184
----------- ----------- ----------- ------------
$ 2,517,329 $ 3,084,231 $ 7,306,803 $ 6,964,898
=========== =========== =========== ============
10
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
NOTE 5 - Earnings Per Share
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Basic income per share is
calculated by dividing income allocated to common and convertible CRA
shareholders ("shareholders") by the weighted average number of common and
convertible CRA shares outstanding during the period. The convertible CRA shares
are included in both the basic and dilutive calculation of shares because they
are entitled to the same economic benefits as common shareholders, including
receipt of the same dividends per share pari passu with common shareholders.
Diluted income per share is calculated using the weighted average number of
shares outstanding during the period plus the additional dilutive effect of
common stock equivalents. The dilutive effect of outstanding share options is
calculated using the treasury stock method. Because each convertible CRA share
is convertible into less than one common share, the potential conversion would
be antidilutive.
Pursuant to the Company's trust agreement and the management agreement, the
Manager is entitled, in its capacity as the general partner of the Company, to a
special distribution (or with respect to CM Corp's assets, an investment
management fee), payable quarterly, equal to .375% per annum of the Company's
total invested assets which equals the face amount of the Revenue Bonds and
other investments. After allocation of the special distributions, the net
remaining profits or losses, after a special allocation of 1% to the Manager,
are then allocated to shareholders in accordance with their percentage
interests.
11
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 2001 NINE MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
NUMERATOR DENOMINATOR AMOUNT NUMERATOR DENOMINATOR AMOUNT
----------- ------------ --------- ----------- ----------- ----------
Net income allocable to share-
Holders (Basic EPS) $10,345,827 32,986,483 $ .31 $25,180,168 29,322,639 $ .86
=========== ==========
Effect of dilutive securities
241,596 share options -- 51,592 -- 57,826
----------- ----------- ----------- -----------
Diluted net income allocable to
shareholders (Diluted EPS) $10,345,827 33,038,075 $ .31 $25,180,168 29,380,465 $ .86
=========== =========== ========== =========== =========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
NUMERATOR DENOMINATOR AMOUNT NUMERATOR DENOMINATOR AMOUNT
----------- ----------- --------- ----------- ----------- ---------
Net income allocable to share-
Holders (Basic EPS) $ 6,446,117 22,569,179 $ .29 $18,282,831 21,626,702 $ .85
========== =========
Effect of dilutive securities - none -- -- -- --
----------- ----------- ----------- ----------
Diluted net income allocable to
shareholders (Diluted EPS) $ 6,446,116 22,569,179 $ .29 $18,282,830 21,626,702 $ .85
=========== =========== ========== =========== ========== =========
12
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
NOTE 6 - Commitments and Contingencies
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
NOTE 7 - Financial Risk Management and Derivatives
The Company's Revenue Bonds generally bear fixed rates of interest income, but
the P-FLOATS and TOP financing programs incur interest expense at variable rates
re-set weekly, so the Company is exposed to interest rate risks. Various
financial vehicles exist which would allow Company management to hedge against
the impact of interest rate fluctuations on the Company's cash flows and
earnings. Prior to December 31, 2000, upon management's analysis of the interest
rate environment and the costs and risks of such strategies, the Company had not
engaged in any of these hedging strategies.
Subsequent to December 31, 2000, the Company entered into two interest rate
swaps in order to reduce the Company's growing exposure to increases in the
floating interest rate on its TOP and P-FLOATS programs. Under such interest
rate swap agreements, the Company is required to pay Merrill Lynch Capital
Services (the "Counterparty") a fixed rate on a notional amount of debt. In
return, the Counterparty will pay the Company a floating rate equivalent to the
BMA Municipal Swap Index, an index of weekly tax-exempt variable rate issues on
which the Company's variable rate financing programs are based. On January 5,
2001, the Company entered into a five-year interest rate swap that fixes the BMA
index to 3.98% on a notional amount of $50.0 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 $100.0 million.
The average BMA rate for the quarter ended September 30, 2001 and the year ended
December 31, 2000 was 2.27% and 4.12%, respectively. Net swap payments received
by the Company, if any, will be taxable income to the Company. A possible risk
of such swap agreements is the possible inability of the Counterparty to meet
the terms of the contracts with the Company; however, there is no current
indication of such an inability.
The Company adopted statement of Financial Accounting Standards No. 133, as
amended and interpreted, on January 1, 2001. Accordingly, the Company has
documented its established policy for risk management and its objectives and
strategies for the use of derivative instruments to potentially mitigate such
risks. Currently, the Company has a strategy to reduce its interest rate risk
through the use of interest rate swaps. At inception, the Company designated
these interest rate swaps as cash flow hedges on the variable interest payments
on its floating rate financing. Accordingly, the interest rate swaps are
recorded at their fair market values each accounting period, with changes in
market values being recorded in other comprehensive income to the extent that
the hedge is effective in achieving offsetting cash flows. The Company assesses,
both at the inception of the hedge and on an ongoing basis, whether the swap
agreements are highly effective in offsetting changes in the cash flows of the
hedged financing. Any ineffectiveness in the hedging relationship is recorded in
earnings. There was no ineffectiveness in the hedging relationship during the
first three quarters of 2001, 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.
13
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
At September 30, 2001, the combined fair market value of the two interest rate
swaps was a liability of $4,253,036, included in interest rate swaps on the
consolidated balance sheet. Interest paid or payable under the terms of the
swaps, of $862,171, is included in interest expense for the nine months ended
September 30, 2001.
NOTE 8 - Shareholder's Equity
On May 15, 2001, the Company completed the issuance of 7,900,000 common shares
of beneficial interest, raising net proceeds of approximately $109 million in a
firm underwriting with UBS Warburg, First Union Securities, Inc., and Legg Mason
Wood Walker Incorporated (the "Underwriters"). On May 24, 2001, the Underwriters
exercised an option to purchase 480,000 additional shares, bringing the total
proceeds raised to approximately $116 million. Approximately $82.6 million of
the net proceeds raised were used to retire a portion of the Company's
borrowings under the P-Float program. The balance of the net proceeds
(approximately $33.4 million) was used to purchase additional Revenue Bonds.
On May 24, 2001, the Company bought back 707,636 Convertible CRA Shares at
$12.70 per share for a total purchase price of $8,986,977. These shares were
originally issued at $14.13 per share.
NOTE 9 - Subsequent Events
On October 12, 2001, the Company acquired a tax-exempt rehabilitation Revenue
Bond, in the face amount of $9,200,000, secured by a 240-unit affordable
multifamily apartment complex located in Little Rock, AR, known as Valley View
and Ridgecrest. The stated interest rate on this Revenue Bond is 5% until escrow
is broken, estimated to be February 2002, at which time the interest rate will
be 7%. The bond matures October 1, 2002, at which time a new permanent bond
will be negotiated.
On October 18, 2001, the Company purchased approximately $18.5 million of the
12% Series A Convertible Preferred Membership Interests issued by ARCap
Investors, L.L.C. ("ARCap"). ARCap is one of several major purchasers of CMBS
subordinate certificates.
On October 24, 2001, the Company acquired a tax-exempt rehabilitation Revenue
Bond, in the face amount of $25,000,000, secured by a 213-unit affordable
multifamily apartment complex located in St. Louis, MO, known as Merchandise
Mart. The stated interest rate on this Revenue Bond is 8.0% during the first 36
months and 7.5% thereafter. The bond matures September 1, 2041; however, the
obligor may prepay the bond without penalty beginning on October 1, 2019. The
Company also funded a $4,640,000 bridge loan at the closing and committed to
fund approximately $5,817,000 in 2002.
On October 26, 2001, the Company announced that CM Corp had entered into a
definitive agreement to acquire approximately 80% of the issued and outstanding
capital stock of PW Funding, Inc. ("PWF") for a purchase price between $37
million and $47 million (subject to adjustment for new servicing on mortgage
loans that are expected to close before the end of the year). PWF is a privately
held national mortgage banking firm, founded in 1971, specializing in
multifamily apartment financing. In 1988 PWF became one of the original Fannie
Mae Delegated Underwriting and Servicing lenders.
On November 6, 2001, the Company acquired a tax-exempt construction Revenue Bond
in the face amount of $21 million and a taxable Revenue Bond in the face amount
of $550,000, secured
14
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
by a 264-unit affordable multifamily apartment complex located in Leander,
Texas, known as Lakeline Apartments. The stated interest rate on the
tax-exempt Revenue Bond is 8.1% during construction and 7.7% thereafter. The
stated interest rate on the Taxable Revenue Bond is 9.65% during construction
and 9.25% thereafter. The tax-exempt and taxable bonds mature on November 1,
2043 and November 1, 2009, respectively; the obligor may prepay the tax-exempt
bond without penalty beginning on August 1, 2018.
SECURITIES OFFERING BY SUBSIDIARY
On October 9, 2001, a subsidiary of the Company completed a $49.5 million
tax-exempt preferred equity offering comprising 62 "Series A-2 Cumulative
Preferred Shares" with an aggregate liquidation amount of $31 million and 37
"Series B-1 Subordinate Cumulative Preferred Shares" with an aggregate
liquidation amount of $18.5 million. The shares were purchased by Merrill Lynch
& Co. and then sold to qualified institutional investors. The Company received
net proceeds of approximately $47,829,000 from this offering.
The Series A-2 Cumulative Preferred Shares rank senior to the Company's common
shares and to the Company's Convertible CRA Shares and pari passu with the
Charter Mac Equity Issuer Trust Series A and A-1 Cumulative Preferred Shares and
senior to the Series B and B-1 Subordinate Cumulative Preferred Shares. The
Series A-2 Cumulative Preferred Shares have identical terms to the Series A and
A-1 Cumulative Preferred Shares except as to the annual preferred dividend rate
of 6.30% and the Liquidation Amount of $500,000 per share differs only from the
Series A Cumulative Preferred Shares. Dividends on the Series A-2 Cumulative
Preferred Shares are paid quarterly commencing January 31, 2002. The Series A-2
Cumulative Preferred Shares are subject to mandatory tender by the holders at
the Liquidation Amount of $500,000 per share thereof for remarketing and
purchase in June 30, 2009.
The Series B-1 Subordinate Cumulative Preferred Shares rank senior to the
Company's common shares and to the Company's Convertible CRA Shares and junior
to the Charter Mac Equity Issuer Trust Series A, Series A-1 and Series A-2
Cumulative Preferred Shares. The Series B-1 Cumulative Preferred Shares have
identical terms to the Series B Cumulative Preferred Shares except as to the
annual preferred dividend rate of 6.80%. Dividends on the Series B-1 Cumulative
Preferred Shares are paid quarterly commencing on January 31, 2002 but only
after payment of all distributions payable with respect to the Series A, Series
A-1 and Series A-2 Cumulative Preferred Shares plus any other senior securities.
The Series B-1 Subordinate Cumulative Preferred Shares are subject to mandatory
tender by the holders at the Liquidation Amount of $500,000 per share thereof
for remarketing and purchase on November 30, 2010.
On November 14, 2001, the Company completed issuance of 3,250,000 common shares
of beneficial interest at $15.00 per share, raising net proceeds of
approximately $45.8 million (net of underwriters' discount and expenses) in a
firm underwriting with Robertson Stephens and Tucker Anthony Sutro Capital
Markets (the "Underwriters"). The Company has granted the Underwriters an
over-allotment option, exercisable until December 8, 2001, to purchase up to
487,500 additional common shares.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Charter Municipal Mortgage Acceptance Company (the "Company") is a Delaware
business trust principally engaged in the acquisition and ownership (either
directly or indirectly) of tax-exempt multifamily housing revenue bonds
("Revenue Bonds") and other instruments that produce tax-exempt income, issued
by various state or local governments, agencies, or authorities. Revenue Bonds
are secured by participating and non-participating first mortgage loans on
underlying properties ("Underlying Properties").
In order to generate increased tax-exempt income and, as a result, enhance the
value of the Company's shares, the Company intends to invest in or acquire
additional tax-exempt Revenue Bonds secured by affordable multifamily
properties. The Company believes that it can earn above market rates of interest
on its bond acquisitions by focusing its efforts primarily on affordable
housing. The Manager estimates that nearly 50% of all new multifamily
development contains an affordable component which produces tax credits pursuant
to Section 42 of the Internal Revenue Code. The Company's Manager has designed a
Direct Purchase Program specifically designed to appeal to developers of such
properties. In general, these properties are smaller than traditional
multifamily housing properties, averaging 150 units. The traditional method of
financing tax-exempt properties requires the involvement of credit enhancement,
rating agencies and investment bankers. Therefore, the up-front cost of such
financing is generally much higher than traditional multifamily financing.
Through its Direct Purchase Program, the Company will invest in or acquire
tax-exempt bonds without the cost associated with credit enhancement, rating
agencies and investment bankers. The Company believes that the up-front cost
savings to the developer will translate into a higher than market interest rate
on the Revenue Bonds acquired by the Company.
The Company believes that it is well positioned to market its Direct Purchase
Program as a result of the Manager's relationship with Related Capital Company
("Related"), a nationwide, fully integrated real estate services firm, because
the Manager is able to utilize Related's resources and relationships in the
multifamily affordable housing finance industry to source potential borrowers of
Revenue Bonds. Related and its predecessor companies have specialized in
offering debt and equity products to mid-market multifamily owners and
developers for over 26 years. According to the 2000 National Multi Housing
Council survey, Related is the third largest owner of apartments in the United
States.
The Company recently formed Charter Mac Corporation as a taxable subsidiary to
help it to more efficiently manage its taxable business and to permit it to
diversify its business lines. Charter Mac Corporation will hold most of the
Company's taxable investments, conduct any fee generating activities in which
the Company may engage and provide management services to the Company. The
Company has determined to expand its business lines to include providing
mortgage origination and servicing to third parties and guaranteeing third party
loans for a fee. In order to effectuate this strategy, on October 26, 2001, the
Company announced that Charter Mac Corporation, had entered into a definitive
agreement to acquire approximately 80% of the issued and outstanding capital
stock of PW Funding, Inc., a privately owned national mortgage banking firm,
which specializes in multifamily apartment financing and is a Fannie Mae
Delegated Underwriting and Servicing lender. See Exhibit 99.2. The transaction
is subject to receipt of required regulatory approvals and customary closing
conditions and there can be no assurance that this acquisition will be
consummated
16
Effective July 10, 2001, the Board of Trustees of the Company named Charles L.
Edson, partner at Nixon Peabody LLP, as an independent member of the Board of
Trustees. Mr. Edson replaces Mr. Thomas W. White, who has been hired as a
consultant to Related Capital Company and, accordingly, can no longer serve as
in independent member of the Company's Board of Trustees; however, he will now
serve as a non-independent member of the Board of Trustees.
LIQUIDITY AND CAPITAL RESOURCES
In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company has primarily used two sources of capital: collateralized
debt securitization and equity offerings. To date, the primary source of
long-term liquidity has come from the Company's Private Label Tender Option
Program (TOP) and preferred equity offerings by the Company or a subsidiary, the
issuance of Common and Convertible CRA Shares, and the Merrill Lynch Pierce
Fenner & Smith Incorporated P-FLOATS/RITES program.
The Company intends to continue to use these same sources of capital. On May 15,
2001, the Company issued 7,900,000 common shares of beneficial interest at
$14.64 per share, resulting in net proceeds of approximately $109 million. On
May 23, 2001, the underwriters of the common offering exercised their option to
purchase an additional 480,000 shares, resulting in additional net proceeds of
approximately $6.7 million. On November 14, 2001, the Company completed the
issuance of 3,250,000 common shares of beneficial interest at $15.00 per share,
resulting in net proceeds of approximately $45.8 million. The Company has
granted the underwriters of this offering an over-allotment option to purchase
up to 487,500 additional common shares.
During the nine months ended September 30, 2001 cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $76,349,000.
The increase was primarily due to cash provided by operating activities ($39
million), proceeds from the repayment of Revenue Bonds and RITE ($22 million),
an increase in minority interest in subsidiary ($75 million) and the issuance of
new common shares ($116 million) less funds used to purchase Revenue Bonds ($123
million), loans made to properties ($6 million), funds used to retire
convertible CRA shares ($9 million), an increase in deferred bond selection
costs ($3 million) and distributions to common, convertible CRA and preferred
shareholders ($34 million).
In October and November 2001, distributions declared in September 2001 were paid
to preferred shareholders of subsidiary Series A, A-1 and B in the amounts of
$1,490,625 ($33,125 per preferred share), $426,000 ($8,875 per preferred share),
and $1,045,000 ($9,500 per preferred share), respectively. Also paid were
distributions of $9,575,495 ($.290 per share) to holders of common and
convertible CRA shares. All distributions were paid from cash flow from
operations.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
ACQUISITIONS
During the period January 1, 2001 through September 30, 2001, the Company
acquired 18 Revenue Bonds for an aggregate purchase price of approximately
$123,487,000, not including bond selection fees and expenses of approximately
$2,600,000.
17
RESULTS OF OPERATIONS
For the nine months ended September 30, 2001 as compared to 2000, total
revenues, total expenses and net income increased due to the net result of the
acquisition of 60 Revenue Bonds during 2001 and 2000, and the repayment of 5
Revenue Bonds.
Interest income from Revenue Bonds increased approximately $4,426,000 and
$13,232,000 for the three and nine months ended September 30, 2001 as compared
to 2000. This increase was primarily due to an increase in interest income of
$16,322,000 during 2000 and 2001, partially offset by a decrease due to Revenue
Bond repayments of $1,448,000 and a decrease in contingent interest payments of
$1,036,000.
Total revenues for the three and nine months ended September 30, 2001 increased
by approximately $3,786,000 and $12,597,000, respectively, including the
increases in interest income from Revenue Bonds noted above, partially offset by
decreases in interest income from temporary investments of approximately
$591,000 and $1,100,000, primarily due to lower cash balances. Also contributing
to the increase was approximately $557,000 in other income which included a
breakup fee for Country Lakes of $250,000, a placement fee of $141,000 for
Mayflower and miscellaneous other items.
Interest expense and recurring fees increased approximately $236,000 and
$1,186,000 for the three and nine months ended September 30, 2001 as compared to
2000 primarily due to increased secured borrowings, a higher outstanding balance
of the TOP during 2001, and interest accrued under the terms of the interest
rate swaps.
Bond servicing fees increased approximately $149,000 and $461,000 for the three
and nine months ended September 30, 2001 as compared to 2000 primarily due to
new acquisitions and the corresponding increase in the Revenue Bond portfolio
serviced.
General and administrative expenses decreased approximately $161,000 for the
three months ended September 30, 2001 as compared to 2000 primarily due to
additional legal fees in 2000 relating to two Revenue Bonds for which the
underlying properties were sold to new owners, and a reduction of amortization
expenses in the current quarter relating to the cost of stock options. General
and administrative expenses increased approximately $390,000 for the nine months
ended September 30, 2001 as compared to 2000 primarily due to an increase in
expense reimbursements to the Manager and its affiliates due to the 2001 and
2000 Revenue Bond acquisitions and an increase in compensation expense
associated with the Company's share options.
Amortization expense increased approximately $82,000 and $246,000 for the three
and nine months ended September 30, 2001 as compared to 2000, primarily due to
the 2001 and 2000 Revenue Bond acquisitions.
Income allocated to preferred shareholders of subsidiary for the three and nine
months ended September 30, 2001 increased approximately $311,000 and $3,253,000,
due to the preferred offerings consummated on September 29, 1999 and July 21,
2000.
Minority interest in income of subsidiary decreased approximately $962,000 and
$820,000 for the three and nine months ended September 30, 2001, as compared to
2000 primarily due to lower interest rates in general and lower interest expense
due to the refinement of the MBNA program in the first quarter of 2001.
18
The Company recognized a $400,000 loss on impairment of Revenue Bonds, related
to Lexington Trails, during the nine months ended September 30, 2001. No
comparable item existed for 2000.
The Company recognized a gain in repayment of Revenue Bonds of approximately
$137,000 during the nine months ended September 30, 2001. No comparable item
existed for 2000.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements include statements regarding the intent, belief
or current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the availability and creditworthiness of prospective tenants,
lease rents and the terms and availability of financing for properties financed
by Revenue Bonds owned by the Company; adverse changes in the real estate
markets including, among other things, competition with other companies; risks
of real estate development and acquisition; governmental actions and
initiatives; and environment/safety requirements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
INFLATION
Inflation did not have a material effect on the Company's results for the
periods presented.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of the Company's investments and the instruments used to raise
capital for their acquisition expose the Company to gains and losses due to
fluctuations in market interest rates. Market interest rates are highly
sensitive to many factors, including governmental policies, domestic and
international political considerations and other factors beyond the control of
the Company.
Revenue Bonds generally bear interest at fixed rates, or pay interest according
to the cash flows of the Underlying Properties, which do not fluctuate with
changes in market interest rates. In contrast, payments required under the TOP
program and on the secured borrowings under the P-FLOATS program vary based on
market interest rates based on the Bond Market Association ("BMA") and are
re-set weekly.
With respect to the portion of the Company's floating rate financing programs
which are not hedged, a change in BMA rate would result in increased or
decreased payments under the financing programs, without a corresponding change
in cash flows from the investments in Revenue Bonds. For example, based on the
unhedged $310 million outstanding under these financing programs at September
30, 2001, the Company estimates that an increase of 1.0% in the BMA rate would
decrease annual net income by approximately $3,100,000. Since the $310 million
is unhedged, the interest rate swaps have no impact on the increases or decrease
to net
19
income caused by interest rate fluctuations. Conversely, a decrease in market
interest rates would generally benefit the Company in the same amount
describe above, as a result of decreased allocations to the minority interest
and interest expense without corresponding decreases in interest received on
the Revenue Bonds.
Various financial vehicles exist which would allow Company management to
mitigate the impact of interest rate fluctuations on the Company's cash flows
and earnings. Prior to December 31, 2000, management did not engage in any of
these hedging strategies. However, beginning in 2001, and upon management's
analysis of the interest rate environment and the costs and risks of such
strategies, the Company entered into two interest rate swaps in order to hedge
against increases in the floating interest rate on its TOP and P-FLOATS
programs. Under such interest rate swap agreements, the Company is required to
pay Merrill Lynch Capital Services (the "Counterparty") a fixed rate on a
notional amount of debt. In return, the Counterparty will pay the Company a
floating rate equivalent to the BMA Municipal Swap Index, an index of weekly
tax-exempt variable rate issues on which the Company's variable rate financing
programs are based. On January 5, 2001, the Company entered into a five-year
interest rate swap that fixes the BMA index to 3.98% on a notional amount of
$50.0 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 $100.0 million. This effectively fixes $50 million and $100 million of
the Company's secured borrowings at 3.98% and 3.64%, respectively, protecting
the Company in the event the BMA Municipal Swap Index rises. For the nine months
ended September 30, 2001, the Company's cost to borrow funds through the TOP and
P-FLOATS programs averaged 3.84% and 4.01%, respectively.
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 the estimated fair values.
For example, the Company projects 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 September 30, 2001 value of $974,832,000 to
approximately $891,040,000. A 1% decline in interest rates would increase the
value of the September 30, 2001 portfolio to approximately $1,084,895,000.
Changes in the estimated fair value of the Revenue Bonds do not impact the
Company's reported net income, earnings per share, distributions or cash flows,
but are reported as components of other comprehensive income and affect reported
shareholders' equity.
The assumptions related to the foregoing discussion of market risk involve
judgments involving future economic market conditions, future corporate
decisions and other interrelating factors, many of which are beyond the control
of the Company and all of which are difficult or impossible to predict with
accuracy. Although the Company believes that the assumptions underlying the
forward-looking information are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
information included herein will prove to be accurate. Due to the significant
uncertainties inherent in forward-looking information, the inclusion of such
information should not be regarded as a representation of the Company that the
objectives and plans of the Company would be achieved.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings --
The Company is not a party to any material pending legal
proceedings.
INFORMATION REGARDING OTHER COMPANIES MANAGED BY AFFILIATES OF OUR MANAGER.
---------------------------------------------------------------------------
The three previously disclosed purported class actions against, among
others, the advisor and property manager of Aegis Realty, Inc. ("Aegis") have
been dismissed without prejudice. Aegis is a public company, which like the
Company, is externally advised by affiliates of Related Charter L.P.. Each of
these three actions challenged Aegis' proposed acquisition of a property
portfolio and development business owned by a third party, which transaction
also involved the termination by Aegis of its external advisory agreements and
purchase by Aegis of various assets owned by these external advisor's. Each suit
alleged that the defendants breached their fiduciary duties to the Aegis
stockholders by, among other things, committing Aegis to pay unwarranted fees
and other consideration to affiliates of Related Charter L.P. On August 7, 2001,
Aegis announced that it had terminated, by mutual consent with the third party,
the transaction that is at issue in each suit. As of October 29, 2001, each of
the three lawsuits had been dismissed without prejudice. No money was paid by
any of the defendants to any plaintiff or plaintiff's attorney in connection
with their dismissals.
Item 2. Changes in Securities and Use of Proceeds -- None
Item 3. Defaults Upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders -- None
Item 5. Other Information --
On July 16, 2001, the Company announced the appointment of Mr. Charles L.
Edson as an independent member of the Board of Trustees. Mr. Edson replaces Mr.
Thomas W. White, who has been hired as a consultant with Related Capital
Company. Mr. White continues to serve as a non-independent member of the Board
of Trustees. See Exhibit 99.1.
On October 26, 2001, the Company announced that its taxable subsidiary,
Charter Mac Corporation, had entered into a definitive agreement to acquire
approximately 80% of the issued and outstanding capital stock of PW Funding,
Inc., a privately owned national mortgage banking firm, which specializes in
multifamily apartment financing and is a Fannie Mae Delegated Underwriting and
Servicing lender. See Exhibit 99.2.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Press release issued July 16, 2001, regarding the
appointment of Charles L. Edson as an independent member of
the Board of Trustees.
21
99.2 Press release issued October 26, 2001, regarding Charter Mac
Corporation's definitive agreement with PW Funding to
acquire approximately 80% of PW Funding's issued and
outstanding capital stock.
99.3 Underwriting Agreement dated November 8, 2001 between
Robertson Stephens, Inc. and Charter Municipal Mortgage
Acceptance Company.
99.4 Management Agreement dated September 13, 2001 between
Charter Municipal Mortgage Acceptance Company and Charter
Mac Corporation.
99.5 Amended and Restated Management Agreement between Charter
Municipal Mortgage Acceptance Company and Related Charter
L.P.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the
quarter ended September 30, 2001:
DATE ITEM REPORTED
---- -------------
8/28/01 Regulation FD disclosure regarding
supplemental information for the
quarter ended March 31, 2001 posted
on Charter Mac's webpage.
9/5/01 Issuance of Series A-2 and B-1
Preferred Shares.
9/6/01 Supplemental unaudited data for
quarter ended June 30, 2001
available on Company's webpage.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: November 14, 2001 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee, President
and Chief Executive Officer
Date: November 14, 2001 By: /s/ Michael I. Wirth
--------------------
Michael I. Wirth
Chief Financial Officer and Chief
Accounting Officer