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, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
-------------------------------------------------
Shares of Beneficial Interest
Name of each exchange on which registered:
-------------------------------------------------
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.
The approximate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant as of March 20, 2002 as $653,820,288,
based on a price of $16.03 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 20, 2002 there were 41,152,738 outstanding shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Those portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held on June 11, 2002, which are incorporated into
Items 10, 11, 12 and 13.
Index to exhibits may be found on page 90
Page 1 of 103
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.
2
PART I
Item 1. Business.
GENERAL
Charter Municipal Mortgage Acceptance Company ("CharterMac") is a Delaware
business trust. CharterMac and its subsidiaries (collectively, the "Company") is
a full service investor in and servicer of multifamily housing debt. The Company
is principally engaged in the acquisition and ownership (directly or indirectly)
of tax-exempt multifamily housing Revenue Bonds and may also acquire, at times,
taxable multifamily housing Revenue Bonds. Both the tax-exempt and the taxable
bonds are herein referred to as Revenue Bonds ("Revenue Bonds").
CharterMac is classified as a partnership for federal income tax purposes and,
thus, is not subject to federal income taxation. As such, CharterMac will pass
through to its shareholders, in the form of distributions, income, including
tax-exempt income, derived from its investments and activities. Although the
exact percentage may vary from quarter to quarter, substantially all of the
distributions to shareholders are excludable from gross income for federal
income tax purposes. For the calendar year ended December 31, 2001,
approximately 96% of the distributions qualified as tax-exempt income.
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. The special
committee has retained independent counsel and expects to hire a financial
advisor to assist them in this process.
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 Capital Company ("Related"), a nationwide, fully integrated
real estate financial services firm. Pursuant to the Merger, CharterMac issued
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."
SIGNIFICANT SUBSIDIARIES
CHARTERMAC EQUITY ISSUER TRUST
In 1999, CharterMac created CharterMac Equity Issuer Trust, a 100% 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 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 CharterMac Corporation ("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 to third parties and guaranteeing mortgage loans for a
fee. CM Corp. 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 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
24 to 36 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.
PWF is a national mortgage-banking firm which specializes in providing financing
and ancillary services to the multifamily 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 $4 billion in multifamily and
commercial loans and currently services a $2.9 billion loan portfolio including
about $1.5 billion in Fannie Mae DUS loans and $595 million in Freddie Mac
loans. Over the past 5 years, the company has averaged more than $350 million
annually in loan originations. Together, PWF and its subsidiaries provide a full
3
range of financing services to the conventional multifamily market and
compliments 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 will be taxable income.
However, CM Corp. incurs tax-deductible expenses which will be used to offset a
portion of this taxable income.
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 Related
Charter LP, an affiliate of Related Capital, to operate its day-to-day
activities and advise on the selection and underwriting of investments. CM Corp.
and Related Charter LP (collectively, 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, financial, accounting, capital markets, asset monitoring, portfolio
management, investor relations and public relations services. The Company
believes that it benefits significantly from its relationship with Related,
since Related provides the Company with resources that are not generally
available to smaller-capitalized, self-managed companies.
BUSINESS PLAN
The Company focuses on investing in a portfolio of Revenue Bonds that are
secured by affordable multifamily housing properties. Through PWF, the Company
focuses on originating and servicing multifamily mortgage loans on behalf of
Government Sponsored Enterprises ("GSEs") such as Fannie Mae, Freddie Mac and
the FHA. Together, these components offer a full range of capital solutions to
developers of affordable and market rate multifamily housing.
INVESTING IN TAX-EXEMPT REVENUE BONDS
In order to generate tax-exempt income to pass through to CharterMac
shareholders and, as a result, enhance the value of its Common Shares,
CharterMac primarily invests in or acquires tax-exempt Revenue Bonds secured by
multifamily properties. The Company believes that it can earn above market rates
of interest on its bond acquisitions by focusing its efforts primarily on
affordable housing. The Manager estimates that nearly 50% of all new multifamily
development contains an affordable component, which produces tax credits
pursuant to Section 42 of the Internal Revenue Code. The traditional methods of
financing affordable housing with tax-exempt Revenue Bonds are complex and time
consuming, and involve the participation of many intermediaries. Through the
Manager, the process has been streamlined using the Company's "Direct Purchase
Program." The 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. By purchasing Revenue Bonds
directly from the governmental issuer, the Company's program eliminates the need
for underwriters and their counsel, rating agencies and costly documentation.
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 Company's program offers to developers allows
the Company to receive above-market rates of interest on Revenue Bonds.
In addition to investing in tax-exempt Revenue Bonds secured by multifamily
properties producing tax credits, the Company may acquire other multifamily
tax-exempt bonds including those issued to finance low-income multifamily
projects and facilities for the elderly owned by Section 501(c)(3)
not-for-profit organizations. The Company also has a portion of assets that
produce a small amount of taxable income.
OFFERING FINANCING THROUGH FANNIE MAE, FREDDIE MAC AND FHA
As a result of the acquisition of PWF, the Company has diversified the range of
its investment products and is able to offer developers fixed and floating rate
tax-exempt and taxable financing through Fannie Mae, Freddie Mac and, to a
lesser extent, FHA for affordable and market rate multifamily properties.
Combining this with the core business of investing in tax-exempt Revenue Bonds
and the Company's affiliation with Related, the Company is able to provide
developers with financing for all aspects of their property's capital structure.
In addition, the Company has diversified its revenues with a fee business that
will grow in value over time and will provide insulation from the vagaries of
the capital markets.
CREDIT ENHANCEMENT TRANSACTIONS
In addition to expanding the Company's business lines to include providing
mortgage origination and servicing to third parties, the Company has also begun
guaranteeing third party mortgage loans for a fee. In 2001, the Company executed
its first credit enhancement transaction. In such transactions, the Company will
generally receive a guarantee fee in return for assuming a first loss position
on a pool of multifamily mortgages. The Company expects to be able to
selectively grow the value of this new fee business over time.
4
CMBS INVESTMENT
In October 2001, the Company purchased 739,741 units of Series A Convertible
Preferred Membership Interests ("Membership Interests") in ARCap Investors,
L.L.C. ("ARCap") at the price of $25.00 per unit, for an aggregate face amount
of approximately $18.5 million, with a preferred return of 12.00%. ARCap was
formed in January 1999 by REMICap and Apollo Real Estate Investors to invest
exclusively in unrated subordinated Collateralized Mortgage-Backed Securities
("CMBS"). As of December 31, 2001, ARCap had approximately $596 million in
assets, including investments of approximately $565 million of CMBS.
Approximately one-third of ARCap's CMBS are secured by multifamily properties.
As of December 31, 2001, ARCap had approximately $78.1 million of Common
Membership Interests outstanding, which are subordinate to the Company's
Membership Interests. ARCap's leverage is predominantly fixed rate, long-term
financing and, as of December 31, 2001, ARCap had approximately $322.1 million
of debt outstanding, representing 54% of its capitalization.
CORPORATE STRATEGY
The Company does not operate as a mortgage REIT, which generally utilizes high
levels of leverage to acquire subordinated interests in commercial and/or
residential mortgage-backed securities. Mortgage REITs typically incur leverage
at ratios ranging from between 3:1 to 10:1. Conversely, and 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 (as defined in the Trust
Agreement) as of the date incurred. Furthermore, the Revenue Bonds owned by the
Company generally call for ten-year restrictions from prepayments, eliminating
the Company's susceptibility to significant levels of repayment risk as a result
of interest rate reductions. Due to the Company's low level of leverage, the
Company is less likely than higher leveraged REITs to be affected by any lack of
liquidity. The Company's portfolio does not contain assets that are especially
vulnerable to volatility during periods of interest rate fluctuations.
Consistent with the foregoing, the Company focuses on providing investors with a
stable level of distributions, even through unstable markets.
Although the Company expects to be able to increase income from its taxable
business, it is not expected that the taxable portion of any distributions will
increase proportionately with the amount of taxable income generated. This is
because CM Corp., as a taxable subsidiary, can reduce income by deducting
certain expenses which qualify for income tax purposes.
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.
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 after the year ended
December 31, 2001; prior to the year ended December 31, 2001 all of the
Company's operations were attributable to the investing segment. Since the
acquisition of PWF took place in late December 2001, there was no impact on the
Company's revenues or net income.
REVENUE BONDS
Generally, Revenue Bonds are secured by mortgage loans on underlying
properties ("Underlying Properties"). As of December 31, 2001, 97.7% of the
Revenue Bond par amount owned by the Company were first mortgage Revenue
Bonds. Revenue Bonds that contain provisions for the Company to receive
additional interest payments by participating with the borrower in a portion
of the cash flow, sale or refinancing proceeds on the Underlying Properties
are referred to as "participating"; Revenue Bonds lacking this provision are
referred to as "non-participating". As of December 31, 2001 14% of the
Company's Revenue Bonds were participating bonds.
As of December 31, 2001 there was an aggregate of 148 Revenue Bonds. The
Underlying Properties securing these Revenue Bonds are garden apartments located
in major metropolitan markets in 23 states and the District of Columbia. The
properties range in size from 70 units to 550 units with an average size of 214
units. Generally, the properties have a market appropriate, competitive amenity
package which may include swimming pools, clubhouses, exercise rooms and tennis
courts. Of these, 63 Revenue Bonds, with an original par amount of approximately
$438 million, had Underlying Properties either under construction or undergoing
major rehabilitation. There were also 24 Revenue Bonds, with an original par
amount of approximately $188 million in the lease-up stage. The remaining 61
Revenue Bonds in the portfolio have properties with stabilized occupancies. The
stabilized portfolio as of December 31, 2001 reports an average occupancy of
94.2%.
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
5
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.
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. 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 such Revenue Bonds.
From time to time, the Company has advanced funds to owners of certain
Underlying Properties in order to preserve the underlying asset. Such
preservation may include funds for construction completion, past due real estate
taxes, remedial deferred maintenance or other operating deficiencies. Promissory
notes and/or second mortgages typically secure such advances. As of December 31,
2001, the face amount of such advances was approximately $12.6 million, with
rates ranging from 8% to 13% and a carrying value of approximately $7.2 million,
(net of purchase accounting adjustments), and a reserve for collectibility of
$138,000. Included in such amounts were advances to obligors which are
affiliates of the Manager at an aggregate face amount of approximately $5
million, with rates ranging from 8% to 10%.
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 $662,000, $1.6 million and $1.9 million for the years ended
December 31, 2001, 2000 and 1999, respectively. Payments under each of the
existing forbearance agreements are current as of December 31, 2001.
PARTICIPATING REVENUE BONDS
Participating Revenue Bonds with an aggregate face amount of approximately $163
million as of December 31, 2001, call for interest only debt service payments
during their respective terms (which generally are 24 to 30 years from issuance
or re-issuance) with repayment of principal due in a lump sum "balloon" payment
at the expiration of their respective terms or upon sale or refinancing. In
addition to the stated base rates of interest, these Revenue Bonds provide for
"participating interest" which is based on a percentage of the underlying
properties cash flow or net sales/refinancing proceeds. Both the stated and
participating interest on the Revenue Bonds are exempt from federal income
taxation. During the years ended December 31, 2001, 2000 and 1999, the Company
was paid participating interest amounting to approximately $1.5 million, $1.7
million and $728,000, respectively.
NON-PARTICIPATING REVENUE BONDS
Non-participating, tax-exempt Revenue Bonds, with an aggregate face amount of
approximately $1 billion as of December 31, 2001, generally bear a fixed base
interest rate and may or may not provide for amortization of principal. Terms
are expected to be 5 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). Bonds that call for
amortization or "sinking fund" payments of principal are usually based on
thirty to forty year level debt service amortization schedules with
amortization generally beginning at the completion of rehabilitation or
construction.
Certain other non-participating Revenue Bonds, with an aggregate face amount of
approximately $13 million are taxable and call for amortization or sinking fund
payments of principal on a term ranging between 13 and 40 years.
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.
6
In connection with the sale of two of the Underlying Properties, Cedar Creek and
Pelican Cove, the Company has agreed to a modification of the terms of the
respective Revenue Bonds. Subject to the local issuer's approval, the stated
interest rate of the Cedar Creek and Pelican Cove Revenue Bonds will be modified
to a stated interest rate of 7.43% and 7.25%, respectively, and the maturity and
call dates for each will be extended to October 1, 2010 and October 1, 2020,
respectively.
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, 2001, this bond had a carrying value and fair value of
approximately $6.9 million and $7.4 million, respectively. In addition to the
above three Revenue Bonds, other Revenue Bonds, with an aggregate face amount of
approximately $154 million, have previously been modified.
REVENUE BONDS WITH THE OBLIGOR AS AN AFFILIATE OF THE MANAGER
The obligors of Revenue Bonds with an aggregate approximate original par amount
of approximately $612 million 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 $12.1 million of Revenue
Bonds have been replaced with affiliates of the Manager who have not made equity
investments. 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 obligors and owners of the Underlying Properties of the Cedar
Creek, Highpointe, Pelican Cove and Loveridge Revenue Bonds have been replaced
with affiliates of the Manager who have not made equity investments. These
affiliates have assumed the day-to-day responsibilities and obligations of the
Underlying Properties. On September 29, 2000, the affiliates of the Manager sold
49% of Pelican Cove and Cedar Creek. During 2001 the remaining 51% of Pelican
Cove and Cedar Creek were purchased by the same buyers who purchased the initial
49%. Also in 2001, ownership of the property underlying the Loveridge Revenue
Bond was transferred to Loveridge L.P., also an affiliate of the Manager. During
June 2001, the affiliates of the Manager sold 49% of Loveridge. The remaining
51% was sold in January 2002, to the same buyer who purchased the initial 49%. A
buyer is being sought for the remaining Underlying Property-Highpointe.
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, 2001 and December 31,
2000 was approximately $5.7 million and $5.6 million, respectively, and the
income earned from Highpointe for the years ended December 31, 2001 and 2000 was
approximately $315,000 and $420,000, respectively.
IMPAIRED REVENUE BOND
During the second quarter of 2001, one Revenue Bond, Lexington Trails, became
impaired. The Company did not receive the regular interest payments on this
Revenue Bond of $210,000 for the period April through September of 2001. The
Company has recorded a reserve against these interest payments. On November 6,
2001, the trustee, for the benefit of the Company, foreclosed on the Underlying
Property. Bond payments were received for October through December of 2001. As a
result of the foregoing, the Company has written the Revenue Bond down to its
estimated fair value of approximately $5.5 million, resulting in 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.
REVENUE BOND REPAYMENTS
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
-------------------------------------------------
Par Amortized Realized 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 22,647 (3,766)
---------
$(911,604)
=========
7
During the period January 1, 2000 through December 31, 2000, three Revenue Bonds
were repaid and two RITES were terminated as described in the table below.
Dispositions for the Year Ended December 31, 2000
-------------------------------------------------
Par Amortized Realized Gains /
Property/Bond Name Amount Cost (Losses)
--------------------------------------------------------------------------------
BONDS
Bay Club $6,400,000 $6,438,942 $ (38,942)
East Ridge 8,700,000 8,437,747 262,253
Martin's Creek 7,300,000 6,842,946 457,054
RITES
Avalon 5,000 40,073 (35,073)
Meadowview Park 5,000 5,141 (141)
---------
$ 645,151
=========
8
REVENUE BONDS - CHARACTERISTICS
The following table provides certain information with respect to each of the
Revenue Bond as of December 31, 2001:
BOND TYPE
LAST YEAR OF (LIHTC /
CONSTRUCTION / PARTICIPATING 501(c)3 /
PROPERTY LOCATION UNITS REHAB BOND OTHER)(1)
-------- -------- ----- ----- ---- --------
TAX-EXEMPT FIRST MORTGAGE BONDS
STABILIZED PORTFOLIO
Bristol Village Bloomington, MN 290 1989 No Other
Carrington Point Los Banos, CA 80 1999 No LIHTC
Casa Ramon Orange County, CA 75 2001 No LIHTC
Cedar Creek McKinney, TX 250 1988 No Other
Cedar Pointe Nashville, TN 210 1989 Yes Other
Cedarbrook Hanford, CA 70 1999 No LIHTC
Clarendon Hills Hayward, CA 285 1989 Yes Other
Crowne Pointe Olympia, WA 160 1986 Yes Other
Cypress Run Tampa, FL 408 1988 Yes Other
Del Monte Pines Fresno, CA 366 2000 No LIHTC
Douglas Pointe Miami, FL 176 2001 No LIHTC
Fort Chaplin Washington, DC 549 2000 No LIHTC
Franciscan Riviera Antioch, CA 129 2001 No LIHTC
Garfield Park Washington, DC 94 2000 No LIHTC
Greenbriar Concord, CA 199 2000 No LIHTC
Highland Ridge St. Paul, MN 228 1989 Yes Other
Highpointe Harrisburg, PA 240 1991 Yes Other
Highpointe Harrisburg, PA * * No Other
Lakepoint Atlanta, GA 360 1989 No Other
Lakes Edge at Walden Miami, FL 400 2001 No Other
Lakes, The Kansas City, MO 400 1989 Yes Other
Lewis Place Gainesville, FL 112 2000 No LIHTC
Lexington Square Clovis, CA 130 2000 No LIHTC
Lexington Trails Houston, TX 200 1997 No 501(c)3
RENTAL
REVENUE BOND FAIR STATED OCCUPANCY
REVENUE BOND VALUE AT DECEMBER 31, INTEREST DECEMBER
PROPERTY DATE CLOSED PAR AMOUNT 2001(2) RATE(3) 31, 2001
-------- ----------- ---------- ------ ------- --------
TAX-EXEMPT FIRST MORTGAGE BONDS
STABILIZED PORTFOLIO
Bristol Village Jul-87 17,000,000 17,388,000 7.500% 91.0%
Carrington Point Sep-98 3,375,000 2,961,000 6.375% 100.0%
Casa Ramon Jul-00 4,744,000 4,895,000 7.500% 100.0%
Cedar Creek Dec-86 8,100,000 8,207,000 7.430% 87.8%
Cedar Pointe Apr-87 9,500,000 9,069,000 7.000% 87.4%
Cedarbrook Apr-98 2,840,000 2,782,000 7.125% 98.6%
Clarendon Hills Dec-86 17,600,000 13,400,000 5.520% 98.6%
Crowne Pointe Dec-86 5,075,000 5,018,000 7.250% 98.1%
Cypress Run Aug-86 15,402,428 12,274,000 5.500% 89.6%
Del Monte Pines May-99 11,000,000 10,317,000 6.800% 91.5%
Douglas Pointe Sep-99 7,100,000 6,778,000 7.000% 100.0%
Fort Chaplin Dec-99 25,800,000 24,250,000 6.900% 97.6%
Franciscan Riviera Aug-99 6,587,500 6,474,000 7.125% 98.4%
Garfield Park Aug-99 3,260,000 3,223,000 7.250% 91.5%
Greenbriar May-99 9,585,000 9,089,000 6.875% 98.0%
Highland Ridge Dec-86 15,000,000 14,831,000 7.250% 95.6%
Highpointe Jul-86 8,900,000 5,728,000 8.500% 96.6%
Highpointe Nov-00 3,250,000 3,989,000 9.000% *
Lakepoint Nov-87 15,100,000 12,355,000 6.000% 99.0%
Lakes Edge at Walden Jun-99 14,850,000 13,974,000 6.900% 95.7%
Lakes, The Dec-86 13,650,000 10,896,000 4.870% 84.8%
Lewis Place Jun-99 4,000,000 3,682,000 7.000% 98.2%
Lexington Square Aug-98 3,850,000 3,376,000 6.375% 100.0%
Lexington Trails Nov-00 4,900,000 5,521,000 9.000% 90.8%
UNIT RENTAL
RATES AT NUMBER OF
DECEMBER 31, COMPETING
PROPERTY 2001 PROPERTIES NOTES
-------- ---- ---------- -----
TAX-EXEMPT FIRST MORTGAGE BONDS
STABILIZED PORTFOLIO
Bristol Village 400-2,398 25 E,J
Carrington Point 448-565 5 E,J,K
Casa Ramon 652-1086 43 E,J,K
Cedar Creek 250-940 10 E,J,Q
Cedar Pointe 540-860 168 D,I
Cedarbrook 418-517 18 E,J,K
Clarendon Hills 619-1,700 99 D,I,R
Crowne Pointe 485-845 39 E,J,R,T
Cypress Run 485-855 247 D,I,Q
Del Monte Pines 388-544 256 E,J,K
Douglas Pointe 504-604 184 C,H,K
Fort Chaplin 419-1,032 158 E,J,K
Franciscan Riviera 500-872 17 C,H,K
Garfield Park 585-946 158 D,I
Greenbriar 750-1,100 55 E,J,K
Highland Ridge 850-1,460 86 E,J,R
Highpointe 450-830 * A,L,M,T
Highpointe * 24 B,L
Lakepoint 462-895 30 C,G,R
Lakes Edge at Walden 618-944 184 C,G
Lakes, The 495-700 152 D,I,R
Lewis Place 529-642 91 C,G,K
Lexington Square 393-471 42 D,I,K
Lexington Trails 435-700 25 B
9
BOND TYPE
LAST YEAR OF (LIHTC /
CONSTRUCTION / PARTICIPATING 501(c)3 /
PROPERTY LOCATION UNITS REHAB BOND OTHER)(1)
-------- -------- ----- ----- ---- --------
Loveridge Pittsburg, CA 148 1987 No Other
Mansions, The Independence, MO 550 1987 No Other
Newport Village Tacoma, WA 402 1987 Yes Other
North Glen Atlanta, GA 284 1987 Yes Other
Ocean Air Norfolk, VA 434 2001 No LIHTC
Orchard Hills Tacoma, WA 176 1987 Yes Other
Orchard Mill Atlanta, GA 238 1990 Yes Other
Pelican Cove St. Louis, MO 402 1989 No Other
Phoenix Stockton, CA 186 2000 No LIHTC
Reflections Casselberry, FL 336 1995 Yes Other
River Run Miami, FL 164 1987 Yes Other
Shannon Lake Atlanta, GA 294 1988 Yes Other
Silvercrest Clovis, CA 100 1999 No LIHTC
South Congress Austin, TX 172 2001 No LIHTC
Standiford Modesto, CA 250 2001 No LIHTC
Stonecreek Clovis, CA 120 2000 No LIHTC
Sunset Creek Lancaster, CA 148 1989 No Other
Sunset Downs Lancaster, CA 264 1987 No Other
Sunset Terrace Lancaster, CA 184 1987 No Other
Sunset Village Lancaster, CA 204 1989 No Other
Sycamore Woods Antioch, CA 186 2000 No LIHTC
Tallwood Virginia Beach, VA 120 2000 No LIHTC
Thomas Lake Eagan, MN 216 1988 No Other
Village Green Merced, CA * * No LIHTC
Village Green Merced, CA 128 2001 No LIHTC
Walnut Park Plaza Philadelphia, PA 224 2000 No LIHTC
Williams Run Dallas, TX 252 1986 No 501(c)3
Willow Creek Ames, IA 138 1988 Yes Other
-------
Subtotal-Revenue Bonds Secured by Stabilized Properties 11,731
-------
LEASE-UP PORTFOLIO
Barnaby Manor Washington, DC 124 2001 No LIHTC
Bay Colony League City, TX 248 2001 No LIHTC
Chapel Ridge at
Little Rock Little Rock, AR 128 2001 No LIHTC
RENTAL UNIT RENTAL
REVENUE BOND FAIR STATED OCCUPANCY RATES AT
REVENUE BOND VALUE AT DECEMBER 31, INTEREST DECEMBER DECEMBER 31,
PROPERTY DATE CLOSED PAR AMOUNT 2001(2) RATE(3) 31, 2001 2001
-------- ----------- ---------- ------ ------- -------- ----
Loveridge Nov-86 8,550,000 7,371,000 7.500% 98.6% 650-1,300
Mansions, The May-86 19,450,000 19,230,000 7.250% 93.6% 410-1,350
Newport Village Feb-87 13,000,000 12,853,000 7.250% 96.5% 376-690
North Glen Sep-86 12,400,000 12,683,000 7.500% 92.6% 575-1,010
Ocean Air Apr-98 10,000,000 9,887,000 7.250% 95.6% 590-690
Orchard Hills Dec-86 5,650,000 5,586,000 7.250% 97.1% 475-815
Orchard Mill May-89 10,500,000 10,739,000 7.500% 93.7% 459-900
Pelican Cove Feb-87 18,000,000 17,797,000 7.250% 95.2% 390-725
Phoenix Apr-98 3,250,000 3,151,000 7.125% 98.4% 395-721
Reflections Nov-00 10,700,000 13,133,000 9.000% 94.6% 280-780
River Run Aug-87 7,200,000 7,855,000 8.000% 94.4% 351-1,034
Shannon Lake Jun-87 12,000,000 12,103,000 7.000% 90.8% 463-855
Silvercrest Sep-98 2,275,000 2,232,000 7.125% 100.0% 300-393
South Congress May-00 6,300,000 6,444,000 7.500% 93.5% 303-504
Standiford Sep-99 9,520,000 9,356,000 7.125% 96.0% 395-650
Stonecreek Apr-98 8,820,000 8,635,000 7.125% 99.1% 654-993
Sunset Creek Mar-88 8,275,000 6,251,000 5.477% 93.1% 460-869
Sunset Downs Feb-87 15,000,000 11,332,000 5.477% 96.6% 535-810
Sunset Terrace Feb-87 10,350,000 7,819,000 5.477% 95.7% 530-815
Sunset Village Mar-88 11,375,000 8,593,000 5.477% 92.0% 520-840
Sycamore Woods May-99 9,415,000 8,928,000 6.875% 96.8% 575-1,003
Tallwood Sep-99 6,205,000 6,135,000 7.250% 98.3% 597-680
Thomas Lake Sep-86 12,975,000 13,271,000 7.500% 95.8% 830-1,300
Village Green Aug-00 503,528 521,000 7.500% * *
Village Green Aug-00 3,078,000 3,184,000 7.500% 98.4% 380-485
Walnut Park Plaza Apr-00 5,500,000 5,600,000 7.500% 85.7% 597-650
Williams Run Dec-00 12,650,000 12,596,000 7.650% 74.6% 554-751
Willow Creek Feb-87 6,100,000 6,031,000 7.250% 100.0% 565-810
-----------------------------
Subtotal-Revenue Bonds Secured by
Stabilized Properties 489,510,456 459,793,000
-----------------------------
LEASE-UP PORTFOLIO
Barnaby Manor Nov-99 4,500,000 4,526,000 7.375% 90.3% 850-975
Bay Colony Aug-00 10,100,000 10,330,000 7.500% 90.3% -
Chapel Ridge at
Little Rock Aug-99 5,600,000 5,428,000 7.125% 91.3% 397-845
NUMBER OF
COMPETING
PROPERTY PROPERTIES NOTES
-------- ---------- -----
Loveridge 18 D,I
Mansions, The 15 E,J
Newport Village 181 E,J,R,T
North Glen 371 E,J
Ocean Air 60 E,J,K
Orchard Hills 181 E,J,R
Orchard Mill 371 E,J,K
Pelican Cove 172 E,J
Phoenix 96 E,J,K
Reflections 9 E,J,R
River Run 184 E,J,R,T
Shannon Lake 371 A,R
Silvercrest 142 E,J,K
South Congress 152 E,J,K
Standiford 63 E,J,K
Stonecreek 5 E,J,K
Sunset Creek 37 C,G,S
Sunset Downs 37 D,I,S
Sunset Terrace 37 D,I,S
Sunset Village 37 C,G,S
Sycamore Woods 17 E,J,K
Tallwood 86 C,H,K
Thomas Lake 16 E,J
Village Green * E,J,K
Village Green 11 E,J,K
Walnut Park Plaza 49 E,J,K
Williams Run 10 C,G
Willow Creek 7 E,J
Subtotal-Revenue Bonds Secured by Stabilized Properties
LEASE-UP PORTFOLIO
Barnaby Manor 12 C,G,K
Bay Colony 15 D,K
Chapel Ridge at
Little Rock 83 E,J,K
10
BOND TYPE
LAST YEAR OF (LIHTC /
CONSTRUCTION / PARTICIPATING 501(c)3 /
PROPERTY LOCATION UNITS REHAB BOND OTHER)(1)
-------- -------- ----- ----- ---- --------
Chapel Ridge at
Texarkana Texarkana, AR 144 2000 No LIHTC
College Park Naples, FL 210 2000 No LIHTC
Columbia at Bells Ferry Cherokee Co., GA 272 2001 No LIHTC
Falcon Creek Indianapolis, IN 131 2000 No LIHTC
Forest Hills Garner, NC 136 2000 No LIHTC
Gulfstream Dania, FL 96 2000 No LIHTC
Hamilton Gardens Hamilton, NJ 174 2001 No LIHTC
Jubilee Courtyards Florida City, FL 98 1999 No LIHTC
Lake Jackson Lake Jackson, TX 160 2000 No LIHTC
Lake Park Turlock, CA 104 2000 No LIHTC
Lakemoor Durham, NC 160 2001 No LIHTC
Lenox Park Gainesville, GA 292 2000 No LIHTC
Madalyn Landing Palm Bay, FL 304 2000 No LIHTC
Marsh Landing Portsmouth, VA 250 2001 No LIHTC
Millpond Village East Windsor, CT 360 2001 No LIHTC
Mountain Ranch Austin, TX 196 2001 No LIHTC
Newark Commons New Castle, DE 220 2001 No LIHTC
Northpointe Village Fresno, CA 406 2000 No LIHTC
Park Sequoia San Jose, CA 81 2001 No LIHTC
San Marcos San Marcos, TX 156 2001 No LIHTC
Summer Lake Davie, FL 108 2001 No LIHTC
Walnut Creek Austin, TX 98 2001 No LIHTC
Walnut Creek Austin, TX * * No LIHTC
---------
Subtotal-Revenue Bonds Secured by properties in
lease-up stage 4,656
---------
CONSTRUCTION BOND PORTFOLIO
Arbors at Creekside Austin, TX 176 - No LIHTC
Armstrong Farm Jeffersonville, IN 168 - No LIHTC
Belmont Heights Estates Tampa, FL 201 - No LIHTC
Bluffview Denton, TX 250 - No LIHTC
Blunn Creek Austin, TX 280 - No LIHTC
Chandler Creek Round Rock, TX 216 - No 501(c)3
Chapel Ridge at
Claremore Claremore, OK 104 - No LIHTC
RENTAL UNIT RENTAL
REVENUE BOND FAIR STATED OCCUPANCY RATES AT
REVENUE BOND VALUE AT DECEMBER 31, INTEREST DECEMBER DECEMBER 31,
PROPERTY DATE CLOSED PAR AMOUNT 2001(2) RATE(3) 31, 2001 2001
-------- ----------- ---------- ------ ------- -------- ----
Chapel Ridge at
Texarkana Sep-99 5,800,000 5,833,000 7.375% 96.5% 320-685
College Park Jul-98 10,100,000 9,961,000 7.250% 94.7% 451-780
Columbia at Bells Ferry Apr-00 13,000,000 13,119,000 7.400% 63.7% 615-835
Falcon Creek Sep-98 6,144,600 6,062,000 7.250% 94.7% 425-800
Forest Hills Dec-98 5,930,000 5,696,000 7.125% 89.0% 550-650
Gulfstream Jul-98 3,500,000 3,445,000 7.250% 94.7% 502-633
Hamilton Gardens Mar-99 6,400,000 6,181,000 7.125% 97.1% 625-730
Jubilee Courtyards Sep-98 4,150,000 3,928,000 7.125% 98.0% 525-710
Lake Jackson Dec-98 10,934,000 10,430,000 7.000% 91.5% 550-1,095
Lake Park Jun-99 3,638,000 3,638,000 7.250% 99.0% 452-634
Lakemoor Dec-99 9,000,000 8,898,000 7.250% - -
Lenox Park Jul-99 13,000,000 12,055,000 6.800% 91.7% 431-620
Madalyn Landing Nov-98 14,000,000 13,349,000 7.000% 87.7% 425-599
Marsh Landing May-98 6,050,000 5,944,000 7.250% 97.6% 445-475
Millpond Village Dec-00 14,300,000 14,724,000 7.550% 99.2% 477-1,020
Mountain Ranch Dec-98 9,128,000 8,863,000 7.125% 62.2% 586-814
Newark Commons May-00 14,300,000 14,236,000 7.300% 86.8% 630-980
Northpointe Village Aug-98 13,250,000 13,679,000 7.500% 98.0% 388-583
Park Sequoia Oct-00 6,740,000 6,972,000 7.500% 96.3% 799-1,350
San Marcos May-00 7,231,000 7,273,000 7.375% 44.2% 645-819
Summer Lake Mar-00 5,600,000 5,651,000 7.400% 100.0% 289-828
Walnut Creek May-00 3,240,000 3,314,000 7.500% 98.0% 338-556
Walnut Creek May-00 360,000 344,000 7.500% * *
-----------------------------------
Subtotal-Revenue Bonds Secured by properties
in lease-up stage 205,995,600 203,879,000
-----------------------------------
CONSTRUCTION BOND PORTFOLIO
Arbors at Creekside Jun-01 8,600,000 8,796,000 8.000% - -
Armstrong Farm Oct-00 8,246,000 8,434,000 7.500% - -
Belmont Heights Estates Jun-01 7,850,000 8,136,000 8.150% - -
Bluffview May-01 10,700,000 11,090,000 8.600% - -
Blunn Creek Aug-01 15,000,000 14,933,000 7.900% - -
Chandler Creek Oct-00 15,850,000 15,679,000 8.500% - -
Chapel Ridge at
Claremore Oct-00 4,100,000 4,193,000 7.500% - -
NUMBER OF
COMPETING
PROPERTY PROPERTIES NOTES
-------- ---------- -----
Chapel Ridge at
Texarkana 26 E,J,K
College Park 33 E,J
Columbia at Bells Ferry 5 E,J
Falcon Creek 252 E,J,K
Forest Hills 152 C,H,K
Gulfstream 5 E,J,K
Hamilton Gardens 16 C,H,K
Jubilee Courtyards 2 E,J,K
Lake Jackson 10 E,J,K
Lake Park 24 E,J,K
Lakemoor 89 C,H
Lenox Park 15 C,G,K
Madalyn Landing 8 E,J,K
Marsh Landing 23 E,J,K
Millpond Village 2 C,G
Mountain Ranch 475 C,H,K
Newark Commons 35 E,J,K
Northpointe Village 256 E,J,K
Park Sequoia 165 E,J,K
San Marcos 25 D,I,K
Summer Lake 6 D,I,K
Walnut Creek * E,J
Walnut Creek 152 E,J
Subtotal-Revenue Bonds Secured by
properties in lease-up stage
CONSTRUCTION BOND PORTFOLIO
Arbors at Creekside 475 C,K,N,P,U
Armstrong Farm 158 C,H,K,N,P
Belmont Heights Estates 269 C,H,K,V
Bluffview 48 C,H,K,W
Blunn Creek 475 C,H,K,X
Chandler Creek 19 C,H,N,P,Y
Chapel Ridge at
Claremore 5 C,K,N,P
11
LAST YEAR BOND TYPE REVENUE BOND
OF CON- PARTICI- (LIHTC / FAIR VALUE AT
STRUCTION PATING 501(c)(3)/ REVENUE BOND DECEMBER 31,
PROPERTY LOCATION UNITS / REHAB BOND OTHER)(1) DATE CLOSED PAR AMOUNT 2001(2)
-------- -------- ----- ------- ---- ------- ----------- ---------- -----
Chapel Ridge at Lowell Lowell, AR 126 - No LIHTC May-01 5,500,000 5,550,000
Cobb Park Ft. Worth, TX 172 - No LIHTC Jul-01 7,500,000 7,569,000
Grace Townhomes Ennis, TX 112 - No LIHTC May-00 5,225,600 5,345,000
Grandview Forest Durham, NC 92 - No LIHTC Dec-00 5,483,907 5,609,000
Greenbridge at
Buckingham Richardson, TX 242 - No 501(c)(3) Nov-00 19,735,000 19,009,000
Hidden Grove Miami, FL 222 - No LIHTC Sep-00 8,600,000 8,679,000
Hillside Dallas, TX 236 - No LIHTC Dec-01 12,500,000 12,500,000
Knollwood Villas Denton, TX 264 - No LIHTC May-01 13,750,000 14,251,000
Lakeline Leander, TX 264 - No 501(c)(3) Nov-01 21,000,000 21,000,000
Lakewood Terrace Belton, MO 152 - No LIHTC Aug-01 7,650,000 7,720,000
Magnolia Arbors Covington, GA 250 - No LIHTC Apr-01 12,500,000 12,785,000
Midtown Square Columbus, GA 144 - No LIHTC Jun-01 5,600,000 5,651,000
Oak Hollow Dallas, TX 150 - No LIHTC Dec-01 8,625,000 8,625,000
Oaks at Hampton Dallas, TX 250 - No LIHTC Apr-00 9,535,000 9,362,000
Palm Terrace Auburn, CA 80 - No LIHTC Aug-01 4,460,000 4,552,000
Palm Terrace Auburn, CA * - No LIHTC Aug-01 1,542,381 2,021,000
Parks at Westmoreland DeSoto, TX 250 - No LIHTC Jul-00 9,535,000 11,053,000
Princess Anne House Virginia Beach, VA 186 - No LIHTC Apr-00 7,500,000 7,671,000
Red Hill Villas Round Rock, TX 168 - No LIHTC Dec-00 9,900,000 9,991,000
River's Edge Green Island, NY 190 - No LIHTC Nov-01 15,000,000 15,000,000
Riverside Meadows Austin, TX 248 - No LIHTC Dec-01 11,500,000 11,500,000
Running Brook Miami, FL 186 - No LIHTC Sep-00 8,495,000 8,573,000
Southwest Trails Austin, TX 160 - No LIHTC Aug-00 6,500,000 6,515,000
West Meadows Colorado Spgs., CO 216 - No LIHTC Dec-01 13,000,000 13,000,000
Westlake Village Jackson, NJ 150 - No LIHTC Nov-01 6,425,000 6,425,000
Westlake Village Jackson, NJ * - No LIHTC Nov-01 575,000 575,000
White Rock San Antonio, TX 336 - No 501(c)(3) Dec-01 20,345,000 20,345,000
Woods Edge Charlottesville, VA 97 - No LIHTC Nov-00 4,850,000 4,961,000
-------- -------------------------------
Subtotal-Revenue Bonds Secured by
Properties in Construction 6,338 333,177,888 337,098,000
-------- -------------------------------
RENTAL UNIT RENTAL NUMBER
STATED OCCUPANCY RATES AT OF
INTEREST DECEMBER DECEMBER 31, COMPETING
PROPERTY RATE(3) 31, 2001 2001 PROPERTIES NOTES
-------- ----- -------- ---- ---------- -----
Chapel Ridge at Lowell 5.500% - - 0 C,G,K
Cobb Park 7.900% - - 259 A,Z
Grace Townhomes 7.500% - - 9 D,I,N,P
Grandview Forest 8.500% - - 82 D,I,K,N,P,AA
Greenbridge at
Buckingham 7.400% - - 30 C,H,N,P
Hidden Grove 7.400% - - 184 C,H,K,N,P
Hillside 7.900% - - 676 C,K,N,P,B
C,H,K,CC
Knollwood Villas 8.600% - - 48 BB
Lakeline 8.100% - - 1 C,N,P,DD
Lakewood Terrace 7.900% - - 1 D,I,N,P,EE
Magnolia Arbors 7.500% - - 3 C,H,N,P
Midtown Square 7.400% - - 38 A,N,P
C,K,N,P,
Oak Hollow 7.900% - - 676 HH
Oaks at Hampton 7.200% - - 11 C,G,K
Palm Terrace 8.400% - - 14 C,G,K,N,P,KK
Palm Terrace 9.500% - - * C,G,K,N,P
Parks at Westmoreland 7.500% - - 14 C,H,K,N,P
Princess Anne House 7.500% - - 250 C,H,K,N,P
Red Hill Villas 8.400% - - 19 C,K,LL
River's Edge 7.700% - - 0 C,MM
Riverside Meadows 7.500% - - 475 C,K,NN
Running Brook 7.400% - - 15 C,K,N,P
Southwest Trails 7.350% - - 15 D,I,K,N,P
West Meadows 5.000% - - 208 C,K,N,P
Westlake Village 7.200% - - 3 C,K,N,P
Westlake Village 8.000% - - * C,K,N,P
White Rock 7.750% - - 467 C,N,P,QQ
Woods Edge 7.800% - - 20 D,I,N,P,RR
Subtotal-Revenue Bonds Secured by
Properties in Construction z
REHABILITATION BOND PORTFOLIO
12
LAST YEAR BOND TYPE REVENUE BOND
OF CON- PARTICI- (LIHTC / FAIR VALUE AT
STRUCTION PATING 501(c)3 / REVENUE BOND DECEMBER 31,
PROPERTY LOCATION UNITS / REHAB BOND OTHER)(1) DATE CLOSED PAR AMOUNT 2001(2)
-------- -------- ----- ------- ---- ------- ----------- ---------- -----
Autumn Ridge San Marcos, CA 192 - No LIHTC Aug-00 9,304,230 9,818,000
King's Village Pasadena, CA 313 - No LIHTC Jul-00 17,650,000 18,259,000
Mecca Vineyards Indio, CA 268 - No LIHTC Nov-01 13,040,000 13,040,000
Mecca Vineyards Indio, CA * - No LIHTC Nov-01 1,500,000 1,500,000
Merchandise Mart St. Louis, MO 213 - No LIHTC Oct-01 25,000,000 25,000,000
Oakwood Manor Little Rock, AR 200 - No LIHTC Jun-01 5,010,000 5,227,000
Oakwood Manor Little Rock, AR * - No LIHTC Jun-01 440,000 459,000
Ocean Ridge Federal Way, WA 192 - No LIHTC Dec-01 6,675,000 6,675,000
Sherwood Lake Tampa, FL 149 - No LIHTC Apr-01 4,100,000 4,166,000
Silverwood Lakewood, WA 107 - No LIHTC Dec-01 3,300,000 3,300,000
Valley View & Ridgecrest Little Rock, AR 240 - No LIHTC Oct-01 9,200,000 9,200,000
Subtotal-Revenue Bonds Secured by
properties undergoing rehabilitation 1,874 95,219,230 96,644,000
--------- ---------------------------------
Subtotal- Tax-Exempt First Mortgage Bonds 24,599 1,123,903,174 1,097,414,000
--------- ---------------------------------
TAXABLE FIRST MORTGAGE BONDS
Chandler Creek Round Rock, TX * * No 501(c)(3) Oct-00 350,000 382,000
Cobb Park Ft. Worth, TX * * No LIHTC Jul-01 285,000 303,000
Greenbriar Concord, CA * * No LIHTC May-99 2,015,000 2,030,000
Greenbridge at
Buckingham Richardson, TX * * No 501(c)(3) Nov-00 350,000 392,000
Hillside Dallas, TX * * No LIHTC Dec-01 400,000 400,000
Lake Park Turlock Park, CA * * No LIHTC Jun-99 375,000 378,000
Lakeline Leander, TX * * No 501(c)(3) Dec-01 550,000 550,000
Lakes Edge at Walden Miami, FL * * No Other Jun-99 1,400,000 1,724,000
Magnolia Arbors Covington, GA * * No LIHTC Apr-01 1,000,000 1,002,000
Mecca Vineyards Indio, CA * * No LIHTC Nov-01 360,000 360,000
Midtown Square Columbus, GA * * No LIHTC Jun-01 235,000 235,000
Oaks at Hampton Dallas, TX * * No LIHTC Apr-00 525,000 529,000
Oakwood Manor Little Rock, AR * * No LIHTC Jun-01 765,000 813,000
Ocean Ridge Federal Way, WA * * No LIHTC Dec-01 2,325,000 2,325,000
Parks at Westmoreland DeSoto, TX * * No LIHTC Jul-00 455,000 458,000
Princess Anne House Virginia Beach, VA * * No LIHTC Apr-00 125,000 133,000
Red Hill Villas Round Rock, TX * * No LIHTC Dec-00 400,000 425,000
RENTAL UNIT RENTAL NUMBER
STATED OCCUPANCY RATES AT OF
INTEREST DECEMBER DECEMBER 31, COMPETING
PROPERTY RATE(3) 31, 2001 2001 PROPERTIES NOTES
-------- ------- -------- ---- ---------- -----
Autumn Ridge 7.650% 97.4% 606-847 11 E,J,K
King's Village 7.500% 98.7% 383-896 12 E,J,K
Mecca Vineyards 7.750% - - 27 C,K,FF
Mecca Vineyards 7.250% * * * C,K
C,K,O,P,
Merchandise Mart 8.000% - - 186 GG
Oakwood Manor 8.500% 41.0% 332-441 94 C,H,K,II
Oakwood Manor 7.650% * * * C,H,K
Ocean Ridge 7.750% - - 57 C,K,JJ
Sherwood Lake 8.450% 58.4% 370-480 269 C,G,K,OO
Silverwood 8.000% - - 10 C,K,PP
Valley View & Ridgecrest 5.000% - - 94 C,G,K
Subtotal-Revenue Bonds Secured by
properties undergoing rehabilitation
Subtotal- Tax-Exempt First Mortgage Bonds
TAXABLE FIRST MORTGAGE BONDS
Chandler Creek 9.750% * * * F,N,P,SS
Cobb Park 9.500% * * * F
Greenbriar 9.000% * * * F,K
Greenbridge at Buckingham 10.000% * * * F,N,P
Hillside 9.250% * * * F,K,N,P
Lake Park 9.000% * * * F,K
Lakeline 9.650% * * * F,N,P
Lakes Edge at Walden 11.000% * * * F
Magnolia Arbors 8.950% * * * F,N,P
Mecca Vineyards 9.000% * * * F,K
Midtown Square 8.950% * * * F,N,P
Oaks at Hampton 9.000% * * * F,K
Oakwood Manor 9.500% * * * F,K
Ocean Ridge 8.750% * * * F,K
Parks at Westmoreland 9.000% * * * F,K,N,P
Princess Anne House 9.500% * * * F,K,N,P
Red Hill Villas 9.500% * * * F,K
13
LAST YEAR BOND TYPE REVENUE BOND
OF CON- PARTICI- (LIHTC / FAIR VALUE AT
STRUCTION PATING 501(c)(3)/ REVENUE BOND DECEMBER 31,
PROPERTY LOCATION UNITS / REHAB BOND OTHER)(1) DATE CLOSED PAR AMOUNT 2001(2)
-------- -------- ----- ------- ---- ------- ----------- ---------- -------
Riverside Meadows Austin, TX * * No LIHTC Dec-01 200,000 200,000
Silverwood Lakewood, WA * * No LIHTC Dec-01 525,000 525,000
White Rock San Antonio, TX * * No 501(c)(3) Dec-01 430,000 430,000
Williams Run Dallas, TX * * No 501(c)(3) Dec-00 200,000 207,000
Subtotal-Taxable Bonds 13,270,000 13,801,000
-------------------------------
Total First Mortgage Bonds 1,137,173,174 1,111,215,000
-------------------------------
OTHER TAX-EXEMPT SUBORDINATE BONDS
Draper Lane Silver Spring, MD 406 No Other Feb-01 11,000,000 11,000,000
Museum Tower Philadelphia, PA 286 No Other Nov-00 6,000,000 6,000,000
Park at Landmark Alexandria, VA 396 No Other Sep-00 9,500,000 9,500,000
Subtotal-Subordinate Bonds 1,088 26,500,000 26,500,000
--------- -------------------------------
Total Revenue Bonds 1,088 1,163,673,174 1,137,715,000
--------- -------------------------------
RENTAL UNIT RENTAL NUMBER
STATED OCCUPANCY RATES AT OF
INTEREST DECEMBER DECEMBER 31, COMPETING
PROPERTY RATE(3) 31, 2001 2001 PROPERTIES NOTES
-------- ----- -------- ---- ---------- -----
Riverside Meadows 8.750% * * * F,K
Silverwood 8.750% * * * F,K
White Rock 9.500% * * * F,N,P
Williams Run 9.250% * * * F
Subtotal-Taxable Bonds
Total First Mortgage Bonds
OTHER TAX-EXEMPT SUBORDINATE BONDS
Draper Lane 10.000% NAP NAP C,H
Museum Tower 8.250% NAP NAP C,G
Park at Landmark 8.750% NAP NAP C,G
Subtotal-Subordinate Bonds
Total Revenue Bonds
1. LIHTC bonds are bonds for which the owner of the Underlying Property is
eligible to receive Low Income Housing Tax Credits. Bonds for which the
obligor is a non-for- profit entity under Section 501( c)(3) of the
Internal Revenue Code are classified as 501 ( c)(3) bonds. Other bonds are
those which are neither LIHTC or 501( c)(3) bonds.
2. The Revenue Bonds are deemed to be available-for-sale debt securities and,
accordingly, are carried at their estimated fair values at December 31,
2001 in accordance with FAS 115.
3. The stated interest rate represents the coupon rate of the Revenue Bond at
December 31, 2001.
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. Owned by CharterMac Corporation, a consolidated subsidiary of the Company.
G. Held by Merrill Lynch as collateral for secured borrowings (see
P-FLOATS/RITES below).
H. Held by Merrill Lynch as collateral in connection with the Merrill Lynch
P-FLOATS/RITES Program (see P-FLOATS/RITES below).
I. Held as collateral in connection with the TOP (see Private Label Tender
Option Program below).
J. Transferred to CharterMac Owner Trust I in connection with the TOP (see
Private Label Tender Option Program below).
K. The obligors of these Revenue Bonds are partnerships in which affiliates of
the Manager are partners that own a controlling interest.
L. The original owner of the Underlying Property and obligor of the Revenue
Bond has been replaced with an affiliate of the Manager.
14
M. The minimum interest rate is the cash flow of the property
N. In the event the construction of the Underlying Property is not completed
in a timely manner, the Company may "put" the Revenue Bond to the
construction lender at par.
O. In the event the rehabilitation of the Underlying Property is not completed
in a timely manner, the Company may "put" the Revenue Bond to the
construction lender at par.
P. All of the "puts" (see N and O above) are secured by a letter of credit
issued by the construction lender to the Company.
Q. 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.
R. The Company received participating interest during 2001.
S. A third party has the option to acquire these Revenue Bonds for an
aggregate price of $35,250,000. The notice to exercise the option, on or
about March 18, 2002, was re- ceived by the Company on February 15, 2002.
T. The Company is permitted to call the Revenue Bond with six months written
notice.
U. The interest rate for this Revenue Bond is 8.5% through September 1, 2002
and 7.5% thereafter.
V. The interest rate for this Revenue Bond is 8.15% through March 1, 2003 and
7.6% thereafter.
W. The interest rate for this Revenue Bond is 8.6% through August 1, 2002 and
7.6% thereafter.
X. The interest rate for this Revenue Bond is 7.9% through November 1, 2002
and 7.4% thereafter.
Y. The interest rate for this Revenue Bond is 8.5% through November 1, 2002
and 7.6% thereafter.
Z. The interest rate for this Revenue Bond is 7.9% through December 1, 2002
and 7.4% thereafter.
AA. The interest rate for this Revenue Bond is 8.5% through January 1, 2003 and
7.5% thereafter.
BB. The interest rate for this Revenue Bond is 7.9% through March 1, 2003 and
7.0% thereafter.
CC. The interest rate for this Revenue Bond is 8.6% through August 1, 2002 and
7.6% thereafter.
DD. The interest rate for this Revenue Bond is 8.1% through November 1, 2003
and 7.7% thereafter.
EE. The interest rate for this Revenue Bond is 7.9% through October 1, 2002 and
7.4% thereafter.
FF. The interest rate for this Revenue Bond is 7.75% through February 1, 2003
and 7.25% thereafter.
GG. The interest rate for this Revenue Bond is 8.0% through March 1, 2003 and
7.5% thereafter.
HH. The interest rate for this Revenue Bond is 7.9% through March 1, 2003 and
7.0% thereafter.
II. The interest rate for this Revenue Bond is 8.5% through September 1, 2002
and 7.65% thereafter.
JJ. The interest rate for this Revenue Bond is 7.75% through November 1, 2002
and 6.95% thereafter.
KK. The interest rate for this Revenue Bond is 8.4% through January 1, 2003 and
7.4% thereafter.
LL. The interest rate for this Revenue Bond is 8.4% through December 1, 2002
and 7.4% thereafter.
MM. The interest rate for this Revenue Bond is 7.7% through December 1, 2003
and 7.2% thereafter.
NN. The interest rate for this Revenue Bond is 7.5% through April 1, 2003 and
7.0% thereafter.
OO. The interest rate for this Revenue Bond is 8.45% through October 1, 2002
and 7.45% thereafter.
PP. The interest rate for this Revenue Bond is 8.0% through September 1, 2002
and 7.2% thereafter.
QQ. The interest rate for this Revenue Bond is 7.75% through April 1, 2003 and
7.7% thereafter.
RR. The interest rate for this Revenue Bond is 7.8% through November 1, 2002
and 7.5% thereafter.
SS. The interest rate for this Revenue Bond is 9.75% through November 1, 2002
and 9.25% thereafter.
15
ACCESSING MULTIPLE FORMS OF CAPITAL
In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company will need to continue to access additional capital. The
Company uses a combination of equity offerings and securitizations of its assets
in order to finance additional investments in Revenue Bonds. The Company's
diverse access to capital provides financial flexibility and enables the Company
to not have to rely on one single source of debt or equity. 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 primarily used two sources of capital: collateralized debt
securitizations and equity offerings. 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-SM- 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 equity offerings to maintain leverage within
required limits.
During 2001, the Company's growth was financed by the Private Label Tender
Option Program, new common share public offerings, 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. During 2002, the Company expects to raise
funds through additional common share, preferred share and Convertible Community
Reinvestment Act Preferred Share offerings ("Convertible CRA Shares"); however,
there can be no assurance that these initiatives will be successful.
PUBLIC OFFERINGS
On February 21, 2002, the Company sold to the public 6.3 million Common Shares
at a price of $15.47 per share. The net proceeds from this offering,
approximating $92.5 million, will be used primarily to fund additional
investments in Revenue Bonds and for general corporate purposes.
On November 8, 2001, the Company sold to the public 3.7 million Common Shares at
a price of $15.00 per share. The net proceeds from this offering, approximating
$51.8 million, were used to fund additional investments in Revenue Bonds and for
general corporate purposes.
On May 10, 2001, the Company sold to the public 8.4 million Common Shares at a
price of $14.64 per share. The net proceeds from this offering, approximating
$115.7 million, were used to fund additional investments in Revenue Bonds,
reduce outstanding debt and for general corporate purposes.
PREFERRED EQUITY ISSUANCES
One of CharterMac's subsidiaries, Equity Issuer, has issued preferred shares to
institutional investors with an aggregate liquidation amount of approximately
$218.5 million, issued as follows: $90.0 million in 1999, $79.0 million in 2000
and $49.5 million in 2001. The Cumulative Preferred Shares are not convertible
into Common Shares of Equity Issuer or the Company's Common Shares. The
Cumulative 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.
PRIVATE LABEL TENDER OPTION PROGRAM
On May 21, 1998, the Company closed on its Private Label Tender Option Program
("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.
As of December 31, 2001, the Company has contributed 64 issues of Revenue Bonds
in the aggregate par amount of approximately $578 million to CharterMac
Origination Trust I (the "Origination Trust"), a wholly-owned, indirect
subsidiary of the Company. The Origination Trust then contributed 47 of its
Revenue Bonds, with an aggregate par amount of approximately $428 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, 2001, four such Series Trusts were created: two
"California only" series that had 17 issues of Revenue Bonds in the aggregate
par amount of approximately $123 million and two "National" (non-state specific)
series that had 37 issues of Revenue Bonds in the aggregate par amount of
approximately $319 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 new investors and (ii) a Residual
Certificate representing the remaining beneficial ownership interest in each
Series Trust, which
16
has been issued to the Origination Trust. At December 31, 2001, the
California only and National Series Trusts had Floater Certificates with an
outstanding amount of $70 million and $205 million, respectively.
The Revenue Bonds remaining in the Origination Trust (aggregate principal
amount of approximately $150 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 3.5%, 5.4% and 4.5% for
the years ended December 31, 2001, 2000 and 1999, respectively.
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 or liquidity provider. At December 31, 2001, the total par
amount of such additional Revenue Bonds, cash and cash equivalents and
temporary investments pledged as collateral was approximately $148 million.
During the year 2001, the Company transferred 13 Revenue Bonds with an
aggregate par amount of approximately $142 million to the P-FLOATS/RITES
program and received proceeds of approximately $135 million. Additionally,
the Company repurchased five Revenue Bonds with an aggregate par value of
approximately $55 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 3.72%, 4.96% and 4.8%, for the years ended December 31, 2001
and for the period June 29, 1999 (inception of this program) through December
31, 1999, respectively.
OTHER DEBT
In December 2001, CM Corp. acquired of 80% of PWF common stock 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. 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 for 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 month thirteen 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 has a $50 million multi-family revolving warehouse facility, which will
expire 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
17
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.
PWF is the guarantor for a $35 million loan and security agreement for
Larson, which will expire on May 31, 2002. The interest rate for the
agreement is 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.
PWF also has another $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 must be selected by the Company from the following two alternatives:
LIBOR (for the estimated duration of the advance) plus 125 basis points or
Prime plus 12.5 basis points (the default rate). At December 31, 2001 there
were no outstanding borrowings under the facility. At December 31, 2001, the
Company was in compliance with all covenants of the facility.
ATEBT MERGER
On November 2, 1999, the Company and American Tax Exempt Bond Trust
("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 tax-exempt first mortgage 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 outstanding
Common Shares at the time of the merger) of the Company.
COMPETITION
The Company, from time to time, may be in competition with private investors,
mortgage banking companies, lending institutions, quasi-governmental agencies
such as Fannie Mae and FHA, 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, the Company is also in competition with 26 licensed DUS lenders
which originate multifamily mortgages on behalf of Fannie Mae. However, the
Company, through PWF, is better positioned to offer a full range of financing
programs on both affordable and market-rate multifamily 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. 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 federal Low Income
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 operates as a stand-alone entity and is actively self-managed
with its own employees. Thus on a consolidated basis, the Company had 145
employees as of December 31, 2001. 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.
18
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.
RECENT LEGISLATION
The States of California and Florida recently adopted administrative
amendments to their allocation plans pursuant to which they award bond value
capital to developers of multifamily housing. These amendments will require,
in some cases, that a certain portion of the debt financing for such
properties to be taxable. Therefore, in certain cases, the Company may be
required to offer taxable financing to California and Florida developers in
order to be competitive.
Since 1986, the Internal Revenue Code has provided that any Revenue Bond
which is a "private activity bond" (other than certain refunding bonds and
bonds issued for Section 501(c)(3) organizations) must receive an allocation
of "volume cap" from the governmental issuer of the bond. The amount of
volume cap was established in 1986 and was not indexed for inflation. Thus,
the amount of available volume cap in real dollars has decreased each year,
reducing the number of projects that may be financed with private activity
bonds. On December 21, 2000, President Clinton signed into law an omnibus
funding bill (H.R. 4577) containing $31.5 billion in tax cuts. Included in
the law are provisions increasing both the low-income housing tax credit and
tax exempt bond volume caps over a two year period as follows: (i) the tax
credit cap has been increased to $1.50 per capita in 2001 and will be $1.75
per capita in 2002; (ii) the bond volume cap has been increased to the
greater of $62.50 per resident or $187.5 million in 2001 and will be $75 per
resident or $225 million in 2002. Both volume caps are indexed for inflation
beginning in 2003.
Item 2. Properties
The Company leases office space as follows:
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.
Item 4. Submission of Matters to a Vote of Shareholders
None.
19
PART II
Item 5. Market for the Company's Common Shares and Related Shareholder Matters.
As of March 20, 2002, there were 3.551 registered shareholders owning 41,152,738
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:
2001 2001 2000 2000
QUARTER ENDED LOW HIGH LOW HIGH
------------- --- ---- --- ----
March 31 $13.300 $16.100 $11.250 $12.375
June 30 $14.210 $15.950 $11.375 $12.813
September 30 $15.000 $15.990 $12.188 $14.250
December 31 $14.750 $16.480 $12.400 $13.930
The last reported sale price of Common Shares on the American Stock Exchange
on March 20, 2002 was $16.03.
INCENTIVE SHARE OPTION PLAN
The Company has adopted an incentive share option plan (the "Incentive Share
Option Plan"), the purpose of which is to (i) permit the Company and the
Manager to attract and retain qualified persons as trustees and officers and
(ii) to provide incentive and to 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 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 Common 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 Share 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 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 Incentive Share
Option Plan may vest immediately upon issuance or in accordance with the
determination of the Compensation Committee. For the years ended December 31,
1997 and 1998 the Company did not grant any options since its distributions
per Common Share did not exceed the minimum threshold of $0.9517 per Common
Share. In 2001, 2000 and 1999, the Company distributed $1.14, $1.07 and
$0.995 per Common Share, respectively, thus enabling the Compensation
Committee, at its discretion, to issue options.
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 297,830 options granted on May 1, 2000 had
an estimated fair value at December 31, 2001 of $.90 per option grant, or a
total of $268,047. The fair value of each option grant is estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2001: dividend yield of 7.38%, expected
volatility of 24%, and expected lives of ten years. On May 1, 2001,
one-third, or 99,276, of the options vested, of which 69,568 were exercised,
leaving a balance of 228,262. The Company recorded compensation cost of
$168,936 and $109,952 during the years ended December 31, 2001 and 2000,
respectively, relating to these option grants.
COMMON SHARE REPURCHASE PLAN
GENERAL
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, 2001,
20
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 Common Shares of beneficial
interest.
PREFERRED EQUITY ISSUANCE BY SUBSIDIARY
One of the Company's subsidiaries, Equity Issuer, has issued preferred shares
to institutional investors with an aggregate liquidation amount of
approximately $218.5 million. Attributes of each series of Cumulative
Preferred Shares are as follows:
DATE OF NUMBER OF LIQUIDATION TOTAL FACE DIVIDEND
PREFERRED SERIES ISSUANCE SHARES PREFERENCE PER SHARE AMOUNT RATE
--------------------- --------------------- ------------ ----------------------- --------------- --------------
Series A June 29, 1999 45 $2,000,000 $90,000,000 6.625%
Series A-1 July 21, 2000 48 500,000 24,000,000 7.100%
Series A-2 October 9, 2001 62 500,000 31,000,000 6.300%
Series B July 21, 2000 110 500,000 55,000,000 7.600%
Series B-2 October 9, 2001 37 500,000 18,500,000 6.800%
The Series A Cumulative Preferred Shares, Series A-1 Cumulative Preferred
Shares and Series A-2 Cumulative Preferred Shares are collectively referred
to as the "Series A Shares". The series B Subordinate Cumulative Preferred
Shares and Series B-1 Subordinate Cumulative Preferred Shares are
collectively referred to as the "Series B Shares". The Series A Shares and
the Series B Shares are collectively referred to as the "Cumulative Preferred
Shares".
The Cumulative Preferred Shares are not convertible into Common Shares of
Equity Issuer or CharterMac's Common Shares. The Cumulative Preferred Shares
have an annual preferred dividend payable quarterly in arrears on January 31,
April 30, July 31 and October 31 of each year, 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.
In connection with the initial offering of Cumulative Preferred Shares,
CharterMac contributed 100% of its ownership interests in the Origination
Trust to Equity Issuer, a Delaware business trust and an indirectly-owned
subsidiary in which CharterMac owns 100% of the common equity. As a result,
Equity Issuer became the direct and indirect owner of all of the Revenue
Bonds held by the Origination Trust and the Owner Trust (see discussion of
Private Label Tender Option Program, in Item 1). In addition to contributing
the ownership of the Origination Trust, CharterMac also contributed certain
additional Revenue Bonds to Equity Issuer.
The Series A Shares all have identical terms except as to the distribution
commencement date, the annual preferred dividend rate and the liquidation
amount per share. Equity Issuer may not redeem the Series A Shares before
June 30, 2009 and they are subject to mandatory tender for remarketing and
purchase on such date and each remarketing date thereafter at a price equal
to their respective per share liquidation amounts plus an amount equal to all
distributions accrued but unpaid on Series A Shares. Holders of the Series A
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. After that date, all or a portion of the shares may be
redeemed, subject to certain conditions. Each holder of the Series A Shares
will be required to tender its shares to Equity Issuer for mandatory
repurchase on June 30, 2049, unless Equity Issuer decides to remarket the
shares on such date.
The Series A Shares rank, with respect to payment of distributions and
amounts upon liquidation, dissolution or winding-up of Equity Issuer, senior
to the Series B Shares and all classes or series of Common Shares of Equity
Issuer and, therefore, effectively rank senior to the Company's Common
Shares, Convertible CRA Shares, and preferred shares, if any.
The Series B Shares all have identical terms, except as to the distribution
commencement date and the annual preferred dividend rate. Equity Issuer may
not redeem the Series B Shares before November 30, 2010 and they are subject
to mandatory tender for remarketing and purchase on such date under the same
terms as the Series A Shares. After that date, all or a portion of the shares
may be redeemed, subject to certain conditions. Each holder of the Series B
Shares will be required to tender its shares to Equity Issuer for mandatory
repurchase on November 30, 2050, unless Equity Issuer decides to remarket the
shares on such date.
The Series B Shares rank with respect to payment of distributions and amounts
upon liquidation, dissolution or winding up of Equity Issuer, senior to all
classes or series of Common Shares of Equity Issuer and, therefore,
effectively rank senior to the Company's Common Shares, Convertible CRA
Shares, and preferred shares, if any, and junior to the Series A Shares.
Equity Issuer is subject to, among others, the following covenants with
respect to the Cumulative Preferred Shares:
TAX-EXEMPT INTEREST AND DISTRIBUTIONS Equity Issuer may only acquire new
investments that it reasonably believes will generate interest and
distributions excludable from gross income for federal income tax purposes.
Equity Issuer will dispose of any investment the interest on which becomes
includable in gross income for federal income tax purposes, for any reason,
as soon as commercially practicable.
LEVERAGE Equity Issuer will not, and will not permit any of its subsidiaries
to, directly or indirectly, incur any obligation except if (i) Equity Issuer
is not in default under its trust agreement, (ii) Equity Issuer has paid or
declared and set aside for payment all accrued and unpaid distributions on
the Cumulative Preferred Shares, and (iii) after giving effect to the
incurrence of the obligation, the leverage ratio on the Company's portfolio
is less than 0.6 to 1.0.
21
FAILURE TO PAY DISTRIBUTION If Equity Issuer has not paid in full six
consecutive quarterly distributions on Equity Issuer preferred shares, Equity
Issuer is required to reconstitute its board of trustees so that a majority
of the board of trustees consists of trustees who are independent with
respect to Equity Issuer, the Company, the Company's Manager or Related
Capital.
ALLOCATION OF TAXABLE INTEREST INCOME AND MARKET DISCOUNT Equity Issuer will
specially allocate taxable interest income and market discount that is
taxable as ordinary income to the Company. Market discount, if any, may arise
where Equity Issuer acquires a bond other than upon its original issuance for
less than its stated redemption price at maturity and the difference is
greater than a de minimis amount (generally 1/4 of 1% of bond's stated
redemption price at maturity multiplied by the number of complete years to
maturity).
LIMITATION ON ISSUANCE OF PREFERRED EQUITY INTERESTS Equity Issuer may not
issue preferred equity interests that are senior to the Series A and A-1
Preferred Shares without the consent of a majority of the holders of the
Series A and A-1 Preferred Shares. Equity Issuer may not issue any preferred
equity interests that are equal in rank to the Cumulative Preferred Shares
unless certain conditions are met, including that the amount of such
preferred equity interests is limited, Equity Issuer has paid or declared and
set aside for payment all accrued and unpaid distributions on the Cumulative
Preferred Shares to holders, and there is no default or event of default
under Equity Issuer's trust agreement.
CONVERTIBLE COMMUNITY REINVESTMENT ACT PREFERRED SHARE OFFERINGS
The Company has completed two issuances of Convertible CRA Shares, raising
net proceeds of approximately $34 million. As of December 31, 2001, the
Company had 1,882,364 Convertible CRA Shares outstanding, which are
convertible at the holders' option into 1,764,663 Common Shares.
The Convertible CRA Shares enable financial institutions to receive positive
consideration under the Community Reinvestment Act ("CRA") as a "qualified
investment". The Company has developed a proprietary method for specially
allocating these CRA "credits" to specific financial institutions that invest
in these Convertible CRA Shares. Other than the preferred allocation of CRA
credits, the investors receive the same economic benefits as the Company's
common shareholders, including receipt of the same dividends per share as
those paid to the Company's common shareholders. Other than on matters
relating to the terms of these Convertible CRA Shares or to amendments to the
Trust Agreement, which would adversely affect the powers, preferences,
privileges or rights of these Convertible CRA Shares, the Convertible CRA
Shares do not have any voting rights. The Company's earnings are allocated
pro rata among Common Shares and 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 the conversion price specified below. Upon conversion, the
investors will no longer be entitled to a special allocation of any CRA
credit.
ISSUANCE DATE CONVERSION PRICE CONVERSION RATIO
---------------------------- -------------------------- ----------------------------
May 10, 2000 $15.33 0.9217
December 20, 2000 $14.60 0.9678
The Company may raise additional equity in the future from similar financial
institutions that can utilize the regulatory benefits that have not
previously been allocated to other holders of the Company's Convertible CRA
Shares. While these future offerings could be a source of additional equity,
it is only one of many potential sources. Furthermore, there is no assurance
that the Company will be able to consummate such transactions at all or on
favorable terms. In addition, this potential source of liquidity would be
eliminated if the applicable federal regulatory agencies were to determine
that an investment in the Convertible CRA Shares did not result in the
financial institutions being able to receive these regulatory benefits.
OTHER
Through calendar year 1999, each independent trustee was entitled to receive
annual compensation for serving as a trustee in the aggregate amount of
$15,000 payable in cash (maximum of $5,000 per year) and/or Common Shares
valued at their fair market value on the date of issuance. Beginning in
calendar year 2000, the annual compensation for the two original independent
trustees was increased from $15,000 to $17,500 and the maximum payable in
cash was increased from $5,000 to $7,500. In 2000, a third independent
trustee was appointed and such trustee will 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, 2001 and 2000, 5,553 and 3,552
Common Shares, respectively, having an aggregate value on the date of
issuance of $75,000 and $45,000, respectively, were issued to the independent
trustees as compensation for their services. An additional 1,830 shares, with
an aggregate value of $30,000 at issuance, were issued to the independent
trustees in January 2002 as compensation for their 2001 service.
22
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, 2001 and 2000 were
as follows:
SHAREHOLDERS OF THE COMPANY
-------------------------------------------------------------------
CASH DISTRIBUTION FOR DATE PER TOTAL AMOUNT
QUARTER ENDED PAID SHARE DISTRIBUTED
------------------------------ --------------------- -------------------- ------------------------
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
===== ==========
March 31, 2000 5/15/00 $0.265 $ 5,454,406
June 30, 2000 8/15/00 0.265 5,749,086
September 30, 2000 11/15/00 0.265 5,970,096
December 31, 2000 2/15/01 0.275 6,800,306
----- ----------
Total for 2000 $1.070 $23,973,894
===== ==========
In addition to the distributions set forth in the table above, the Company
paid the Manager a special distribution (equal to .375% per annum of the
total invested assets of the Company), which amounted to $3,620,923 and
$2,743,465 for the years ended December 31, 2001 and 2000, 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.
23
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 financial
statements and notes thereto contained in "Item 8. Financial Statements and
Supplementary Data".
FOR THE YEAR ENDED DECEMBER 31, ($000S EXCEPT PER SHARE DATA)
-----------------------------------------------------------------------
OPERATIONS 2001 2000 1999 1998 1997 (1)
---------- ----------- ----------- ----------- ----------- ----------
Total revenues $ 75,081 $ 59,091 $ 40,437 $ 27,940 $ 14,230
Operating expenses (6,074) (4,563) (3,151) (2,391) (1,902)
Interest expense and financing costs (16,132) (16,488) (8,768) (3,523) (429)
Other-than-temporary impairments related to investments - -
in Revenue Bonds (400) (1,859) (1,843)
Gain/(Loss) on repayment of Revenue Bonds (912) 645 (463) -- --
----------- ----------- ----------- ----------- ----------
Income before allocation to preferred shareholders 51,563 38,685 26,196 22,026 10,056
Income allocated to preferred shareholders of subsidiary (12,578) (8,594) (3,014) -- --
----------- ----------- ----------- ----------- ----------
Net income $ 38,985 $ 30,091 $ 23,182 $ 22,026 $ 10,056
=========== =========== =========== =========== ==========
Net income applicable to Shareholders (5) $ 35,011 $ 27,074 $ 20,951 $ 20,343 $ 2,438 (3)
=========== =========== =========== =========== ==========
Net income per Share (5)
Basic $ 1.14 $ 1.22 $ 1.02 $ .99 $ .12 (3)
=========== =========== =========== =========== ==========
Diluted $ 1.14 $ 1.22 $ 1.02 $ .98 $ .12 (3)
=========== =========== =========== =========== ==========
Weighted average Shares outstanding
Basic 30,782 22,141 20,581 20,587 20,587 (3)
=========== =========== =========== =========== ==========
Diluted 30,837 22,152 20,581 20,741 20,587 (3)
=========== =========== =========== =========== ==========
FINANCIAL POSITION
Total assets $ 1,411,263 $ 925,236 $ 673,791 $ 492,586 $ 362,391
=========== =========== =========== =========== ==========
Financing arrangements $ 541,796 $ 385,026 $ 257,770 $ 150,000 $ --
=========== =========== =========== =========== ==========
Notes payable $ 56,586 $ -- $ -- $ -- $ 21,445
=========== =========== =========== =========== ==========
Total liabilities $ 652,427 $ 399,222 $ 268,239 $ 165,092 $ 30,722
=========== =========== =========== =========== ==========
Preferred shares of subsidiary (subject to mandatory
repurchase) $ 218,500 $ 169,000 $ 90,000 $ -- $ --
=========== =========== =========== =========== ==========
Total shareholders' equity/partners' capital $ 535,248 $ 357,014 $ 315,552 $ 327,494 $ 331,668
=========== =========== =========== =========== ==========
DISTRIBUTIONS
Distributions to Series A preferred shareholders $ 5,962,500 $ 5,962,500 $ 3,014,375 N/A N/A
=========== =========== =========== =========== ==========
Distributions to Series A-1 preferred shareholders $ 1,704,000 $ 762,067 N/A N/A N/A
=========== =========== =========== =========== ==========
Distributions to Series B preferred shareholders $ 4,180,000 $ 1,869,389 N/A N/A N/A
=========== =========== =========== =========== ==========
Distributions to Series A-2 preferred shareholders $ 444,850 N/A N/A N/A N/A
=========== =========== =========== =========== ==========
Distributions to Series B-1 preferred shareholders $ 286,544 N/A N/A N/A N/A
=========== =========== =========== =========== ==========
Distributions to BUC$holders N/A N/A N/A N/A $7,138,263 (4)
==========
Distributions to Shareholders (5) $36,607,570 $23,973,872 $20,478,112 $19,144,597 $4,735,120 (3)
=========== =========== =========== =========== ==========
Distributions per share (2) $ 1.14 $ 1.07 $ 1.00 $ .93 $ .23 (3)
=========== =========== =========== =========== ==========
24
OTHER DATA
(1) Information prior to October 1, 1997 (the date of the Merger) is only with
respect to Summit Tax Exempt L.P. II. Information subsequent to September 30,
1997 is with respect to the Company and its consolidated subsidiaries that
include Summit Tax Exempt II and the other Partnerships pursuant to the Merger.
(2) Distributions per share are the same for both Common Shares and Convertible
CRA Shares. Net income and distribution per Share information for periods prior
to October 1, 1997 is not presented because it is not indicative of the
Company's continuing capital structure.
(3) Represents amount for the three months ended December 31, 1997.
(4) Represents amount for the nine months ended September 30, 1997.
(5) Includes common shareholders and Convertible CRA Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GENERAL
The Company is a full service investor in and servicer of multifamily housing
debt. The Company is principally engaged in the acquisition and ownership
(directly or indirectly) of tax-exempt (and, on occasion, taxable) multifamily
housing revenue bonds issued by various state or local governments, agencies, or
authorities ("Revenue Bonds") and other investments that produce tax-exempt
income. The Revenue Bonds are secured by mortgage loans on underlying properties
("Underlying Properties").
CharterMac is classified as a partnership for federal income tax purposes
and, thus, is not subject to federal income taxation. As such, CharterMac
will pass through to its shareholders, in the form of distributions, income,
including tax-exempt income, derived from its investments and activities.
Although the exact percentage may vary from quarter to quarter, substantially
all of the distributions to shareholders are excludable from gross income for
federal income tax purposes. For the calendar year ended December 31, 2001,
approximately 96% of the distributions qualified as tax-exempt income.
The Company focuses on investing in a portfolio of Revenue Bonds that are
secured by affordable multifamily rental housing properties. Through PWF, the
Company focuses on originating and servicing multifamily mortgage loans on
behalf of GSEs such as Fannie Mae, Freddie Mac and FHA. Together, these
components offer a full range of capital solutions to developers of
affordable and market rate multifamily housing.
The Company does not operate as a mortgage REIT, which generally utilizes
high levels of leverage and acquire subordinated interests in commercial
and/or residential mortgage-backed securities. Unlike mortgage REITs that
typically incur leverage at ratios ranging from 3:1 to 10:1, the Company is
only able to incur leverage or other financing up to 50% of the Company's
Total Market Value (as defined and pursuant to its Trust Agreement) as of the
date incurred. Furthermore, the Revenue Bonds owned by the Company generally
call for ten-year restrictions from prepayments, eliminating the Company's
susceptibility to significant levels of repayment risk as a result of
interest rate reductions. Due to the Company's low level of leverage, the
Company is less likely than highly leveraged REITs to be affected by any lack
of liquidity. The Company's portfolio does not contain assets that are
especially vulnerable to volatility during periods of interest rate
fluctuations. Consistent with the foregoing, the Company focuses on providing
investors with a stable level of distributions, even through unstable markets.
In order to generate tax-exempt income to pass through to the Company's
shareholders and, as a result, enhance the value of the Company's Common
Shares, the Company primarily invests in or acquires tax-exempt bonds secured
by 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 traditional
methods of financing affordable housing with tax-exempt Revenue Bonds are
complex and time consuming, and involve the participation of many
intermediaries. Through Manager, the process has been streamlined with the
"Direct Purchase Program." The Company's Direct Purchase Program removes all
intermediaries from the financing process (except the governmental issuer of
the Revenue Bond) and enables developers to deal directly with one source.
Because the Company purchases its Revenue Bonds directly from the
governmental issuer, the need for underwriters and their counsel, rating
agencies and costly documentation is eliminated. This reduces the financing
life cycle, often by several months, and also reduces the bond issuance
costs, usually by 30% or more. In dealing directly with the Company,
developers feel more certain about the terms and timing of their financing.
The Company believes the savings in time and up-front costs and the certainty
of execution that the Direct Purchase Program offers to developers allows us
to receive above-market rates of interest on the Company's Revenue Bonds.
In addition to investing in tax-exempt Revenue Bonds secured by multifamily
properties producing tax credits, the Company may acquire other multifamily
tax-exempt bonds including those issued to finance low-income multifamily
projects and facilities for the elderly owned by Section 501(c)(3)
not-for-profit organizations. The Company also has a portion of assets that
produce a small amount of taxable income.
As a result of the acquisition of PWF, the Company has diversified the range
of the Company's investment products and is able to offer developers fixed
and floating rate tax-exempt and taxable financing through Fannie Mae,
Freddie Mac and, to a lesser extent, FHA for affordable and market rate
multifamily properties. Combining this with the Company's core business of
investing in Revenue Bonds and its affiliation with Related Capital, the
Company is able to provide developers with financing for all aspects of
25
their property's capital structure. In addition, the Company has diversified
its revenues with a fee business that will grow in value over time and will
insulate the Company from the vagaries of the capital markets.
On January 14, 2002, the Company announced that its Board of Trustees had
formed a special committee to explore strategic alternatives for the
Company's future management structure, including internalization of
management, and ways to further diversify the Company's revenue sources. The
special committee consists of the independent members of the Board of
Trustees, Peter T. Allen, Arthur P. Fisch and Charles L. Edson. The special
committee has retained independent counsel and expects to hire a financial
advisor to assist them in this process.
CRITICAL ACCOUNTING POLICIES
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").
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 Company periodically evaluates its credit risk exposure associated with
its Revenue Bonds to determine whether other than temporary impairments
exist. Impairment is indicated if, based on current information and events,
it is probable that the Company will be unable to collect all amounts due,
including principal and interest, according to the existing contractual terms
of the Revenue Bond. The cost basis of a Revenue Bond with other than
temporary impairment 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 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 multifamily
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, 2001, all but one 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 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 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, 2001, the
Company serviced approximately $362 million of loans under the FHA 223(f),
232, and 242 Programs, of which approximately $120 million had GNMA
securities outstanding.
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, 2001, the Company had
approximately $595 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 multifamily and commercial mortgages for insurance companies,
and banks. The servicing for these loans is generally retained by the
Company. At December 31 2001, the Company had approximately $305 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.
26
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 estimated fair values
based on the purchase price paid by CM Corp for its 80% share of PWF.
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 Statement of Operations 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
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.
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 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"). 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.
27
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 securitizations and equity offerings. To date, the primary source of
long-term liquidity has come from the Company's Private Label Tender Option
Program and preferred equity offerings by the Company or a subsidiary. During
the years 1999, 2000 and 2001, the Company raised additional capital as follows:
AMOUNT OF CAPITAL RAISED DURING (IN $000'S): ENDING BALANCE
--------------------------------------------------------------------------------------------------------
CAPITAL SOURCE 1999 2000 2001 DECEMBER 31, 2001
--------------------------------------------------------------------------------------------------------
EQUITY:
PREFERRED
Series A $ 90,000 $ -- $ -- $ 90,000
Series A-1 -- 24,000 -- 24,000
Series A-2 -- -- 31,000 31,000
Series B -- 55,000 -- 55,000
Series B-1 -- -- 18,500 18,500
Convertible CRA -- 36,596 -- 36,596
------------- ------------- ------------- -------------
Total $ 90,000 $ 115,596 $ 49,500 $ 255,096
------------- ------------- ------------- -------------
COMMON
May 2001 $ -- $ -- $ 122,683 $ 122,683
November 2001 -- -- 55,140 55,140
------------- ------------- ------------- -------------
Total $ -- $ -- $ 177,823 $ 177,823
------------- ------------- ------------- -------------
SECURITIZATIONS:
Private Label Tender Option Program $ 177,000 $ 98,000 $ 75,000 $ 350,000
P-Floats/RITES 80,769 29,348 81,770 191,796
------------- ------------- ------------- -------------
Total $ 257,769 $ 127,348 $ 156,770 $ 541,796
------------- ------------- ------------- -------------
FLEET: PW ACQUISITION $ -- $ -- $ 27,261 $ 27,261
------------- ------------- ------------- -------------
PW WAREHOUSE LINE $ -- $ -- $ 29,325 $ 29,325
------------- ------------- ------------- -------------
Total of all capital activity $ 347,769 $ 242,944 $ 440,679 $ 1,031,301
============= ============= ============= =============
These capital raising transactions are described in more detail below.
The Company has two primary securitization programs: the Private Label Tender
Option Program and the P-FLOATS/RITES-SM- 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, 2001, the
Company has no off-balance sheet debt.
28
CAPITAL RAISING TRANSACTIONS
(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.
PREFERRED DATE OF MANDATORY MANDATORY NUMBER LIQUIDATION TOTAL FACE DIVIDEND
SERIES ISSUANCE TENDER REPURCHASE OF SHARES PREFERENCE 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 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%
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 and A-2 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 and Series B-1 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 and A-2 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 2002, preferred shareholder distributions that were
declared in December 2001, were paid to the preferred shareholders from cash
flow from operations for the quarter ended December 31, 2001. 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 B; 7.600% $ 9,500 $1,045,000
Series B-1; 6.800% $ 8,500 $1,258,000
(II) CONVERTIBLE COMMUNITY REINVESTMENT ACT PREFERRED SHARE OFFERINGS
On May 10, 2000, the Company completed a $27,497,000 private placement 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.) The Company incurred an initial purchasers'
discount of approximately $1,109,000 and other related costs of approximately
$610,000, resulting in net proceeds (less expenses) of $25,778,000. On December
14, 2000, the Company completed an additional $9,100,000 private placement of
Convertible CRA Shares to three additional financial institutions (644,000
Convertible CRA Shares priced at $14.13 per share). After an initial purchasers'
discount of approximately $367,000 and other related costs of approximately
$318,000, the Company received net proceeds (less expenses) of $8,414,000. 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 $8,986,977. As of
December 31, 2001, the Company had outstanding, 1,882,364 Convertible CRA
Shares, which are convertible at the holders option into 1,764,663 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.
29
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
(III) PRIVATE LABEL TENDER OPTION PROGRAM
On May 21, 1998, the Company closed on its Private Label Tender Option Program
("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, 2001 (the equity in the Owner Trust,
represented by the Senior Certificate), was $350 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 3.5%, 5.4% and 4.5% for the years ended
December 31, 2001, 2000 and 1999, 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-SM- 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 2000, the Company transferred 13 Revenue Bonds with an aggregate
face amount of approximately $142 million to P-FLOATS/RITES-SM- program and
received proceeds of approximately $135 million. Additionally, the Company
repurchased five Revenue Bonds with an aggregate face value of approximately $55
million.
The Company's cost of funds relating to its secured borrowings under the Merrill
Lynch P-FLOATS/RITES-SM- program (calculated as interest expense as a percentage
of the weighted average amount of the secured borrowings) was approximately
3.72%, 4.96% and 4.8%, annualized, for the years ended December 31, 2001 and
2000 and the period June 29, 1999 (inception of this program) through December
31, 1999, respectively.
30
(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
month thirteen 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 has a $50 million multi-family revolving warehouse facility, which will
expire 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.
PWF is the guarantor for a $35 million loan and security agreement for Larson,
which will expire on May 31, 2002. The interest rate for the agreement is 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.
PWF also has another $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 must be selected by the Company from the following two alternatives:
LIBOR (for the estimated duration of the advance) plus 125 basis points or Prime
plus 12.5 basis points (the default rate). At December 31, 2001 there were no
outstanding borrowings under the facility. At December 31, 2001 the Company was
in compliance with all covenants of the facility.
COMMITMENTS AND CONTINGENCIES
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.
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 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, 2001, all but one 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, 2001, that reserve was
approximately $3.5 million.
Unlike loans originated for Fannie Mae, PWF does not share the risk of loss for
loans it originates for Freddie Mac or FHA.
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 multifamily mortgage loans originated by
CreditRe Mortgage Capital, LLC, an affiliate of Credit Suisse First Boston and
the Related Companies, L.P. The Re-
31
lated 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 therefor, 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 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.
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.
Minimum annual rentals, under non-cancelable leases for a office space, are as
follows:
2002 $ 504,000
2003 501,000
2004 397,000
2005 311,000
2006 291,000
2007 50,000
------------------
$2,054,000
==================
Leases contain provisions for escalation based on certain increases in costs
incurred by the lessors.
32
ACQUISITIONS AND DISPOSITIONS OF REVENUE BONDS
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 INTEREST
CLOSING DATE AGGREGATE PURCHASE RATE AT
PROJECT NAME 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 $302,314,588
---------------- --------------------
(a) Includes bonds selection fees and other direct costs of acquiring the bond.
33
During 2000, the Company acquired 44 Revenue Bonds (including, Revenue Bonds
acquired in the ATEBT merger) with an aggregate per value of approximately
$299.8 million, not including bond selection fees and expense of approximately
$5.8 million and a purchase price adjustment related to the ATEBT bonds of
approximately $5 million.
ACQUISITIONS FOR THE YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------
BOND INTEREST
CLOSING DATE AGGREGATE PURCHASE RATE AT 12/31/00
PROPERTY/BOND NAME PAR AMOUNT PRICE (a)
----------------------------------------- ------------- ---------------- -------------------- -----------------
Summer Lake Mar-14 $5,600,000 $ 5,726,806 7.400%
Princess Anne House Apr-06 125,000 127,500 9.500%
Princess Anne House Apr-06 7,500,000 7,684,106 7.500%
Walnut Park Plaza Apr-11 5,500,000 5,611,284 7.500%
Columbia at Bells Ferry Apr-19 13,000,000 13,264,889 7.400%
Oaks at Hampton Apr-27 525,000 535,500 9.000%
Oaks at Hampton Apr-27 9,535,000 9,737,266 7.200%
Walnut Creek May-04 360,000 367,200 7.500%
Walnut Creek May-04 3,240,000 3,305,433 7.500%
South Congress May-04 6,300,000 6,431,026 7.500%
Newark Commons May-17 14,300,000 14,643,370 7.300%
Grace Townhomes May-23 5,225,600 5,330,112 7.500%
San Marcos May-23 7,231,000 7,380,311 7.375%
Casa Ramon Jul-14 4,744,000 4,856,800 7.500%
Parks at Westmoreland Jul-17 455,000 464,100 9.000%
Parks at Westmoreland Jul-17 9,535,000 9,745,037 8.500%
Kings Villages Jul-26 17,650,000 18,027,011 8.500%
Autumn Ridge Aug-11 9,304,230 9,495,593 8.000%
Bay Colony Aug-11 10,100,000 10,306,797 7.500%
Village Green Aug-14 503,528 513,598 8.500%
Village Green Aug-14 3,078,000 3,144,885 8.500%
Southwest Trails Aug-14 6,500,000 6,633,855 7.350%
Park at Landmark Sep-07 9,500,000 9,690,000 8.750%
Hidden Grove Sep-26 8,600,000 8,772,000 7.400%
Running Brook Sep-27 8,495,000 8,674,092 7.400%
Park Sequoia Oct-17 6,740,000 6,874,800 8.500%
Armstrong Farm Oct-19 8,246,000 8,410,920 7.500%
Chapel Ridge of Claremore Oct-26 4,100,000 4,182,000 7.500%
Chandler Creek Oct-31 350,000 357,000 9.750%
Chandler Creek Oct-31 15,850,000 16,167,000 8.500%
Greenbridge at Buckingham Nov-07 350,000 357,000 10.000%
Greenbridge at Buckingham Nov-07 19,735,000 20,143,757 7.400%
Woods Edge Nov-13 4,850,000 4,947,000 7.800%
Highpointe Club Nov-14 3,250,000 3,927,000 (b) 9.000%
Lexington Trails Nov-14 4,900,000 5,921,000 (b) 9.000%
Rolling Ridge Nov-14 4,925,000 5,951,000 (b) 9.000%
Reflections Nov-14 10,700,000 12,930,000 (b) 9.000%
Museum Tower Nov-29 6,000,000 6,120,000 8.250%
Williams Run Dec-06 200,000 204,000 9.250%
Williams Run Dec-06 12,650,000 12,903,000 7.650%
Red Hill Villas Dec-12 400,000 408,000 9.500%
Red Hill Villas Dec-12 9,900,000 10,112,024 8.400%
Grandview Forest Dec-22 5,483,907 5,597,602 8.500%
Millpond Village Dec-28 14,300,000 14,586,000 8.550%
---------------- --------------------
$299,836,265 $310,567,674
---------------- --------------------
(a) Includes bond selection fees and other direct costs of acquiring the bond.
(b) These bonds were purchased as part of the ATEBT merger.
34
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
-------------------------------------------------
Par Amortized Realized Gains /
Property/Bond Name Amount Cost (Losses)
------------------------------ ---------------------- ------------------- -----------------
BONDS
Greenway $12,850,000 $12,745,927 $ 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)
==========
During the period January 1, 2000 through December 31, 2000, three Revenue Bonds
were repaid and two RITES were terminated as more fully described in table
below.
DISPOSITIONS FOR THE YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------
Bond Par Amortized Realized Gains /
Property/Bond Name Amount Cost (Losses)
------------------------------ ---------------------- ------------------- -----------------
BONDS
Bay Club $6,400,000 $6,438,942 $ (38,942)
East Ridge 8,700,000 8,437,747 262,253
Martin's Creek 7,300,000 6,842,946 457,054
RITES
Avalon 5,000 40,073 (35,073)
Meadowview Park 5,000 5,141 (141)
---------
$645,151
=========
INVESTMENT IN 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").
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 Company periodically evaluates its credit risk exposure associated with its
Revenue Bonds to determine whether other than temporary impairments exist.
Impairment is indicated if, based on current information and events, it is
probable that the Company will be unable to collect all amounts due, including
principal and interest, according to the existing contractual terms of the
Revenue Bond. The cost basis of a Revenue Bond with other than temporary
impairment 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.
REVENUE BOND MODIFICATIONS
The original obligors and owners of the Underlying Properties of the Cedar Creek
and Pelican Cove Revenue Bonds have been replaced with affiliates of the Manager
who have not made equity investments. These affiliates have assumed the
day-to-day responsibilities and obligations of the Underlying Properties. On
September 29, 2000, the affiliates of the Manager sold 49% of Pelican Cove and
Cedar Creek to a third party buyer with an option from the buyers to purchase
the remaining 51% in 2001.
35
In connection with the sale of two of the Underlying Properties, Cedar Creek and
Pelican Cove, the Company has agreed to a modification of the terms of the
respective Revenue Bonds. Subject to Issuer approval, the stated interest rate
of the Cedar Creek Revenue Bond will be modified to a stated interest rate of
7.43% and 7.25% and the maturity and call dates will be extended to October 1,
2010 and October 1, 2020, respectively.
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, 2001, this bond had a carrying value and fair value of
approximately $6.9 million and $7.4 million respectively.
IMPAIRMENT OF REVENUE BOND
During the second quarter of 2001, one Revenue Bond, Lexington Trails, became
impaired. The Company did not receive the regular interest payments on this
Revenue Bond of $210,000 for the period April through September of 2001. The
Company has recorded a reserve against these interest payments. On November 6,
2001, the trustee, for the benefit of the Company, foreclosed on the Underlying
Property. Bond payments were received for October through December of 2001. As a
result of the foregoing, the Company has written the Revenue Bond down to its
estimated fair value of approximately $5.5 million, earning 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.
ATEBT MERGER
On November 2, 1999, the Company and American Tax Exempt Bond Trust ("ATEBT"),
whose manager is 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
tax-exempt first mortgage 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.
RESULTS OF OPERATIONS
The following is a summary of the Company's results of operations for the years
ended December 31, 2001, 2000 and 1999. Net income for the years ended December
31, 2001, 2000 and 1999 was $38.9 million, $30.1 million and $23.2 million,
respectively.
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
deferred, unrecorded base interest related to prior periods, 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 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 $5.5 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.
36
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 swing between the years was due to
declining interest rates and is recorded as part of other comprehensive income
in the statements of changes in shareholders' equity.
2000 VS. 1999
For the year ended December 31, 2000 as compared to 1999, total revenues,
total expenses and net income increased due to the net result of the
acquisition of 44 Revenue Bonds and the repayment of three Revenue Bonds.
Interest income from Revenue Bonds increased approximately $17.2 million for
the year ended December 31, 2000 as compared to 1999. This increase was
primarily due to an increase in interest income of $15.2 million on new
Revenue Bonds acquired during 1999 and 2000. Also contributing to the
increase was the receipt during 2000 of deferred, unrecorded, base interest
of $2.5 million relating to prior periods with respect to certain Revenue
Bonds.
Total revenues for the year ended December 31, 2000 increased by
approximately $18,700,000, including the increases in interest income from
Revenue Bonds noted above. The remaining increase is due to an increase in
interest income from temporary investments of approximately $1,100,000
primarily due to cash pledged as collateral during 2000 related to
securitization transactions, and an increase in interest income from
promissory notes of approximately $300,000 primarily due to the Country Lake
note acquired during 2000.
Interest expense and recurring fees increased approximately $3,200,000 for
the year ended December 31, 2000 as compared to 1999 primarily due to
increased secured borrowings and a higher outstanding balance of the TOP
during 2000.
Loan servicing and asset management fees increased approximately $480,000 for
the year ended December 31, 2000 due to new acquisitions and the
corresponding increase in the Revenue Bond portfolio serviced. General and
administrative expenses increased approximately $737,000 for the year ended
December 31, 2000, primarily due to an increase in legal costs related in
part to bond modifications, an increase in the amortized cost related to
stock options, an increase in other fees and an increase in expense
reimbursements to the Manager and affiliates due to the 2000 and 1999 Revenue
Bond acquisition.
Amortization increased approximately $195,000 for the year ended December 31,
2000 as compared to 1999 primarily due to an increase in amortization of
deferred costs relating to the TOP and issuance of preferred shares of
subsidiary.
For the year ended December 31, 2000, the Company recognized a gain on the
repayment of Revenue Bonds of approximately $645,000 as compared to a loss on
repayment of Revenue Bonds of approximately $463,000 recognized for the year
ended December 31, 1999.
Income allocated to preferred shareholders of subsidiary for the year ended
December 31, 2000 increased approximately $5,600,000, related to the
Preferred Offerings executed on June 29, 1999 and July 21, 2000. Minority
interest in income of subsidiary increased approximately $4,500,000 for the
year ended December 31, 2000 as compared to 1999 primarily due to a higher
outstanding balance of the TOP during 2000.
INCOME TAXES
CharterMac is organized as a Delaware Business 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%, 96% and 97% of CharterMac's tax basis income for
the years ended December 31, 2001, 2000 and 1999, respectively, 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 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 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, 2001, 2000 and 1999 was
approximately 79%, 86% and 76% 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.
37
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 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 implemented
SFAS 142 on January 1, 2002. The Company has determined that the amount it has
currently capitalized as goodwill from business combinations prior to PWF
(approximately $3.2 million at December 31, 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. The goodwill capitalized as part of the PWF acquisition (approximately
$9.8 million) will not be amortized, but will be reviewed annually to determine
whether or not any impairment exists. Thus, implementation of these statements
did not have a material impact on the Company's financial statements.
In June of 2001, the FASB issued SFAS No, 143, "Accounting for Asset Retirement
Obligations" (effective January 1, 2003) and, in August of 2001, 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.
Management believes the implementation of these two statements will not have a
material impact on the Company's financial statements.
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 7A. 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 derive income by investing in Revenue Bonds secured by multifamily
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.
38
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.
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 its CM Corp. subsidiary, 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). As 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 so are not impacted
by changes in market interest rates.
A rising interest rate environment could reduce the demand for multifamily
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 multifamily 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. Prior to December 31, 2000, management did not engage in any of
these hedging strategies after careful analysis and due to its low leverage.
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
interest rate swaps in order to hedge against increases in the floating interest
rate 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 $50.0 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 $100.0 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.
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 $392 million ($542 million outstanding under these financing
programs at December 31, 2001, 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 $3,920,000. 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
39
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, 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, 2001, the combined fair market value of the two interest rate
swaps was a liability of $2,957,663, included in interest rate swaps on the
consolidated balance sheet. Interest paid or payable under the terms of the
swaps, of $1,685,774, is included in interest expense for the year ended
December 31, 2001.
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 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, 2001 value of $1,137,715,000 to
approximately $1,049,092,150. A 1% decline in interest rates would increase the
value of the December 31, 2001 portfolio to approximately $1,126,337,850.
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. Each loan is tied to LIBOR. A 1% change in
LIBOR would affect the Company's annual net income by approximately $566,000
(based on the outstanding balances at December 31, 2001 of approximately $27.3
million for the PWF acquisition loan and $29.3 million for the warehouse line.
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.
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,
2001, $542 million of the senior interests were subject to annual "rollover"
renewal for liquidity and credit enhancement, respectively. Of the $542 million,
$350 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.
40
Item 8. Financial Statements and Supplementary Data.
PAGE
----
(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report 42
Consolidated Balance Sheets as of
December 31, 2001 and 2000 43
Consolidated Statements of Income for
the years ended December 31, 2001, 2000
and 1999 44
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999 45
Consolidated Statements of Cash Flows
for the years ended December 31, 2001,
2000 and 1999 47
Notes to Consolidated Financial
Statements 49
41
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, 2001 and 2000, 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, 2001. Our audits also included the financial
statement schedule listed in Item 14(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, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 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 6, 2002
42
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
2001 2000
-------------- ------------
ASSETS
Revenue Bonds-at fair value $1,137,715,000 $845,405,056
Investment in ARCap 18,949,530 --
Guaranteed investment contracts 18,406,159 --
Mortgage servicing rights 35,645,823 --
Cash and cash equivalents 105,363,728 36,116,481
Cash and cash equivalents-restricted 4,669,670 --
Interest receivable, net 6,457,600 5,202,999
Promissory notes and mortgages receivable 45,022,547 9,909,933
Deferred costs, net 31,796,414 24,201,342
Goodwill, net 12,996,402 3,792,959
Other assets 3,103,170 607,095
-------------- ------------
Total assets $1,420,126,043 $925,235,865
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 541,796,333 $385,026,031
Notes payable 56,586,357 --
Interest rate swaps 2,957,663 --
Accounts payable, accrued expenses and other liabilities 13,820,023 2,835,144
Due to Manager and affiliates 2,265,781 1,598,921
Due to FNMA 18,406,159 --
Distributions payable to preferred shareholders
of subsidiary 3,693,019 2,961,625
Deferred tax liability 10,250,789 --
Reserve for possible DUS losses 1,937,480 --
Distributions payable to Convertible CRA Shareholders 564,708 558,250
Distributions payable to common shareholders 10,447,756 6,242,046
-------------- ------------
Total liabilities 662,726,068 399,222,017
-------------- ------------
Preferred shares of subsidiary (subject to mandatory
repurchase) 218,500,000 169,000,000
-------------- ------------
Minority interest in consolidated subsidiary 3,652,281 --
-------------- ------------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity - Convertible CRA
shareholders (1,882,364 and 2,590,000 shares, issued and
outstanding in 2001 and 2000 respectively) 25,521,546 34,397,168
Beneficial owner's equity-manager 1,068,972 715,342
Beneficial owners' equity-other common shareholders
(50,000,000 shares authorized; 34,834,308 issued and
34,825,908 outstanding and 22,706,739 issued and
22,698,329 outstanding in 2001 and 2000, respectively) 511,456,298 344,870,761
Treasury shares of beneficial interest (8,400 shares) (103,359) (103,359)
Accumulated other comprehensive loss (2,695,763) (22,866,064)
-------------- ------------
Total shareholders' equity 535,247,694 357,013,848
-------------- ------------
Total liabilities and shareholders' equity $1,420,126,043 $925,235,865
============== ============
See accompanying notes to financial statements
43
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues:
Interest income:
Revenue Bonds $71,499,711 $55,708,904 $38,444,530
Temporary investments 1,278,941 2,379,976 1,289,669
Promissory notes 1,183,649 1,001,681 702,991
Other income 662,275 -- --
Equity in earnings of ARCap 456,005 -- --
----------- ----------- -----------
Total revenues 75,080,581 59,090,561 40,437,190
----------- ----------- -----------
Expenses:
Interest expense 13,640,843 14,290,623 7,351,489
Recurring fees relating to the Private
Label Tender Option Program 2,490,810 2,197,557 1,416,756
Bond servicing 2,454,137 1,817,270 1,337,738
General and administrative 2,754,671 2,167,862 1,430,798
Amortization 865,448 577,388 382,027
Loss on impairment of assets 400,000 -- 1,859,042
----------- ----------- -----------
Total expenses 22,605,909 21,050,700 13,777,850
----------- ----------- -----------
Income before (loss) gain on repayment of
Revenue Bonds 52,474,672 38,039,861 26,659,340
(Loss) gain on repayment of Revenue Bonds (911,604) 645,151 (463,147)
----------- ----------- -----------
Income before allocation to preferred
shareholders of subsidiary 51,563,068 38,685,012 26,196,193
Income allocated to preferred shareholders
of subsidiary (12,577,894) (8,593,956) (3,014,375)
----------- ----------- -----------
Net income $38,985,174 $30,091,056 $23,181,818
=========== =========== ===========
Allocation of net income to:
Special distribution to Manager $ 3,620,923 $ 2,743,465 $ 2,018,822
=========== =========== ===========
Manager $ 353,643 $ 273,476 $ 211,630
=========== =========== ===========
Common shareholders $32,558,758 $25,500,984 $20,951,366
Convertible CRA Shareholders 2,451,850 1,573,131 0
----------- ----------- -----------
Total for shareholders $35,010,608 $27,074,115 $20,951,366
=========== =========== ===========
Net income per share:
Basic $ 1.14 $ 1.22 $ 1.02
=========== =========== ===========
Diluted $ 1.14 $ 1.22 $ 1.02
=========== =========== ===========
Weighted average shares
outstanding:
Basic 30,782,161 22,140,576 20,580,756
=========== =========== ===========
Diluted 30,837,340 22,152,239 20,580,756
=========== =========== ===========
See accompanying notes to financial statements
44
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, 1999 $ -- $ 230,259 $312,307,115 $ (103,359) $ 15,060,191 $327,494,206
Comprehensive income:
Net income -- 2,230,452 20,951,366 -- 23,181,818 -- 23,181,818
Other comprehensive loss:
Net unrealized loss on Revenue Bonds
Net unrealized holding loss arising
during the period (14,968,784)
Add: Reclassification adjustment
for losses included in net income
2,322,189
Other comprehensive loss (12,646,595) (12,646,595) (12,646,595)
Comprehensive income 10,535,223
===========
Issuance of Common Shares -- -- 20,000 -- -- 20,000
Distributions -- (2,018,833) (20,478,101) -- -- (22,496,934)
----------- ------------- ------------ ------------ ------------ ------------
Balance at December 31, 1999 -- 441,878 312,800,380 (103,359) 2,413,596 315,552,495
Comprehensive income:
Net income 1,573,131 3,016,941 25,500,984 -- 30,091,056 -- 30,091,056
Other comprehensive loss:
Net unrealized loss on Revenue Bonds
Net unrealized holding loss arising
during the period (24,634,509)
Add: Reclassification adjustment for
net gain included in net income (645,151)
Other comprehensive loss (25,279,660) (25,279,660) (25,279,660)
Comprehensive income 4,811,396
===========
Issuance of Common Shares -- -- 29,174,649 -- -- 29,174,649
Issuance of Convertible CRA Shares 34,192,657 34,192,657
Distributions (1,368,620) (2,743,477) (22,605,252) -- -- (26,717,349)
----------- ------------- ------------ ------------ ------------ ------------
45
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, 2000 34,397,168 715,342 344,870,761 (103,359) (22,866,064) 357,013,848
Comprehensive income:
Net income 2,451,850 3,974,566 32,558,758 -- 38,985,174 -- 38,985,174
Other comprehensive (gain) loss:
Net unrealized loss on interest rate
swaps (2,957,663)
Net unrealized gain on Revenue Bonds:
Net unrealized holding loss arising
during the period 26,224,964
Add: Reclassification adjustment for
net gain included in net income
(3,097,000)
-----------
20,170,301 20,170,301 20,170,301
-----------
Comprehensive income $59,155,475
===========
Retirement of convertible CRA shares (8,986,977) (8,986,977)
Issuance of Common Shares 168,293,854 168,293,854
Distributions (2,340,495) (3,620,936) (34,267,075) (40,228,506)
----------- ------------ ------------ ------------
Balance at December 31, 2001 $25,521,546 $ 1,068,972 $511,456,298 $ (103,359) $(2,695,763) $535,247,694
=========== ============ ============ ============ =========== ============
See accompanying notes to financial statements
46
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 38,985,174 $ 30,091,056 $ 23,181,818
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) loss on repayments of Revenue Bonds 911,604 (645,151) 463,147
Loss on impairment of assets 400,000 -- 1,859,042
Other amortization 865,448 577,388 382,027
Amortization of goodwill 474,995 364,653 297,624
Amortization of bond selection costs 3,726,967 938,319 452,949
Accretion of deferred income and purchase
accounting adjustment (144,482) (163,129) (66,212)
Income allocated to preferred shareholders
of subsidiary 12,577,894 8,593,956 3,014,375
Equity in earnings of ARCap, in excess of
distributions received (456,005) -- --
Changes in operating assets and liabilities:
Interest receivable (1,254,601) (2,279,045) (1,290,716)
Other assets (2,667,195) 51,357 (5,097)
Accounts payable, accrued expenses and
other liabilities 11,188,262 212,093 (4,948,125)
Deferred costs -- other (68,471) -- --
Increase in reserves for possible DUS losses 1,937,480
Deferred tax liability 10,250,789
Due to Manager and affiliates 629,043 (705,149) (87,926)
-------------- -------------- --------------
Net cash provided by operating activities 77,356,902 37,036,348 23,252,906
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from repayments of Revenue Bonds 24,227,000 22,400,000 21,395,213
Proceeds from repayment of promissory note
receivable 2,540,000 -- --
Periodic principal payments of Revenue Bonds 1,583,591 378,563 --
Purchase of Revenue Bonds (295,962,380) (276,011,265) (165,934,618)
Increase in deferred bond selection costs (9,100,059) (6,499,035) (3,906,784)
Increase in deferred financing costs -- PWF (484,694) -- --
Investment in preferred shares of ARCap (18,493,525) 45,541,000 (45,541,000)
Increase in guaranteed investment contracts (18,406,159)
Increase in due to FNMA 18,406,159
Increase in mortgage servicing rights (35,645,823)
Increase in notes receivable (29,324,645)
Increase in notes payable 27,261,712 -- --
Increase in minority interest in subsidiary 3,652,281
(Increase) decrease in other assets -- 1,000 (251,500)
Increase in goodwill (9,842,064)
Increase in other deferred costs -- (545,632) (100,000)
Loans made to properties (11,122,000) (200,000) (2,847,185)
Principal payments received from loans made
to properties 2,794,031 438,127 328,045
Cash acquired in ATEBT merger -- 837,958 --
-------------- -------------- --------------
Net cash used in investing activities (347,916,575) (213,659,284) (196,857,829)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from financing arrangements 253,596,090 377,348,725 107,769,616
Principal repayments of financing arrangements (96,825,788) (92,310) --
Decrease (increase) in cash and cash
equivalents-restricted -- 1,028,209 (1,028,209)
Distributions paid to the Manager and
Common shareholders (33,455,685) (24,343,782) (21,815,252)
Distributions paid to preferred shareholders
of subsidiary (11,846,500) (7,122,956) (1,523,750)
Distributions paid to Convertible CRA
shareholders (2,334,036) (810,370) --
(continued)
47
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2001 2000 1999
------------- ------------- ------------
Repayment of minority interest -- (250,000,000) --
Increase in notes payable-warehouse lines 29,324,645 -- --
Increase in deferred costs relating to the Private
Label Tender Option Program (873,196) (2,300,639) (559,632)
Issuance of Common Shares 168,263,854 -- --
Retirement of Convertible CRA Shares (8,986,977) -- --
Issuance of preferred stock of subsidiary 49,500,000 79,000,000 90,000,000
Deferred costs relating to the issuance of
preferred stock of subsidiary (1,885,817) (2,813,620) (3,605,331)
Increase in other deferred costs -- -- (72,039)
Issuance of Convertible CRA Shares -- 34,192,657 --
------------- ------------- ------------
Net cash provided by financing activities 344,476,590 204,085,914 169,165,403
------------- ------------- ------------
Net increase (decrease) in cash and
cash equivalents 73,916,917 27,462,978 (4,439,520)
Cash and cash equivalents at the
beginning of the year 36,116,481 8,653,503 13,093,023
------------- ------------- ------------
Cash and cash equivalents at the
end of the year $ 110,033,398 $ 36,116,481 $ 8,653,503
============= ============= ============
Supplemental information:
Interest paid $ 4,492,800 $ 4,108,958 $ 1,418,865
============= ============= ============
Supplemental disclosure of noncash activities:
Merger and issuance of shares:
Increase in other assets $ -- $ (150) $ --
Increase in Revenue Bonds -- (28,729,000) --
Increase in interest receivable -- (120,676) --
Increase in accounts payable, accrued
expenses and other liabilities -- 356,502 --
Increase in due to affiliates -- 1,013,987 --
Increase in goodwill, net -- (1,482,986) --
Issuance of shares of common stock -- 29,154,649 --
Decrease in deferred costs -- 645,632 --
------------- ------------- ------------
Cash acquired in ATEBT merger $ -- $ 837,958 $ --
============= ============= ============
Acquisition of PW Funding Inc.
Increase in investment in subsidiary $ 34,948,485
Increase in guaranteed investment contracts (18,406,159)
Increase in mortgage servicing rights (35,645,823)
Increase in promissory notes receivable (29,324,645)
Increase in other assets (2,499,712)
Increase in notes payable 29,324,645
Increase in due to FNMA 18,406,159
Increase in accounts payable, accrued
expenses and other liabilities 9,807,257
Increase in reserves for possible DUS losses 1,937,480
Increase in minority interest in subsidiary 3,652,281
Increase in deferred tax liability 10,250,789
Increase in goodwill (9,842,064)
-------------
Cash acquired in PWF purchase $ 12,608,693
=============
See accompanying notes to financial statements
48
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Significant Accounting Policies
Charter Municipal Mortgage Acceptance Company (the "Company") is a Delaware
business trust principally engaged in the acquisition and ownership (directly or
indirectly) of tax-exempt multifamily housing Revenue Bonds ("Revenue Bonds")
and other investments that produce tax-exempt income issued by various state or
local governments, agencies, or authorities. Revenue Bonds are primarily secured
by participating and non-participating first mortgage loans on underlying
properties ("Underlying Properties").
The Company 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.
In July 2001, the Company placed a substantial portion of its taxable bond
investments in CharterMac Corporation ("CM Corp."), a wholly-owned, consolidated
taxable subsidiary of CharterMac. CM Corp. 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 hold
most of taxable investments, conduct any fee-generating activities in which the
Company may engage and provide management services to Charter Municipal Mortgage
Acceptance Company 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 two to three years. PWF is
a national mortgage banking firm and, with its subsidiaries, specializes in
providing financing and ancillary service to the multifamily 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.
The Company has engaged Related Charter LP (the "Manager"), an affiliate of
Related, to manage its day-to-day affairs.
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 Notes 6 and 7), and one wholly-owned corporation,
CM Corp. CM Corp, in turn, owns 80% of PWF and its subsidiaries, Larsen
Financial Services, Inc. and Cambridge Healthcare Funding. 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 2001
presentation. The most significant of these reclassifications involves the
presentation of the Company's borrowings under its Private Label Tender Option
Program (see Note 5). In prior years, the Company had presented these borrowings
as a separate line item on its consolidated balance sheet between liabilities
and equity, called "minority interest in subsidiary (subject to mandatory
redemption)," and the income allocated to the holders of the interests in the
associated trust was classified as "minority interest in income of subsidiary"
on the consolidated statement of income. During 2001, Company management
determined that the borrowings under the Private Label Tender Option Program
should be classified with the Company's other financing arrangements, and the
associated income allocations classified with interest expense, to more clearly
reflect the economic substance of the borrowing arrangement and to conform to
the treatment afforded these items for debt and trust agreement compliance
calculations. The reclassification of prior year amounts to conform to this
presentation did not impact the Company's previously reported net income, net
income per share, shareholders' equity or cash flows.
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").
49
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 Company periodically evaluates its credit risk exposure associated with its
Revenue Bonds to determine whether other than temporary impairments exist.
Impairment is indicated if, based on current information and events, it is
probable that the Company will be unable to collect all amounts due, including
principal and interest, according to the existing contractual terms of the
Revenue Bond. The cost basis of a Revenue Bond with other than temporary
impairment 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
periodically deemed appropriate.
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.
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 multifamily 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, 2001, all but one 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 $2.4 billion of mortgage loans. At December 31, 2001, the Company had
approximately $1.6 billion of such loans in its servicing portfolio. In
addition, as of December 31, 2001, the Company received commitments from Fannie
Mae on two loans totaling approximately $4 million. A substantial portion of the
underlying properties subject to these mortgages are located in California. The
Company also services approximately $104 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 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.
50
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, 2001, the Company
serviced approximately $362 million of loans under the FHA 223(f), 232, and 242
Programs, of which approximately $120 million had GNMA securities outstanding.
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, 2001, the Company had approximately $595
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 multifamily and commercial mortgages for insurance companies, and
banks. The servicing for these loans is generally retained by the Company. At
December 31 2001, the Company had approximately $305 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 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 $18.1 million as
of December 31, 2001.
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 estimated fair values based on the
purchase price paid by CM Corp for its 80% share of PWF.
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 Statement of Operations 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.
TEMPORARY INVESTMENTS
Temporary investments 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).
DEFERRED COSTS
Fees paid for 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.
51
Costs incurred in connection with the Company's Private Label Tender Option
Program (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 8), 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
During 2001, the Company entered into two interest rate swaps (see Note 18),
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. At
December 31, 2001, the combined fair market value of the two interest rate swaps
has a liability of $2,957,663, included in interest rate swaps on the
consolidated balance sheet. Interest paid or payable under the terms of the
swaps of $1,685,774, is included in interest expense for the year ended December
31, 2001.
GOODWILL
For financial accounting and reporting purposes, the Merger was accounted for
using the purchase method of accounting. Under this method, Summit Tax Exempt
L.P. II was deemed to be the acquirer. As the surviving entity for accounting
purposes, the assets and liabilities of Summit Tax Exempt L.P. II were recorded
at their historical cost, with the assets and liabilities of the other
Partnerships recorded at their estimated fair values.
The application of purchase accounting initially resulted in the Company
recording a deferred credit for the excess of the fair value of the net assets
acquired over their cost. The accrual of the estimated value of the Counsel Fee
Shares (see Note 11) at October 1, 1998 was considered to be a purchase price
adjustment resulting in the reversal of the carrying value of the excess of
acquired net assets over cost ($2,982,708) and the recognition of goodwill at
October 1, 1998 in the amount of $4,805,828. In April 1999, the Company
successfully negotiated a Discounted Cash Settlement (see Note 12) in lieu of
the issuance of Common Shares which resulted in a decrease in the liability for
Counsel Fee Shares and in goodwill in the amount of $1,698,986. Goodwill is
being amortized to interest income from Revenue Bonds using the straight-line
method over nine years, the approximate average remaining term to maturity of
the Revenue Bonds acquired in the Merger at that time.
The application of purchase accounting to the merger also resulted in certain
Revenue Bonds being initially recorded at a discount or premium to their face
amounts. These discounts and premiums are included in the applicable bond's cost
basis and amortized into interest income over the bond's remaining term to
maturity. Discounts are not amortized, however, if collectibility of amounts in
excess of the bond's amortized cost is doubtful.
The merger with American Tax-Exempt Bond Trust ("ATEBT") in 2000 (see Note 11)
resulted in the capitalization of an additional $1,482,986 of goodwill. This
goodwill is being amortized to interest income from Revenue Bonds using the
straight-line method over 10 years, the approximate average term to maturity of
the four Revenue Bonds acquired in this transaction.
The Company has determined that the amounts currently capitalized as goodwill
from the business combinations discussed above, meet the criteria in SFAS 141
(see "New Pronouncements" below) for recognition as intangible assets apart from
goodwill, and accordingly will continue to amortize these amounts over the
remaining expected useful lives. This intangible asset is periodically reviewed
for impairment, based on the performance of the Revenue Bonds that were acquired
in the applicable merger, and would be written down if impairment was indicated.
The acquisition of PWF was accounted for using the purchase method of
accounting, as required under SFAS 141 (see New Pronouncements below).
FAIR VALUE OF FINANCIAL INSTRUMENTS
As described above, the Company's investments in Revenue Bonds and its liability
under the interest rate swaps 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 and secured borrowings approximate their carrying values at December
31, 2001 and 2000.
52
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 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"). 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, 2001, the net tax basis of the Company's assets and
liabilities exceeded the net book basis by approximately $230,969,000.
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, 2001,
approximately $1.32 billion are attributable to the investing segment and
approximately $100 million are attributable to the operating segment.
NEW PRONOUNCEMENTS
In June 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 implemented
SFAS 142 on January 1, 2002. The Company has determined that the amount it has
currently capitalized as goodwill from business combinations prior to PWF
(approximately $3.2 million at December 31, 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. The goodwill capitalized as part of the PWF acquisition (approximately
$9.8 million) will not be amortized, but will be reviewed annually to determine
whether or not any impairment exists. Thus, implementation of these statements
did not have a material impact on the Company's financial statements.
In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (effective January 1, 2003) and, in August of 2001, 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.
Management believes the implementation of these two statements will not have a
material impact on the Company's financial statements.
53
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:
STATED REVENUE
DATE INTEREST CALL MATURITY BOND PAR AMORTIZED BOND FAIR
PROPERTY LOCATION NOTES CLOSED RATE(1) DATE DATE AMOUNT COST VALUE(2)
------------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT FIRST MORTGAGE BONDS
Stabilized Portfolio
--------------------
Bristol Village Bloomington, MN E,J Jul-87 7.500% Jan-10 Dec-27 17,000,000 17,000,000 17,388,000
Carrington Point Los Banos, CA E,J,K Sep-98 6.375% Oct-17 Sep-40 3,375,000 3,351,181 2,961,000
Casa Ramon Orange County, CA E,J,K Jul-00 7.500% Oct-16 Sep-35 4,744,000 4,707,384 4,895,000
Cedar Creek McKinney, TX E,J,Q Dec-86 7.430% Oct-10 Oct-20 8,100,000 8,202,434 8,207,000
Cedar Pointe Nashville, TN D,I Apr-87 7.000% Nov-06 Apr-17 9,500,000 8,500,000 9,069,000
Cedarbrook Hanford, CA E,J,K Apr-98 7.125% May-17 May-40 2,840,000 2,819,056 2,782,000
Clarendon Hills Hayward, CA D,I,R Dec-86 5.520% Dec-03 Dec-03 17,600,000 14,683,645 13,400,000
Crowne Pointe Olympia, WA E,J,R,T Dec-86 7.250% Aug-29 5,075,000 5,054,000 5,018,000
Cypress Run Tampa, FL D,I,Q Aug-86 5.500% Dec-29 Dec-29 15,402,428 13,910,255 12,274,000
Del Monte Pines Fresno, CA E,J,K May-99 6.800% May-17 May-36 11,000,000 10,947,736 10,317,000
Douglas Pointe Miami, FL C,H,K Sep-99 7.000% Oct-26 Sep-41 7,100,000 7,091,837 6,778,000
Fort Chaplin Washington, DC E,J,K Dec-99 6.900% Jan-16 Jan-36 25,800,000 25,618,289 24,250,000
Franciscan Riviera Antioch, CA C,H,K Aug-99 7.125% Apr-16 Aug-36 6,587,500 6,573,173 6,474,000
Garfield Park Washington, DC D,I Aug-99 7.250% Aug-17 Aug-31 3,260,000 3,247,130 3,223,000
Greenbriar Concord, CA E,J,K May-99 6.875% May-17 May-36 9,585,000 9,585,000 9,089,000
Highland Ridge St. Paul, MN E,J,R Dec-86 7.250% Jun-10 Jun-18 15,000,000 14,400,000 14,831,000
Highpointe Harrisburg, PA A,L,M,T Jul-86 8.500% Jun-06 8,900,000 7,000,186 5,728,000
Highpointe Harrisburg, PA B,L Nov-00 9.000% Jun-06 Jun-06 3,250,000 3,789,719 3,989,000
Lakepoint Atlanta, GA C,G,R Nov-87 6.000% Jul-05 Jun-17 15,100,000 13,146,195 12,355,000
Lakes Edge at Walden Miami, FL C,G Jun-99 6.900% Jun-13 May-35 14,850,000 14,850,000 13,974,000
Lakes, The Kansas City, MO D,I,R Dec-86 4.870% Dec-06 Dec-06 13,650,000 12,750,000 10,896,000
Lewis Place Gainesville, FL C,G,K Jun-99 7.000% Jun-16 Jun-41 4,000,000 3,989,143 3,682,000
Lexington Square Clovis, CA D,I,K Aug-98 6.375% Sep-17 Aug-40 3,850,000 3,820,940 3,376,000
Lexington Trails Houston, TX B Nov-00 9.000% May-07 May-22 4,900,000 5,467,511 5,521,000
Loveridge Pittsburg, CA D,I Nov-86 7.500% Jun-04 Nov-06 8,550,000 6,850,000 7,371,000
Mansions, The Independence, MO E,J May-86 7.250% Jan-11 Apr-25 19,450,000 18,267,040 19,230,000
Newport Village Tacoma, WA E,J,R,T Feb-87 7.250% Aug-29 13,000,000 12,946,000 12,853,000
54
STATED REVENUE
DATE INTEREST CALL MATURITY BOND PAR AMORTIZED BOND FAIR
PROPERTY LOCATION NOTES CLOSED RATE(1) DATE DATE AMOUNT COST VALUE(2)
------------------------------------------------------------------------------------------------------------------------------------
North Glen Atlanta, GA E,J Sep-86 7.500% Jul-05 Jun-17 12,400,000 11,481,433 12,683,000
Ocean Air Norfolk, VA E,J,K Apr-98 7.250% Jan-16 Nov-30 10,000,000 10,000,000 9,887,000
Orchard Hills Tacoma, WA E,J,R Dec-86 7.250% Jun-04 Aug-29 5,650,000 5,627,000 5,586,000
Orchard Mill Atlanta, GA E,J,K May-89 7.500% Jul-05 Jun-17 10,500,000 8,746,667 10,739,000
Pelican Cove St. Louis, MO E,J Feb-87 7.250% Oct-10 Oct-20 18,000,000 17,600,000 17,797,000
Phoenix Stockton, CA E,J,K Apr-98 7.125% Nov-16 Oct-29 3,250,000 3,177,166 3,151,000
Reflections Casselberry, FL E,J,R Nov-00 9.000% Dec-05 Dec-25 10,700,000 12,829,900 13,133,000
River Run Miami, FL E,J,R,T Aug-87 8.000% Aug-07 7,200,000 7,200,000 7,855,000
Shannon Lake Atlanta, GA A,R Jun-87 7.000% Jul-05 Jun-17 12,000,000 11,571,000 12,103,000
Silvercrest Clovis, CA E,J,K Sep-98 7.125% Oct-17 Sep-40 2,275,000 2,261,912 2,232,000
South Congress Austin, TX E,J,K May-00 7.500% Oct-16 Sep-36 6,300,000 6,290,635 6,444,000
Standiford Modesto, CA E,J,K Sep-99 7.125% Apr-16 Aug-36 9,520,000 9,499,295 9,356,000
Stonecreek Clovis, CA E,J,K Apr-98 7.125% May-17 Apr-40 8,820,000 8,751,326 8,635,000
Sunset Creek Lancaster, CA C,G,S Mar-88 5.477% Dec-09 Dec-19 8,275,000 6,144,157 6,251,000
Sunset Downs Lancaster, CA D,I,S Feb-87 5.477% Dec-09 Dec-19 15,000,000 11,284,000 11,332,000
Sunset Terrace Lancaster, CA D,I,S Feb-87 5.477% Dec-09 Dec-19 10,350,000 7,991,679 7,819,000
Sunset Village Lancaster, CA C,G,S Mar-88 5.477% Dec-09 Dec-19 11,375,000 8,799,352 8,593,000
Sycamore Woods Antioch, CA E,J,K May-99 6.875% May-17 May-36 9,415,000 9,371,045 8,928,000
Tallwood Virginia Beach, VA C,H,K Sep-99 7.250% Nov-17 Oct-41 6,205,000 6,198,351 6,135,000
Thomas Lake Eagan, MN E,J Sep-86 7.500% Jan-10 Dec-27 12,975,000 13,407,547 13,271,000
Village Green Merced, CA E,J,K Aug-00 7.500% * Aug-14 503,528 495,795 521,000
Village Green Merced, CA E,J,K Aug-00 7.500% Jan-17 Jan-37 3,078,000 3,078,000 3,184,000
Walnut Park Plaza Philadelphia, PA E,J,K Apr-00 7.500% - Oct-18 5,500,000 5,320,000 5,600,000
Williams Run Dallas, TX C,G Dec-00 7.650% Jan-11 Nov-40 12,650,000 12,650,000 12,596,000
Willow Creek Ames, IA E,J Feb-87 7.250% Jul-08 Jun-22 6,100,000 6,100,000 6,031,000
--------------------------------------
Subtotal-Revenue Bonds Secured by Stabilized Properties 489,510,456 464,444,114 459,793,000
--------------------------------------
Lease-up Portfolio
------------------
Barnaby Manor Washington, DC C,G,K Nov-99 7.375% May-17 May-32 4,500,000 4,500,000 4,526,000
League City, TX D,K Aug-00 7.500% Aug-17 Aug-42 10,100,000 10,100,000 10,330,000
Chapel Ridge at Little
Rock Little Rock, AR E,J,K Aug-99 7.125% Aug-15 Aug-39 5,600,000 5,562,828 5,428,000
Chapel Ridge at Texarkana, AR E,J,K Sep-99 7.375% Oct-16 Sep-41 5,800,000 5,794,000 5,833,000
Texarkana
55
STATED REVENUE
DATE INTEREST CALL MATURITY BOND PAR AMORTIZED BOND FAIR
PROPERTY LOCATION NOTES CLOSED RATE(1) DATE DATE AMOUNT COST VALUE(2)
------------------------------------------------------------------------------------------------------------------------------------
College Park Naples, FL E,J Jul-98 7.250% Jul-25 Jul-40 10,100,000 10,036,000 9,961,000
Columbia at Bells Ferry Cherokee Co., GA E,J Apr-00 7.400% Apr-17 Apr-42 13,000,000 13,000,000 13,119,000
Falcon Creek Indianapolis, IN E,J,K Sep-98 7.250% Sep-16 Aug-38 6,144,600 6,108,067 6,062,000
Forest Hills Garner, NC C,H,K Dec-98 7.125% Jun-16 Jun-34 5,930,000 5,825,398 5,696,000
Gulfstream Dania, FL E,J,K Jul-98 7.250% Apr-16 Jul-38 3,500,000 3,468,478 3,445,000
Hamilton Gardens Hamilton, NJ C,H,K Mar-99 7.125% Mar-17 Mar-35 6,400,000 6,323,103 6,181,000
Jubilee Courtyards Florida City, FL E,J,K Sep-98 7.125% Oct-25 Sep-40 4,150,000 4,026,517 3,928,000
Lake Jackson Lake Jackson, TX E,J,K Dec-98 7.000% Jan-18 Jan-41 10,934,000 10,882,376 10,430,000
Lake Park Turlock, CA E,J,K Jun-99 7.250% Oct-15 Sep-35 3,638,000 3,638,000 3,638,000
Lakemoor Durham, NC C,H Dec-99 7.250% Jan-17 Dec-41 9,000,000 9,000,000 8,898,000
Lenox Park Gainesville, GA C,G,K Jul-99 6.800% Aug-21 Jul-41 13,000,000 12,973,512 12,055,000
Madalyn Landing Palm Bay, FL E,J,K Nov-98 7.000% Dec-17 Nov-40 14,000,000 13,928,183 13,349,000
Marsh Landing Portsmouth, VA E,J,K May-98 7.250% Jul-17 Jul-30 6,050,000 5,960,540 5,944,000
Millpond Village East Windsor, CT C,G Dec-00 7.550% - Dec-31 14,300,000 14,300,000 14,724,000
Mountain Ranch Austin, TX C,H,K Dec-98 7.125% Jan-18 Jan-41 9,128,000 9,086,371 8,863,000
Newark Commons New Castle, DE E,J,K May-00 7.300% May-18 May-43 14,300,000 14,300,000 14,236,000
Northpointe Village Fresno, CA E,J,K Aug-98 7.500% Sep-17 Aug-40 13,250,000 13,176,504 13,679,000
Park Sequoia San Jose, CA E,J,K Oct-00 7.500% Mar-17 Mar-37 6,740,000 6,740,000 6,972,000
San Marcos San Marcos, TX D,I,K May-00 7.375% Mar-17 Mar-42 7,231,000 7,231,000 7,273,000
Summer Lake Davie, FL D,I,K Mar-00 7.400% Apr-27 Mar-42 5,600,000 5,600,000 5,651,000
Walnut Creek Austin, TX E,J May-00 7.500% Oct-16 Sep-36 3,240,000 3,235,184 3,314,000
Walnut Creek Austin, TX E,J May-00 7.500% * May-14 360,000 308,674 344,000
--------------------------------------
Subtotal-Revenue Bonds Secured by properties in lease-up stage 205,995,600 205,104,735 203,879,000
--------------------------------------
Construction Bond Portfolio
---------------------------
Arbors at Creekside Austin, TX C,K,N,P,U Jun-01 8.000% Jun-18 May-41 8,600,000 8,600,000 8,796,000
Armstrong Farm Jeffersonville, IN C,H,K,N,P Oct-00 7.500% Oct-17 Oct-40 8,246,000 8,246,000 8,434,000
Belmont Heights Estates Tampa, FL C,H,K,V Jun-01 8.150% Jun-18 Jun-43 7,850,000 7,850,000 8,136,000
Bluffview Denton, TX C,H,K,W May-01 8.600% May-18 May-41 10,700,000 10,700,000 11,090,000
Blunn Creek Austin, TX C,H,K,X Aug-01 7.900% Jul-18 Jul-41 15,000,000 15,000,000 14,933,000
Chandler Creek Round Rock, TX C,H,N,P,Y Oct-00 8.500% Dec-17 Nov-42 15,850,000 15,850,000 15,679,000
56
STATED REVENUE
DATE INTEREST CALL MATURITY BOND PAR AMORTIZED BOND FAIR
PROPERTY LOCATION NOTES CLOSED RATE(1) DATE DATE AMOUNT COST VALUE(2)
------------------------------------------------------------------------------------------------------------------------------------
Chapel Ridge at
Claremore Claremore, OK C,K,N,P Oct-00 7.500% Oct-17 Oct-42 4,100,000 4,100,000 4,193,000
Chapel Ridge at Lowell Lowell, AR C,G,K May-01 5.500% Oct-01 May-02 5,500,000 5,500,000 5,550,000
Cobb Park Ft. Worth, TX A,Z Jul-01 7.900% Aug-18 Jul-41 7,500,000 7,500,000 7,569,000
Grace Townhomes Ennis, TX D,I,N,P May-00 7.500% Jun-17 Jun-42 5,225,600 5,225,600 5,345,000
Grandview Forest Durham, NC D,I,K,N,P,AA Dec-00 8.500% Feb-18 Jan-43 5,483,907 5,483,907 5,609,000
Greenbridge at
Buckingham Richardson, TX C,H,N,P Nov-00 7.400% Mar-17 Nov-40 19,735,000 19,735,000 19,009,000
Hidden Grove Miami, FL C,H,K,N,P Sep-00 7.400% Oct-17 Oct-42 8,600,000 8,600,000 8,679,000
Hillside Dallas, TX C,K,N,P,BB Dec-01 7.900% Nov-18 Dec-41 12,500,000 12,500,000 12,500,000
Knollwood Villas Denton, TX C,H,K,CC May-01 8.600% May-18 May-41 13,750,000 13,750,000 14,251,000
Lakeline Leander, TX C,N,P,DD Nov-01 8.100% Aug-18 Aug-43 21,000,000 21,000,000 21,000,000
Lakewood Terrace Belton, MO D,I,N,P,EE Aug-01 7.900% Feb-19 Aug-41 7,650,000 7,650,000 7,720,000
Magnolia Arbors Covington, GA C,H,N,P Apr-01 7.500% May-18 Apr-23 12,500,000 12,500,000 12,785,000
Midtown Square Columbus, GA A,N,P Jun-01 7.400% Jun-21 May-43 5,600,000 5,600,000 5,651,000
Oak Hollow Dallas, TX C,K,N,P,HH Dec-01 7.900% Nov-18 Dec-41 8,625,000 8,625,000 8,625,000
Oaks at Hampton Dallas, TX C,G,K Apr-00 7.200% Mar-27 Mar-40 9,535,000 9,535,000 9,362,000
Palm Terrace Auburn, CA C,G,K,N,P,KK Aug-01 8.400% Aug-18 Jul-44 4,460,000 4,460,000 4,552,000
Palm Terrace Auburn, CA C,G,K,N,P Aug-01 9.500% - Apr-03 1,542,381 1,542,381 2,021,000
Parks at Westmoreland DeSoto, TX C,H,K,N,P Jul-00 7.500% Jul-17 Jul-40 9,535,000 9,535,000 11,053,000
Princess Anne House Virginia Beach, VA C,H,K,N,P Apr-00 7.500% Apr-25 Apr-42 7,500,000 7,500,000 7,671,000
Red Hill Villas Round Rock, TX C,K,LL Dec-00 8.400% Dec-17 Dec-40 9,900,000 9,900,000 9,991,000
River's Edge Green Island, NY C,MM Nov-01 7.700% Jun-16 Nov-43 15,000,000 15,000,000 15,000,000
Riverside Meadows Austin, TX C,K,NN Dec-01 7.500% Nov-20 Dec-41 11,500,000 11,500,000 11,500,000
Running Brook Miami, FL C,K,N,P Sep-00 7.400% Jan-27 Dec-42 8,495,000 8,495,000 8,573,000
Southwest Trails Austin, TX D,I,K,N,P Aug-00 7.350% Jun-17 Jun-42 6,500,000 6,500,000 6,515,000
West Meadows Colorado Spgs., CO C,K,N,P Dec-01 7.250% Aug-18 Nov-41 13,000,000 13,000,000 13,000,000
Westlake Village Jackson, NJ C,K,N,P Nov-01 7.200% May-19 Nov-41 6,425,000 6,425,000 6,425,000
Westlake Village Jackson, NJ C,K,N,P Nov-01 8.000% - Feb-04 575,000 575,000 575,000
White Rock San Antonio, TX C,N,P,QQ Dec-01 7.750% Dec-18 Dec-41 20,345,000 20,345,000 20,345,000
Woods Edge Charlottesville, VA D,I,N,P,RR Nov-00 7.800% Nov-17 Nov-40 4,850,000 4,850,000 4,961,000
--------------------------------------
Subtotal-Revenue Bonds Secured by Properties in Construction 333,177,888 333,177,888 337,098,000
--------------------------------------
57
STATED REVENUE
DATE INTEREST CALL MATURITY BOND PAR AMORTIZED BOND FAIR
PROPERTY LOCATION NOTES CLOSED RATE(1) DATE DATE AMOUNT COST VALUE(2)
-----------------------------------------------------------------------------------------------------------------------------------
Rehabilitation Bond Portfolio
-----------------------------
Autumn Ridge San Marcos, CA E,J,K Aug-00 7.650% Aug-27 Jul-37 9,304,230 9,304,230 9,818,000
King's Village Pasadena, CA E,J,K Jul-00 7.500% Dec-16 Dec-36 17,650,000 17,650,000 18,259,000
Mecca Vineyards Indio, CA C,K,FF Nov-01 7.750% May-18 May-38 13,040,000 13,040,000 13,040,000
Mecca Vineyards Indio, CA C,K Nov-01 7.250% - Jul-14 1,500,000 1,500,000 1,500,000
Merchandise Mart St. Louis, MO C,K,O,P,GG Oct-01 8.000% Oct-19 Sep-41 25,000,000 25,000,000 25,000,000
Oakwood Manor Little Rock, AR C,H,K,II Jun-01 8.500% Dec-17 Nov-37 5,010,000 5,010,000 5,227,000
Oakwood Manor Little Rock, AR C,H,K Jun-01 7.650% - Nov-11 440,000 440,000 459,000
Ocean Ridge Federal Way, WA C,K,JJ Dec-01 7.750% Nov-18 Nov-38 6,675,000 6,675,000 6,675,000
Sherwood Lake Tampa, FL C,G,K,OO Apr-01 8.450% Nov-17 Sep-37 4,100,000 4,100,000 4,166,000
Silverwood Lakewood, WA C,K,PP Dec-01 8.000% Nov-18 Nov-38 3,300,000 3,300,000 3,300,000
Valley View & Ridgecrest Little Rock, AR C,G,K Oct-01 8.000% - Dec-27 9,200,000 9,200,000 9,200,000
- ----------------------------------------
Subtotal-Revenue Bonds Secured by properties undergoing rehabilitation 95,219,230 95,219,230 96,644,000
----------------------------------------
Subtotal- Tax-Exempt First Mortgage Revenue Bonds 1,123,903,174 1,097,945,96 1,097,414,000
----------------------------------------
TAXABLE FIRST MORTGAGE BONDS
Chandler Creek Round Rock, TX F,N,P,SS Oct-00 9.750% Dec-42 350,000 350,000 382,000
Cobb Park Ft. Worth, TX F Jul-01 9.500% Nov-10 285,000 285,000 303,000
Greenbriar Concord, CA F,K May-99 9.000% May-36 2,015,000 1,974,902 2,030,000
Greenbridge at
Buckingham Richardson, TX F,N,P Nov-00 10.000% Feb-07 350,000 350,000 392,000
Hillside Dallas, TX F,K,N,P Dec-01 9.250% Oct-09 400,000 400,000 400,000
Lake Park Turlock Park, CA F,K Jun-99 9.000% Sep-35 375,000 347,078 378,000
Lakeline Leander, TX F,N,P Dec-01 9.650% May-09 550,000 550,000 550,000
Lakes Edge at Walden Miami, FL F Jun-99 11.000% Aug-10 1,400,000 1,272,094 1,724,000
Magnolia Arbors Covington, GA F,N,P Apr-01 8.950% Jul-18 1,000,000 1,000,000 1,002,000
Mecca Vineyards Indio, CA F,K Nov-01 9.000% Apr-07 360,000 360,000 360,000
Midtown Square Columbus, GA F,N,P Jun-01 8.950% Feb-14 235,000 235,000 235,000
Oaks at Hampton Dallas, TX F,K Apr-00 9.000% May-10 525,000 525,000 529,000
Oakwood Manor Little Rock, AR F,K Jun-01 9.500% Jan-09 765,000 746,179 813,000
Ocean Ridge Federal Way, WA F,K Dec-01 8.750% Sep-23 2,325,000 2,325,000 2,325,000
58
STATED REVENUE
DATE INTEREST CALL MATURITY BOND PAR AMORTIZED BOND FAIR
PROPERTY LOCATION NOTES CLOSED RATE(1) DATE DATE AMOUNT COST VALUE(2)
---------------------------------------------------------------------------------------------------------------------------------
Parks at Westmoreland DeSoto, TX F,K,N,P Jul-00 9.000% Nov-09 455,000 455,000 458,000
Princess Anne House Virginia
Beach, VA F,K,N,P Apr-00 9.500% Jan-06 125,000 125,000 133,000
Red Hill Villas Round Rock, TX F,K Dec-00 9.500% Jul-01 400,000 400,000 425,000
Riverside Meadows Austin, TX F,K Dec-01 8.750% May-09 200,000 200,000 200,000
Silverwood Lakewood, WA F,K Dec-01 8.750% Aug-17 525,000 525,000 525,000
White Rock San Antonio, TX F,N,P Dec-01 9.500% Aug-08 430,000 430,000 430,000
Williams Run Dallas, TX F Dec-00 9.250% Jul-04 200,000 151,879 207,000
------------------------------------------
Subtotal-Taxable Bonds 13,270,000 13,007,132 13,801,000
------------------------------------------
Total First Mortgage Bonds 1,137,173,174 1,110,953,099 1,111,215,000
------------------------------------------
OTHER TAX-EXEMPT SUBORDINATE BONDS
Draper Lane Silver Spring,
MD C,H Feb-01 10.000% Mar-06 Mar-40 11,000,000 11,000,000 11,000,000
Museum Tower Philadelphia, PA C,G Nov-00 8.250% Dec-26 6,000,000 6,000,000 6,000,000
Park at Landmark Alexandria, VA C,G Sep-00 8.750% Dec-29 9,500,000 9,500,000 9,500,000
------------------------------------------
Subtotal-Subordinate Bonds 26,500,000 26,500,000 26,500,000
------------------------------------------
Total Revenue Bonds 1,163,673,174 1,137,453,099 1,137,715,000
==========================================
59
1. The stated interest rate represents the coupon rate of the Revenue Bond at
December 31, 2001.
2. The Revenue Bonds are deemed to be available-for-sale debt securities and,
accordingly, are carried at their estimated fair values at December 31,
2001.
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. Owned by CharterMac Corporation, a consolidated subsidiary of the Company.
G. Held by Merrill Lynch as collateral for secured borrowings (see Financing
Arrangements below).
H. Held by Merrill Lynch as collateral in connection with the Merrill Lynch
P-FLOATS/RITESSM Program (see Financing Arrangements below).
I. Held as collateral in connection with the TOP (see Private Label Tender
Option Program below).
J. Transferred to CharterMac Owner Trust I in connection with the TOP (see
Private Label Tender Option Program below).
K. The obligors of these Revenue Bonds are partnerships in which affiliates of
the Manager are partners that own a controlling interest.
L. The original owner of the Underlying Property and obligor of the Revenue
Bond has been replaced with an affiliate of the Manager.
M. The minimum par rate is the cash flow of the property.
N. In the event the construction of the Underlying Property is not completed
in a timely manner, the Company may "put" the Revenue Bond to the
construction lender at par.
O. In the event the rehabilitation of the Underlying Property is not completed
in a timely manner, the Company may "put" the Revenue Bond to the
construction lender at par.
P. All of the "puts" (see N and O above) are secured by a letter of credit
issued by the construction lender to the Company.
Q. 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.
R. The Company received participating interest during 2001.
S. A third party has the option to acquire these Revenue Bonds for an
aggregate price of $35,250,000. The notice to exercise the option, on or
about March 18, 2002, was received by the Company on February 15, 2002.
T. The Company is permitted to call the Revenue Bond with six months written
notice.
U. The interest rate for this Revenue Bond is 8.5% through September 1, 2002
and 7.5% thereafter.
V. The interest rate for this Revenue Bond is 8.15% through March 1, 2003 and
7.6% thereafter.
W. The interest rate for this Revenue Bond is 8.6% through August 1, 2002 and
7.6% thereafter.
X. The interest rate for this Revenue Bond is 7.9% through November 1, 2002
and 7.4% thereafter.
Y. The interest rate for this Revenue Bond is 8.5% through November 1, 2002
and 7.6% thereafter.
Z. The interest rate for this Revenue Bond is 7.9% through December 1, 2002
and 7.4% thereafter.
AA. The interest rate for this Revenue Bond is 8.5% through January 1, 2003 and
7.5% thereafter.
BB. The interest rate for this Revenue Bond is 7.9% through March 1, 2003 and
7.0% thereafter.
CC. The interest rate for this Revenue Bond is 8.6% through August 1, 2002 and
7.6% thereafter.
60
DD. The interest rate for this Revenue Bond is 8.1% through November 1, 2003
and 7.7% thereafter.
EE. The interest rate for this Revenue Bond is 7.9% through October 1, 2002 and
7.4% thereafter.
FF. The interest rate for this Revenue Bond is 7.75% through February 1, 2003
and 7.25% thereafter.
GG. The interest rate for this Revenue Bond is 8.0% through February 1, 2002
and 7.5% thereafter.
HH. The interest rate for this Revenue Bond is 7.9% through March 1, 2003 and
7.0% thereafter.
II. The interest rate for this Revenue Bond is 8.5% through September 1, 2002
and 7.65% thereafter.
JJ. The interest rate for this Revenue Bond is 7.75% through November 1, 2002
and 6.95% thereafter.
KK. The interest rate for this Revenue Bond is 8.4% through January 1, 2003 and
7.4% thereafter.
LL. The interest rate for this Revenue Bond is 8.4% through December 1, 2002
and 7.4% thereafter.
MM. The interest rate for this Revenue Bond is 7.7% through December 1, 2003
and 7.2% thereafter.
NN. The interest rate for this Revenue Bond is 7.5% through April 1, 2003 and
7.0% thereafter.
OO. The interest rate for this Revenue Bond is 8.45% through October 1, 2002
and 7.45% thereafter.
PP. The interest rate for this Revenue Bond is 8.0% through September 1, 2002
and 7.2% thereafter.
QQ. The interest rate for this Revenue Bond is 7.75% through April 1, 2003 and
7.7% thereafter.
RR. The interest rate for this Revenue Bond is 7.8% through November 1, 2002
and 7.5% thereafter.
SS. The interest rate for this Revenue Bond is 9.75% through November 1, 2002
and 9.25% thereafter.
61
Reconciliation of Revenue Bonds: 2001 2000 1999
-------------- ------------ ------------
Balance at beginning of period $845,405,056 $587,892,000 $458,662,600
Acquisitions 295,962,380 304,740,265 165,355,500
Proceeds from repayments of bonds (24,227,000) (22,400,000) (21,395,213)
Periodic principal repayments of bonds (1,583,592) (378,563) --
Carrying amount of bonds in excess (less than) of
proceeds from the repayment (681,904) 719,308 (256,000)
Loss on impairment of assets (400,000) -- (1,859,042)
Net change in fair value of bonds 23,135,335 (25,291,326) (12,642,300)
Accretion of deferred income and purchase accounting
adjustment 104,725 123,372 26,455
-------------- ------------ ------------
Balance at close of period $1,137,715,000 $845,405,056 $587,892,000
============== ============ ============
The weighted average interest rates recognized on the face amount of the
portfolio of Revenue Bonds for the years ended December 31, 2001, 2000 and 1999
were 7.4%, 7.74% and 7.26%, respectively, based on weighted average face amounts
of approximately $965,865,000, $710,544,000 and $525,092,000, respectively.
The amortized cost basis of the Company's portfolio of Revenue Bonds at December
31, 2001 and 2000 was $1,137,453,098 and $868,278,491, respectively. The net
unrealized gain on Revenue Bonds in the amount of $261,902 at December 31, 2001
consisted of gross unrealized gains and losses of $20,212,713 and $19,940,811,
respectively. The net unrealized loss on Revenue Bonds in the amount of
$22,873,435 at December 31, 2000 consisted of gross unrealized gains and losses
of $6,835,510 and $29,708,945, 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 (the "Mortgage Loans"). 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, 2001, 2000 or 1999.
Based on the face amount of Revenue Bonds at December 31, 2001, approximately
24% of the Underlying Properties are located in California, 11% are located in
Florida, and 24% are located in Texas. No other state comprises more than 10% of
the total face amount at December 31, 2001. Based on the face amount of Revenue
Bonds at December 31, 2000, approximately 23.1% of the Underlying Properties
were located in California, 13.6% were located in Florida, and 17.2% were
located in Texas. No other state comprised more than 10% of the total face
amount at December 31, 2000.
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, 2001, 2000 and
1999, participating interest was collected amounting to approximately
$1,496,000, $1,716,000 and $728,000, respectively. Revenue Bonds that contain
provisions for contingent interest are referred to as "participating"; Revenue
Bonds lacking this provision are "non-participating".
62
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 advances. As of
December 31, 2001, the face amount of such advances was $12,625,000, with rates
ranging from 8% to 13% and a carrying value of $7,166,000, (net of purchase
accounting adjustments), and a reserve for collectibility of $138,000. Included
in such amounts were advances to obligors which are affiliates of the Manager at
an aggregate face amount of approximately $5,029,000, rates ranging from 8% to
10%.
2001 TRANSACTIONS
AGGREGATE WEIGHTED AVERAGE WEIGHTED AVERAGE
PURCHASE CONSTRUCTION PERMANENT INTEREST
FACE AMOUNT PRICE RATE 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:
REALIZED
FACE AMOUNT COST GAINS/(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 (RITES) 5,000 8,766 (3,766)
Notes
Stabilized 2,540,000 2,540,000 --
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, 2001, this bond had a carrying value and fair value of
approximately $6.9 million and $7.4 million, respectively.
2001 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.
63
2000 TRANSACTIONS
Revenue Bonds acquired, including those in the ATEBT merger (see Note 11),
during 2000 are summarized below:
AGGREGATE WEIGHTED AVERAGE WEIGHTED AVERAGE
PURCHASE CONSTRUCTION PERMANENT INTEREST
FACE AMOUNT PRICE RATE RATE
--------------------------------------------------------------------------------------------------------------------------------
Participating Revenue Bonds
Stabilized properties $ 15,625,000 $ 18,880,000 N/A 9.000%
Non-participating Revenue Bonds
Stabilized properties 31,219,000 23,575,084 N/A 7.964%
Construction/rehabilitation properties 237,467,265 242,453,590 7.837% 7.461%
Subordinated non-participating Revenue Bonds 15,500,000 15,810,000 N/A 8.460%
(a) Includes bonds acquired as part of the ATEBT merger.
Revenue Bonds repaid and RITES (see Note 4) terminated during 2000 are
summarized below:
REALIZED
FACE AMOUNT COST GAINS/(LOSSES)
----------------------------------------------------------------------------------------------------
Participating Revenue Bonds
Stabilized $22,400,000 $21,719,635 $680,365
Non-participating Revenue Bonds
Construction/rehabilitation (RITES) 10,000 10,000 (35,214)
In connection with these dispositions, the Company recognized $645,151 in net
realized gains and $1,941,703 in accrued but unpaid interest.
2000 BOND MODIFICATIONS
In connection with the sale of two of the Underlying Properties, Cedar Creek and
Pelican Cove, the Company has agreed to a modification of the terms of the
respective Revenue Bonds. Subject to Issuer approval, the stated interest rate
of the Cedar Creek and Pelican Cove Revenue Bonds will be modified to a stated
interest rate of 7.43% and 7.25%, respectively, and the maturity and call dates
will be extended to October 1, 2010 and October 1, 2020, respectively.
The original obligors and owners of the Underlying Properties of the Cedar
Creek, Highpointe, Pelican Cove and Loveridge Revenue Bonds have been replaced
with affiliates of the Manager who have not made equity investments. These
affiliates have assumed the day-to-day responsibilities and obligations of the
Underlying Properties. On September 29, 2000, the affiliates of the Manager sold
49% of Pelican Cove and Cedar Creek. During 2001 the remaining 51% of Pelican
Cove and Cedar Creek were purchased by the same buyers who purchased the initial
49%. Also in 2001, ownership of the property underlying the Loveridge Revenue
Bond was transferred to Loveridge L.P., also an affiliate of the Manager. A
buyer is being sought for the remaining Underlying Property-Highpointe.
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, 2001 and December 31,
2000 was approximately $5,728,000 and $5,591,000, respectively, and the income
earned from Highpointe for the years ended December 31, 2001 and 2000 was
approximately $315,000 and $420,000, respectively.
64
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 $25.00 per unit, with a preferred return of 12.00%.
ARCap Investors, LLC was formed in January, 1999 by REM/CAP and Apollo Real
Estate Investors to invest exclusively in subordinated CMBS. Since then, ARCap
has changed its focus and has begun to provide portfolio management services for
third parties.
Summarized financial information for ARCap as of December 31, 2001 and the year
then ended is as follows:
($'s in millions)
Investment securities - trading $ 565
Other assets 31
---
Total assets $ 596
===
Repurchase agreements and long-term debt $ 322
Other liabilities 50
Members' equity 224
---
Total liabilities and equity $ 596
===
Total revenues $ 63
Total expenses 50
---
Net income $ 13
===
NOTE 4 - Deferred Costs
The components of deferred costs are as follows:
DECEMBER 31,
----------------------------
2001 2000
----------- -----------
Deferred bond selection costs $25,355,551 $16,260,545
Deferred costs relating to the Private Label Tender Option
Program (see Note 5) 6,788,462 5,915,266
Deferred costs relating to the issuance of preferred shares
of subsidiary (see Note 7) 8,376,806 6,490,989
Deferred financing costs PWF acquisition and warehouse debt 332,285 -
----------- -----------
40,853,104 28,666,800
Less: Accumulated amortization (9,056,690) (4,465,458)
----------- -----------
$31,796,414 $24,201,342
=========== ===========
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-SM- 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-SM- 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.
65
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, 2001, the total carrying amount of such
additional Revenue Bonds, cash and cash equivalents and temporary investments
pledged as collateral was approximately $148 million.
During the year 2001, the Company transferred 13 Revenue Bonds with an aggregate
face amount of approximately $142 million to the P-FLOATS/RITES program and
received proceeds of approximately $135 million. Additionally, the Company
repurchased five Revenue Bonds with an aggregate face value of approximately $55
million.
The Company's cost of funds relating to its secured borrowings under the Merrill
Lynch P-FLOATS/RITES-SM- program (calculated as interest expense as a percentage
of the weighted average amount of the secured borrowings) was approximately
3.72%, 4.96% and 4.8%, annualized, for the years ended December 31, 2001 and
2000 and the period June 29, 1999 (inception of this program) through December
31, 1999, respectively.
PRIVATE LABEL TENDER OPTION PROGRAM
The Company also utilizes its Private Label Tender Option Program ("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, 2001, the Company has contributed 64 issues of Revenue Bonds
in the aggregate par amount of approximately $578 million to CharterMac
Origination Trust I (the "Origination Trust"), a wholly owned, indirect
subsidiary of the Company. The Origination Trust then contributed 47 of its
Revenue Bonds, with an aggregate par amount of approximately $428 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, 2001, 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, 2001, the two California only
and two National Series Trusts had Floater Certificates with an outstanding
amount of $124 million and $305 million, respectively.
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. 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.
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 3.5%, 5.4% and 4.5% for the
years ended December 31, 2001, 2000 and 1999, respectively.
The following table shows the components of the financing arrangements.
AMOUNT FINANCED
FINANCING ARRANGEMENT DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------- ----------------- -----------------
P-FLOATS/RITES $191,796,333 $110,026,031
Private Label Tender Offer Program 350,000,000 275,000,000
------------ ------------
Total $541,796,333 $385,026,031
============ ============
66
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 month thirteen 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, 2001, there was approximately $27.3 million outstanding on this
loan, included in notes payable in the accompanying financial statements.
PWF also has another $50 million multi-family revolving warehouse facility,
which will expire 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.
PWF is the guarantor for a $35 million loan and security agreement for Larson,
which will expire on May 31, 2002. The interest rate for the agreement is 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.
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 must be
selected by the Company from the following two alternatives: LIBOR (for the
estimated duration of the advance) plus 125 basis points or Prime plus 12.5
basis points (the default rate). At December 31, 2001 there were no outstanding
borrowings under the facility. At December 31, 2001 the Company were in
compliance with all covenants of the facility.
NOTE 7 - Preferred Shares of Subsidiary
Since June 1999, the Company, through a consolidated subsidiary, has issued
multiple series of "Cumulative Preferred Shares".
PREFERRED DATE OF MANDATORY MANDATORY NUMBER LIQUIDATION TOTAL FACE DIVIDEND
SERIES ISSUANCE TENDER REPURCHASE OF SHARES PREFERENCE 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 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%
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 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 and A-2 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 and B-1 Cumulative Preferred Shares and Common Shares of the of the
Company. The Series B and B-1 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 and
A-2 Cumulative Preferred Shares.
67
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
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 to PWF. As
of December 31, 2001, the sale of 80% of PWF resulted in a change in tax status
from an S corporation to a C corporation.
As a result of the termination of PWF's S corporation election effective
December 31, 2001, PWF has provided a deferred tax liability for cumulative
temporary differences between financial statement and income tax bases of PWF's
assets and liabilities by recording an expense of $7.2 million in its
consolidated statement of income for the year. However, as a result of CM
Corp.'s acquisition of PWF effective December 31, 2001 this liability was
reflected as a component of the purchase price allocation. Such deferred tax
liabilities were based on the cumulative temporary differences that existed on
December 31, 2001 (principally allowance for loan losses and originated mortgage
servicing rights).
PWF's effective rate of 39.01% is due to State income taxes net of Federal
benefit.
The components of the deferred tax (asset) liability are as follows:
PWF CM CORP.
---------------------------------------
Allowance for loan losses $(1,363,000) $ --
Deferred construction servicing fees -- (1,301,823)
Valuation reserve -- 137,272
Originated mortgage service rights 11,614,000 --
Deferred bond selection fees -- 1,164,551
---------------------------------------
Total deferred tax liability $ 10,251,000 $ --
=======================================
CM Corp has cumulative temporary differences between financial statement and
income tax bases of its assets and liabilities at December 31, 2001, principally
deferred income relating to construction servicing fee income and bond selection
fees that are capitalized and amortized over the construction period and call
date, respectively for financial statement purposes. CM Corp. has determined
that a portion of the deferred tax asset may not be realizable, so has taken a
valuation reserve against that asset.
NOTE 9 - Convertible Community Reinvestment Act Preferred Share Offerings
On May 10, 2000, the Company completed a $27,497,000 private placement 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.) The Company incurred an initial purchasers'
discount of approximately $1,109,000 and other related costs of approximately
$610,000, resulting in net proceeds (less expenses) of $25,778,000. On December
14, 2000, the Company completed an additional $9,100,000 private placement of
Convertible CRA Shares to three additional financial institutions (644,000
Convertible CRA Shares priced at $14.13 per share). After an initial purchasers'
discount of approximately $367,000 and other related costs of approximately
$318,000, the Company received net proceeds (less expenses) of $8,414,000. 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 $8,986,977. As of
December 31, 2001, the Company had outstanding, 1,882,364 Convertible CRA
Shares, which are convertible at the holders option into 1,764,663 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 is-
68
sued 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 20, 2000 $14.60 0.9678
NOTE 10 - Related Parties
Pursuant to the Management Agreement and other servicing agreements with
subsidiaries, the Manager receives (inclusive of fees paid directly to the
Manager by subsidiaries of the Company) certain fees for its ongoing management
and operations of the Company:
Fees/Compensation Amount
----------------- ------
I. Bond selection 2% of the face amount of each asset invested in or acquired by the Company
fee
II. Special 0.375% per annum of the total invested assets of the Company
distribution/Investment
Management fee
III. Loan servicing 0.25% per annum of the outstanding face amount of Revenue Bonds or other investments owned
fee by the Company
IV. Liquidation fee 1.5% of the gross sales price of assets sold by the Company
V. Operating For direct expenses incurred by the Manager or CM Corp., in an amount not to exceed
expense $556,331 per annum (subject to increases based on increases in the Company's assets and to
Reimbursements annual increases based upon increases in the Consumer Price index)
VI. Incentive share options The Manager may receive options to acquire additional shares of the Company pursuant to the
incentive share option plan to the extent distributions in any year exceed $0.9517 per common
share, and the compensation committee of the Company's board of trustees determines to grant
such options
Fees payable to the Manager are based on Revenue Bonds or assets of the Company.
In addition, the Manager receives bond placement fees directly from the borrower
in an amount equal to 1% to 1.5% of the principal amount of each Revenue Bond or
other instrument acquired or invested in by the Company. In addition, affiliates
of the Manager are part of a joint venture that has a development services
agreement with the owners of certain Underlying Properties.
The term of each of CharterMac's management agreements is one year. The term of
each of CharterMac's subsidiaries' management agreements is five years; provided
that if CharterMac's management agreement with Related Charter LP is terminated
or not renewed, each of the management agreements with such subsidiaries would
terminate as of such date. Each of the management agreements may be renewed,
subject to evaluation of the performance of the manager by the relevant entity's
board of trustees. Each management agreement may be terminated (i) without cause
by the manager, or (ii) for cause by a majority of the applicable entity's
independent trustees, in each case without penalty and upon 60 days prior
written notice to the non-terminating party.
69
The costs, expenses and the special distributions incurred to the Manager and
its affiliates for the years ended December 31, 2001, 2000 and 1999 were as
follows:
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
Bond selection fees $ 7,852,916 (1) $ 5,995,724 $3,806,510
Special distribution/Investment Management fee 3,620,923 2,743,465 2,018,822
Bond servicing fees 2,454,136 1,809,638 1,337,738
Expense reimbursement 637,337 578,191 384,231
------------ ------------ ------------
$14,565,312 $ 11,127,018 $7,547,301
============ ============ ============
(1) Included in the Bond Selection Fee for 2001 is approximately $588,000 paid
to Related Capital Company related to the purchase of PWF.
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 multifamily 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, 2001, the obligors of certain Revenue Bonds (see footnote K
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, 2001, the owners of the Underlying Properties and obligors of
the Highpointe, and Loveridge Revenue Bonds are affiliates of the Manager who
have not made equity investments. These entities have assumed the day-to-day
responsibilities and obligations of the Underlying Properties. Buyers are being
sought who would make equity investments in the Underlying Properties 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 Capital Company 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.
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
70
assets (which equals the face amount of the Revenue Bonds), 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 Statement of Financial
Accounting Standards ("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 less than
one common share, the potential conversion would be antidilutive.
FOR THE YEAR ENDED DECEMBER 31, 2001
INCOME SHARES* PER SHARE
NUMERATOR DENOMINATOR AMOUNT
----------- ----------- ---------
Net income allocable to shareholders (Basic EPS) $35,010,595 30,782,161 $1.14
Effect of Dilutive securities - 228,262 stock options - 55,179 =========
----------- -----------
Diluted net income allocable to shareholders (Diluted EPS) $35,010,595 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) $27,074,115 22,140,576 $1.22
Effect of Dilutive securities - 297,830 stock options - 11,663 =========
----------- -----------
Diluted net income allocable to shareholders (Diluted EPS) $27,074,115 22,152,239 $1.22
=========== =========== =========
FOR THE YEAR ENDED DECEMBER 31, 1999
INCOME SHARES* PER SHARE
NUMERATOR DENOMINATOR AMOUNT
----------- ----------- ---------
Net income allocable to shareholders (Basic EPS) $20,951,366 20,580,756 $1.02
Effect of Dilutive securities- None =========
Diluted net income allocable to shareholders (Diluted EPS) $20,951,366 20,580,756 $1.02
=========== =========== =========
*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 determi-
71
nation of the Compensation Committee. For 1998 the Company did not grant any
options as its distributions per Share did not exceed the minimum threshold of
$0.9517 per share. In 2001, 2000 and 1999, the Company distributed $1.14, $1.07,
and $0.995, respectively, per Share, thus enabling the Compensation Committee,
at their discretion, 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 1,044,777, 680,950 and 617,430 Common Shares, respectively. Since this
total exceeds the maximum 10% of Common Shares outstanding on October 1, 1999 by
2,058,748, this is now the total number of options available to be issued.
On May 1, 2000, options to purchase 297,830 Common Shares (which reduces the
number of options available to be granted to 1,760,918) were granted to officers
of the Company and certain employees of an affiliate of the Manager, none of
whom are employees of the Company. The exercise price of each option is $11.5625
per share with a term of ten years, and vesting 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 weighted average grant date fair value
at December 31, 2000, for options granted during 2000, was $268,047. No
additional options were granted during 2001. The 297,830 options granted on May
1, 2000 had an estimated fair value at December 31, 2001 of $1.23 per option
grant, or a total of $445,752. The fair value of each option grant is estimated
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2001: dividend yield of 7.38%, expected
volatility of 24%, and expected lives of ten years. On May 1, 2001, one-third,
or 99,276 of the options vested, of which 69,568 were exercised, leaving a
balance of 228,262 options. The Company recorded compensation cost of $168,936
for the year ended December 31, 2001 relating to these option grants.
The following table shows the number of options outstanding granted, exercised
and exercisable and the exercise price of those options.
YEAR ENDED DECEMBER 31,
2001 2000
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------------------------------------------------------------------
Options outstanding at Beginning of Year 297,830 $11.5625 -- $ --
Options granted during the year -- $ -- 297,830 $11.5625
Options exercised during the year 69,568 $11.5625 -- $ --
Options outstanding at End of Year 228,262 $11.5625 297,830 $11.5625
Options exercisable at End of Year 29,708 $11.5625 -- $ --
Through calendar year 1999, each independent trustee was entitled to receive
annual compensation for serving as a trustee in the aggregate amount of $15,000
payable in cash (maximum of $5,000 per year) and/or Common Shares based on the
fair market value at the date of issuance. Beginning in calendar year 2000, the
annual compensation for the two original independent trustees was increased from
$15,000 to $17,500 and the maximum payable in cash was increased from $5,000 to
$7,500. In 2000, a third independent trustee was appointed and such trustee will
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, 2001 and
2000, 5,553 and 3,552 Common Shares, respectively, having an aggregate value at
the date of issuance of $75,000 and $45,000, respectively, have been issued to
the independent trustees. An additional 1,830 shares, with an aggregate value of
$30,000 at issuance, were issued to the independent trustees in January, 2002 as
compensation for their 2001 service.
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 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.
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 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, 2000 and 1999, 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.
The Company was created as part of the settlement in 1997 of class action
litigation against, among others, the sponsors of the Partnerships which were
consolidated to form the Company. As part of that settlement, counsel ("Class
Counsel") for the partners of
72
the Partnerships had the right to petition the United States District Court for
the Southern District of New York (the "Court") for additional attorneys' fees
("Counsel's Fee Shares") in an amount to be determined in the Court's sole
discretion. The Counsel's Fee Shares were based upon a percentage (which Class
Counsel proposed to be 25%) of the increase in value of the Company, ("the Added
Value") if any, as of October 1, 1998 based upon the difference between (i) the
trading prices of the Company's Common Shares of beneficial interest during the
six month period ended October 1, 1998 and (ii) the trading prices of the
limited partnership units and the asset values of the Partnerships prior to
October 1, 1997. As of October 1, 1998, 25% of the Added Value amounted to
$7,788,536 and, in accordance with an Order and Stipulation of Settlement by the
Court on February 18, 1999 (the "Order"), Class Counsel was entitled to receive
608,955 Common Shares of beneficial interest in the Company. On April 15, 1999,
the Company successfully negotiated a discounted cash settlement (the
"Discounted Cash Settlement") of $6,089,550 with Class Counsel in lieu of the
issuance of Common Shares. On April 26, 1999, the Board of Trustees approved the
Discounted Cash Settlement and it was paid on May 3, 1999.
NOTE 14 - Selected Quarterly Financial Data (unaudited)
2001 QUARTER ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ -------------
Revenues:
Interest income:
Revenue Bonds $ 16,340,627 $ 16,360,699 $ 18,818,704 $ 19,979,681
Temporary investments 224,578 390,899 270,184 393,280
Promissory notes 256,934 232,834 168,411 525,470
Equity in earnings of ARCap -- -- -- 456,005
Other income 35,073 506,532 50,042 70,628
------------ ------------ ------------ -------------
Total revenues 16,857,212 17,490,964 19,307,341 21,425,064
------------ ------------ ------------ -------------
Expenses:
Interest expense 3,413,858 3,889,828 3,009,772 3,327,385
Recurring fees relating to the Private
Label Tender Option Program 564,573 569,702 623,288 733,247
Loan servicing and management fees 541,886 595,453 618,035 698,763
General and Administrative 742,279 729,772 523,424 759,195
Amortization 198,574 202,545 221,900 242,429
Loss on impairment of Revenue Bond -- 400,000 -- --
------------ ------------ ------------ -------------
Total Expenses 5,461,170 6,387,300 4,996,419 5,761,019
------------ ------------ ------------ -------------
Income before loss on repayment of
Revenue Bonds 11,396,042 11,103,664 14,310,922 15,664,045
Gain (loss) on repayment of Revenue Bonds 101,791 -- -- (1,013,395)
------------ ------------ ------------ -------------
Income before allocation to preferred shareholders
of subsidiary 11,497,833 11,103,664 14,310,922 14,650,650
Income allocated to preferred shareholders
of subsidiary (2,961,625) (2,961,625) (2,961,625) (3,693,019)
------------ ------------ ------------ -------------
Net Income $ 8,536,208 $ 8,142,039 $ 11,349,297 $ 10,957,631
============ ============ ============ ============
Allocation of income to:
Special distribution to manager $ 827,652 $ 866,412 $ 898,966 $ 1,027,906
============ ============ ============ ============
Manager $ 77,086 $ 72,756 $ 104,504 $ 99,296
============ ============ ============ ============
Common shareholders $ 6,849,905 $ 6,548,069 $ 10,165,756 $ 8,995,017
Convertible CRA shareholders 781,565 654,802 180,071 835,411
------------ ------------ ------------ -------------
Total shareholders $ 7,631,470 $ 7,202,871 $ 10,345,827 $ 9,830,429
============ ============ ============ ============
Net income per share (Basic and 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
73
2000 QUARTER ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ -------------
Revenues:
Interest income:
Revenue Bonds $ 11,341,104 $ 12,554,464 $ 14,392,775 $ 17,420,561
Temporary investments 467,654 656,738 861,495 394,089
Promissory notes 242,211 240,633 266,637 252,200
------------ ------------ ------------ -------------
Total revenues 12,050,969 13,451,835 15,520,907 18,066,850
------------ ------------ ------------ -------------
Expenses:
Interest expense 2,607,575 3,781,942 3,740,189 4,160,917
Recurring fees relating to the Private
Label Tender Option Program 426,978 529,478 619,086 622,015
Bond servicing 396,504 429,305 468,980 522,481
General and administrative 448,199 472,187 684,689 562,787
Amortization 110,699 126,230 139,650 200,809
------------ ------------ ------------ -------------
Total expenses 3,989,955 5,339,142 5,652,594 6,069,009
------------ ------------ ------------ -------------
Income before gain on repayment of
Revenue Bonds 8,061,014 8,112,693 9,868,313 11,997,841
Gain on repayment of Revenue Bonds -- -- -- 645,151
------------ ------------ ------------ -------------
Income before allocation to preferred shareholders
of subsidiary 8,061,014 8,112,693 9,868,313 12,642,992
Income allocated to preferred shareholders
of subsidiary (1,490,625) (1,490,625) (2,651,081) (2,961,625)
------------ ------------ ------------ -------------
Net income $ 6,570,389 $ 6,622,068 $ 7,217,232 $ 9,681,367
============ ============ ============ ============
Allocation of net income to:
Special distribution to Manager $ 594,756 $ 641,425 $ 706,000 $ 801,281
============ ============ ============ ============
Manager $ 59,756 $ 59,806 $ 65,112 $ 88,802
============ ============ ============ ============
Common shareholders $ 5,915,877 $ 5,626,157 $ 5,889,308 $ 8,083,604
Convertible CRA Shareholders 0 294,680 556,809 707,680
------------ ------------ ------------ -------------
Total for shareholders $ 5,915,877 $ 5,920,837 $ 6,446,117 $ 8,791,284
============ ============ ============ ============
Net income per share
(basic and diluted) $ .29 $ .27 $ .29 $ .37
============ ============ ============ ============
Weighted average share outstanding
Basic 20,581,805 20,582,617 22,528,617 23,735,475
Diluated 20,581,805 21,694,617 22,569,179 23,768,251
The results for the quarter ended December 31, 2000 reflect net gains totaling
$645,151 resulting from the repayment of Revenue Bonds (see Note 2).
NOTE 15 - Credit Enhancement Transaction
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' $46.9 million first loss position on a $351.9 million pool of
tax-exempt weekly variable rate multifamily mortgage loans originated by
CreditRe Mortgage Capital, LLC, an affiliate of Credit Suisse First Boston and
The Related Companies, L.P. (See Note 16). As of December 31, 2001, no liability
or losses have been recognized as the guaranteed pool has performed according to
terms. The maximum contingent liability for this credit enhancement transaction
as of December 31, 2001 to the Company is $23.5 million because The Related
Companies, L.P., has indemnified CM Corp. for 50% of its first loss position.
74
NOTE 16 - 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.
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, 2001, all but one 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, 2001, that reserve
was approximately $3.5 million. 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 - MERRILL LYNCH CAPITAL SERVICES - (SEE NOTE 15)
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 $1,247,000 in return
for assuming MLCS's $46.9 million first loss position on a $351.9 million
pool of tax-exempt weekly variable rate multifamily mortgage loans 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 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 a security
therefor, 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
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.
NON-CANCELABLE LEASES
Minimum annual rentals under non-cancelable leases for office space are as
follows:
2002 $504,000
2003 501,000
2004 397,000
2005 311,000
2006 291,000
2007 50,000
----------------
$2,054,000
================
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.
75
NOTE 17 - 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 24 to 36 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. Because the
acquisition was effective December 31,2001, it had no impact on the Company's
operations.
NOTE 18 - Financial Risk Management and Derivatives
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on
the balance sheet at fair value. If the derivative is designated in a fair
value hedge, the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other
comprehensive income (OCI) and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. The adoption of SFAS
133 did not have a significant impact on the financial position or results of
operations of the Company.
The Company's Revenue Bonds generally bear fixed rates of interest income.
However, the P-FLOATS and TOP financing programs incur interest expense at
variable rates, which are reset weekly. Therefore, 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, the
Company, upon management's analysis of the interest rate environment and the
costs and risks of such strategies, has not engaged in any of these hedging
strategies.
During 2001, the Company entered into 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 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 2001 and 2000 was 2.61% and 4.12%, respectively. Net
swap payments received by the Company, if any, will be taxable income to the
Company and any resultant dividends paid 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 has designated these interest rate swaps as cash flow hedges of
the variable interest payments on its floating rate financing. Accordingly,
the interest rate swaps will be 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. Any ineffectiveness in the hedging relationship will
be recorded in earnings. The Company believes that these hedging
relationships were perfectly effective and that there was no ineffectiveness.
As of December 31, 2001 the estimated fair value of both swaps is a liability
of $2,957,663 and is recorded as interest rate swaps in the financial
statements. The total of interest paid or payable for the year ended December
31, 2001 was $1,685,774, and is included in interest expense in the financial
statements.
The Company estimates that approximately $1.2 million of net derivative loss
included in accumulated other comprehensive income will be reclassified into
interest expense within the next twelve months.
76
NOTE 19 - Segment Information
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information", requires enterprises to repost certain financial and
descriptive information about their reportable business segments and certain
other 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,
2001, approximately $1.32 billion are attributable to the investing segment
and approximately $100 million are attributable to the operating segment.
NOTE 20 - Subsequent Events
On February 21, 2002, the Company sold to the public 6.3 million Common
Shares at a price of $15.47 per share. The net proceeds from this offering,
approximating $92.5 million, will be used primarily to fund additional
investments in Revenue Bonds and for general corporate purposes.
On February 1, 2002, the Company acquired a $10.1 million tax-exempt Revenue
Bond secured by West Oaks, a 168-unit multifamily affordable housing
apartment complex located in Houston, Texas. The bond matures in January 2042
and has an interest rate of 7.5% until construction is completed when the
interest rate changes to 7.2%.
On February 1, 2002, the Company acquired a $9.3 million tax-exempt bond and
a $1.9 million taxable bond secured by Circle s Apartments, a 200-unit
multifamily affordable housing complex located in Austin, Texas. The
tax-exempt bond matures in January 2042 and has an interest rate of 7.5%
until construction is completed when the interest rate changes to 7.15%. The
taxable bond matures in October 2023 and bears interest at 8.75%.
On January 18, 2002, the Clarendon Revenue Bond and associated note payable
were repaid. The Company received $17.6 million representing the face amount
of the bond, plus approximately $1.8 million in contingent interest from the
net proceeds of the sale of the underlying property. The secured mortgage was
repaid at the face amount of $6.6 million. The Revenue Bond and note had
carrying values of approximately $14.7 million and $6.6 million respectively
at the time of repayment.
During January 2002, the Company entered into an 8% interest rate cap on a
notional amount of $30 million to mitigate the floating 1 month LIBOR risk
associated with the PWF acquisition loan and the PWF warehouse line.
During February 2002, the Company received notice and the required $250,000
deposit, that the borrower of the four Sunset Revenue Bonds (Sunset Creek,
Sunset Downs, Sunset Terrace and Sunset Village) intended to exercise its
option to purchase the bonds for the option price of $35,250,000. At December
31, 2001, these four bonds had an aggregate carrying value of approximately
$34.2 million.
In February 2002, the letter of credit bank, the construction lender , for
Chandler Creek, notified us that the property would not be completed by the
expected completion date. The Company exercised its right to put the bonds
under the letter of credit. The Company recovered the entire original face
amount of both the taxable and tax-exempt Revenue Bonds of $350,000 and
$15,850,000, respectively.
77
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
The Board of Trustees directs the management of the business of CharterMac,
but retains CharterMac Corporation ("CM Corp."), the Company's wholly owned
subsidiary, and Related Charter, LP ("RCLP") to manage the Company's
day-to-day affairs. CM Corp. and RCLP provide CharterMac services pursuant to
management agreements between (i) CM Corp. and CharterMac and (ii) RCLP and
CharterMac. Collectively, they are referred to as the "Manager". The Manager
has subcontracted its obligations to Related Capital Company ("Related") and
uses Related's resources and real estate investment expertise to advise the
Company. See "Management Agreements" below. The Board of Trustees has
delegated certain responsibilities to the Manager including, among other
things, overseeing the Company's portfolio of assets and acquiring and
disposing of investments. During 2001, the Board of Trustees held fifteen
meetings, the compensation committee did not hold any meetings and the audit
committee held four 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 Office Held Officer/Trustee Term Expires
---- --- ----------- --------------- ------------
Stephen M. Ross 61 Managing Trustee,
Chairman of the Board 1999 2003
Stuart J. Boesky 45 Managing Trustee, President,
and Chief Executive Officer 1997 2003
Alan P. Hirmes 47 Managing Trustee,
Executive Vice President,
Secretary 1997 2002
Peter T. Allen 56 Managing Trustee 1997 2004
Arthur P. Fisch 60 Managing Trustee 1997 2004
Charles L. Edson 67 Managing Trustee 2001 2002
Michael J. Brenner 56 Managing Trustee 2000 2004
Thomas W. White 64 Managing Trustee 2000 2002
Michael I. Wirth 43 Chief Financial Officer and
Chief Accounting Officer 2000 --
STEPHEN M. ROSS is Chairman of the Board of Trustees of CharterMac and is a
Member of the sole general partner of the Manager. Mr. Ross is the founder,
Chairman, CEO and Managing General Partner of the Related Companies, L.P.
("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.
STUART J. BOESKY is a Managing Trustee, the President and Chief Executive
Officer of CharterMac and the President, Chief Executive Officer and Member
of the sole general partner of the Manager. Mr. Boesky is also a Partner and
Senior Managing Director of Related Capital Company ("Related"), the
financial services arm of TRCLP, where he is primarily responsible for the
creation, design and implementation of Related's debt and equity finance
programs. Prior to joining Related in 1986, Mr. Boesky practiced real estate
and tax law with the law firm of Shipley & Rothstein and the Boston office of
Stroock and Stroock and Lavan. Previously, Mr. Boesky was a consultant at the
accounting firm of Laventhol & Horwath. Mr. Boesky received a Bachelor of
Arts degree with high honors from Michigan State University, a Juris Doctor
degree from Wayne State University School of Law and a Master of Law degree
in Taxation from Boston University School of Law. Mr. Boesky also serves on
the Board of Directors of Aegis Realty, Inc. ("Aegis") and the Board of
Trustees of American Mortgage Acceptance Company ("AMAC"), both of which are
managed by affiliates of RCLP.
78
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 the Manager. Mr. Hirmes is also a Partner and a
Senior Managing Director of Related, where he is responsible for overseeing
the finance, accounting and portfolio management 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 Directors of Aegis and the Board of
Trustees of AMAC.
PETER T. ALLEN is a Managing 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 Directors of
Aegis and on the Board of Trustees of AMAC.
ARTHUR P. FISCH is a Managing 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 Directors of Aegis and the Board of Trustees of AMAC.
CHARLES L. EDSON is a Managing Trustee of CharterMac. Mr. Edson is a retired
partner of the law firm Nixon Peabody LLP where he focused on all aspects of
housing development, management finance and taxation. He served as counsel to
several governmental, trade and public interest entities and groups on
housing and legislative matters and continues 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.
MICHAEL J. BRENNER is a Managing Trustee of CharterMac, and is the Executive
Vice President and Chief Financial Officer of The Related Companies, LP
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. Mr. Brenner also serves on the Board of
Directors of Aegis.
THOMAS W. WHITE is a Managing Trustee of CharterMac. Mr. White retired as a
Senior Vice President of Fannie Mae in the multifamily activities department,
where he was responsible for the development and implementation of policies
and procedures for all Fannie Mae multifamily 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 multifamily loans in portfolio or
Mortgage-Backed Securities. Mr. White joined Fannie Mae in November 1987 as
director of multifamily product management. He was elected Vice President for
multifamily 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. Mr. White currently
serves as a consultant to CharterMac.
MICHAEL I. WIRTH is the Chief Financial Officer and Chief Accounting Officer
of CharterMac and is a Senior Vice President and Chief Financial Officer of
the general partner of the Manager. Mr. Wirth is also a Senior Vice President
of Related. Mr. Wirth joined Related in August, 2000. Prior to Related, Mr.
Wirth was a Vice President in the Real Estate Group at CGA Investment
Management where he was responsible for the underwriting, investment and
management of all commercial real estate debt investments made by the
company. Prior to CGA, Mr. Wirth spent 4 years as a senior manager at
Deloitte & Touche in the Realty Consulting Group and Technology Solutions
practice and 5 years as a senior manager and national director to the
financial services industry at The Roulac Group of Deloitte & Touche. Mr.
Wirth received a Bachelors in Business Administration from Georgia State
University. He has been a Certified Public Accountant since 1986.
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
79
with CharterMac's independent auditors. The Audit Committee is comprised of
Messrs. Allen, Fisch and Edson and had four meetings during CharterMac's
fiscal year ended December 31, 2001.
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 did not hold any meetings during CharterMac's fiscal year
ended December 31, 2001. The Compensation Committee must have at least two
members, each of which must be Independent Trustees.
Related Charter, LP
The directors and executive officers of Related Charter LLC ("Related
Charter"), the sole general partner of RCLP, are set forth below. These
officers of the sole general partner of RCLP may also provide services to
CharterMac on behalf of RCLP. The executive officers of RCLP are the exact
same as the executive officers of CM Corp.
Related Charter LLC
Year First Became
Name Age Offices Held Officer/Member
--- --- ------------ -----------------
Stuart J. Boesky 45 Member, President and
Chief Executive Officer 1997
Alan P. Hirmes 47 Member, Senior Vice President 1997
Stephen M. Ross 61 Member 1997
Michael I. Wirth 43 Senior Vice President and Chief
Financial Officer 2000
James D. Spound 41 Executive Vice President 1998
Denise L. Kiley 42 Senior Vice President 1997
Marc D. Schnitzer 40 Senior Vice President 1997
John J. Sorel 41 Senior Vice President 1999
Steven B. Wendel 39 Senior Vice President 2001
Mark J. Schlacter 51 Vice President 1997
Max E. Schlopy 65 Vice President 1998
Gary Parkinson 52 Controller 2000
Teresa Wicelinski 36 Secretary 1998
Biographical information with respect to Messrs. Boesky, Ross, Hirmes and
Wirth is set forth above.
JAMES D. SPOUND is an Executive Vice President of Related Charter, LLC with
primary responsibility for bond originations. 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.
DENISE L. KILEY is a Senior Vice President of Related Charter, LLC. Ms. Kiley is
also a Partner and a Managing Director of Related where she is responsible for
the underwriting and asset management groups. Ms. Kiley oversees the investment
underwriting and approval of all multifamily residential properties invested in
Related sponsored corporate, public and private equity and debt funds. Prior to
joining Related in 1990, Ms. Kiley had experience acquiring, financing and
managing the assets of multifamily residential properties. From 1981 through
1985 she was an auditor with a national accounting firm. Ms. Kiley holds a
Bachelor of Science degree in Accounting from Boston College and is a Member of
the Affordable Housing Roundtable.
MARC D. SCHNITZER is a Senior Vice President of Related Charter, LLC. Mr.
Schnitzer is also a Partner and a Managing Director of Related where he is
responsible for the Tax Credit Acquisitions and Corporate Funds Groups. Mr.
Schnitzer received a Master of Business Administration degree from The Wharton
School of The University of Pennsylvania in December 1987, and joined Related in
January, 1988. From 1983 to 1986, Mr. Schnitzer was a Financial Analyst in the
Fixed Income Research Department of The First
80
Boston Corporation in New York. Mr. Schnitzer received a Bachelor of Science
degree, summa cum laude, in Business Administration from the School of
Management at Boston University.
JOHN SOREL is a Senior Vice President of Related Charter, LLC and is a Senior
Vice President of Related. Mr. Sorel is responsible for overseeing
construction risk management for CharterMac. Prior to joining Related in
November, 1999, Mr. Sorel was a Vice President for BankBoston in their real
estate department from 1993-1999, where he originated and managed over $150
million of corporate and construction loan facilities for the low income
housing tax credit industry. From 1991-1993, Mr. Sorel worked as an Assistant
Vice President for Recoll Management. Mr. Sorel holds a Bachelor of Arts
degree in Economics from Syracuse University.
STEVEN B. WENDEL is a Senior Vice President of Related Charter, LLC and a
Senior Vice President of Related Capital, focusing on taxable mortgage
financing for multifamily 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.
MARK J. SCHLACTER is a Vice President of Related Charter, LLC. Mr. Schlacter
is a Vice President of Related and has been with Related since June 1989. Mr.
Schlacter is primarily responsible for the origination and acquisition of
taxable mortgage products. Prior to joining Related, Mr. Schlacter garnered
16 years of direct real estate experience covering retail and residential
construction, single and multifamily mortgage origination and servicing,
commercial mortgage origination and servicing, property acquisition and
financing, and mortgage lending program underwriting and development. He was
a Vice President with Bankers Trust Company from 1986 to June 1989, and held
prior positions with Citibank, Anchor Savings Bank and the Pyramid Companies
covering the 1972-1986 period. Mr. Schlacter holds a Bachelor of Arts degree
in Political Science from Pennsylvania State University.
MAX E. SCHLOPY is a Vice President of Related Charter, LLC. An attorney, Mr.
Schlopy practiced corporate and commercial real estate law in Buffalo, New
York for many years, where he was a partner with the law firm of Duke,
Holzman, Yeager and Schlopy. He served as Vice President - General Counsel
for Marc Equity Corporation, a diversified real estate development company
with operations in several states and later as a Vice President of the
general partner for the Summit Tax Exempt Bond Funds. More recently, Mr.
Schlopy was President of MK Industries, Inc., an Orlando, Florida-based
company involved in the research and development of high technology military
and biomedical products and processes. He presently practices law and offers
consulting services to the real estate industry from his offices in Park
City, Utah. Mr. Schlopy was educated at Cornell and San Francisco State
Universities, and received his Juris Doctor degree, cum laude, from the
School of Law, State University of New York at Buffalo.
GARY PARKINSON is the Controller of Related Charter, LLC. 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 Related Charter, LLC. 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.
MANAGEMENT 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 has subcontracted its obligations under the management agreements
to Related Capital Company.
81
Pursuant to the terms of the Management Agreement, the Manager is entitled to
receive the fees and other compensation set forth below:
FEE/COMPENSATION* AMOUNT
----------------- ------
Bond Selection Fee 2.00% of the face amount of each asset
invested in or acquired by CharterMac
or its subsidiaries.
Special Distribution/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 Reimbursements For direct
expenses incurred by the Manager or CM
Corp. in an amount not to exceed
$556,331 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 us or our 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.
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.
The Manager is entitled to subcontract its obligations under the Management
Agreement to an affiliate. In accordance with the foregoing, the Manager has
assigned its rights and obligations to Related.
RCLP 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. RCLP 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
82
$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.
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, as further
described in Item 10. 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 2,058,638 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. No additional options were
granted in 2001.
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 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.
84
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, 2001:
- The Audit Committee has reviewed and discussed with CharterMac's management
the Company's fiscal 2001 audited financial statements;
- 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;
- The Audit Committee has received the written disclosures and letter from
the independent auditors required by Independence Standards Board 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, 2001.
Submitted by the Audit Committee of CharterMac's Board of Trustees:
Charles L. Edson -- Chairman
Peter T. Allen
Arthur P. Fisch
As of March 7, 2002, 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 7, 2002, 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.
85
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 7, 2002, 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
NAME TITLE BENEFICIAL OWNERSHIP PERCENT OF CLASS(10)
---- ----- -------------------- --------------------
Stephen M. Ross Chairman of the Board of 246,454 Common Shares(1,2,3) *
CharterMac and Member of
Related Charter
Alan P. Hirmes Trustee, Executive VP and 58,232 Common Shares(1,3,4) *
Secretary, of CharterMac
and Member and Senior VP
of Related Charter
Stuart J. Boesky Trustee, President and 66,188 Common Shares(1,3,4) *
CEO of CharterMac and Member,
President and CEO of Related
Charter
Peter T. Allen Trustee of CharterMac 3,053 Common Shares *
Arthur P. Fisch Trustee of CharterMac 3,053 Common Shares *
Thomas W. White Trustee of CharterMac 972 Common Shares *
Charles L. Edson Trustee of CharterMac 305 Common Shares *
Michael J. Brenner Trustee of CharterMac 13,605 Common Shares(5) *
Michael I. Wirth CFO & CAO of CharterMac and
SVP & CFO of Related Charter 10,319 Common Shares(6)
James D. Spound Executive VP of Related Charter 27,210 Common Shares(7) *
Marc D. Schnitzer Senior VP of Related Charter 13,628 Common Shares(4) *
Denise L. Kiley Senior VP of Related Charter 13,628 Common Shares(4) *
John J. Sorel Senior VP of Related Charter 1,667 Common Shares(8) *
Steven B. Wendel Senior VP of Related Charter 0 Common Shares
All Senior Officers and Trustees of CharterMac
and Related Charter as a group (14 persons) 415,978 Common Shares(1,3,9) 1.13%
*Less than 1% of the outstanding Common Shares.
------------------
(1) 11 of these Common Shares are owned by the Manager, of which a majority is
owned by Messrs. Ross, Hirmes, and Boesky.
(2) Includes 8,702 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 6,961 options to purchase Common Shares (which are exercisable
within 60 days)
(5) Includes 13,605 options to purchase Common Shares (which are exercisable
within 60 days)
(6) Includes 4,752 options to purchase Common Shares (which are exercisable
within 60 days)
(7) Includes 27,210 options to purchase Common Shares (which are exercisable
within 60 days)
(8) Includes 1,667 options to purchase Common Shares (which are exercisable
within 60 days)
(9) Includes 83,780 options to purchase Common Shares (which are exercisable
within 60 days)
(10) Based on the Common Shares outstanding as of March 7, 2002 (40,327,738)
plus the Common Shares issuable upon the conversion of (i) all options to
purchase Common Shares which are exercisable within 60 days (83,780) and
(ii) all CRA Preferred Shares (1,764,663).
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, 2001,
CharterMac's officers, trustees and greater than 10% beneficial owners
complied with all applicable Section 16(a) filing requirements, except for a
Form 4 required to be filed on behalf of Marc Schnitzer after exercising an
option to purchase 6,667 Common Shares. A Form 5 has been filed with the SEC
to reflect this purchase.
Item 13. Certain Relationships and Related Transactions
GENERAL
The Company 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 the Company's total market value, on
the aggregate amount of Revenue Bonds either the Company may hold where the
borrowers under such Revenue Bonds are either direct or indirect affiliates
of Related Capital and Related Capital generally has a controlling economic
interest ("15% Affiliates"). The Trust Agreement also requires that the
Company 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 Related Capital'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 Capital 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 the Company 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 Company
investment other than financing provided by the Company. 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 the Company is required to take
any of the following actions with respect to a Revenue Bond secured by a
property which an affiliate of the Manager owns an equity interest: (i)
modification of any material rights and obligations respecting the affiliate,
(ii) the Company'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 the Company's
rights or collect any material costs due to us from an affiliate borrower.
MANAGEMENT AGREEMENTS
CharterMac has, and will continue to have certain relationships with RCLP and
its affiliates. While there have been no direct financial transactions
between CharterMac and its Trustees and officers or the members and officers
of the sole general partner of RCLP, RCLP (and CM Corp.) has subcontracted
certain obligations under the management agreements to RCLP. See "Management
Agreements" under Item 10 for a further description of the management
agreements.
AFFILIATED BORROWERS
The obligors of Revenue bonds with an aggregate approximate original par
amount of approximately $612 million 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 million of
Revenue Bonds have been replaced with affiliates of the Manager who have not
made equity investments.
As of December 31, 2001, the owners of the Underlying Properties and obligors
of the Highpointe and Loveridge Revenue bonds were affiliates of the Manager
who have not made equity investments. During June 2001, the affiliates of the
Manager sold 49% of Loveridge. The remaining 51% was sold in January 2002, to
the same buyer who purchased the initial 49%. A buyer is being sought for the
remaining Underlying Property -- Highpointe. 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, 2001 was approximately
$5,728,000, and the income earned from Highpointe for the years ended
December 31, 2001 was approximately $315,000.
ADVANCES TO AFFILIATED BORROWERS
From time to time the Company has advanced funds to owners of certain
properties securing the Company's investments in order to preserve the value
of the underlying asset. Such advances have been used to complete
construction, fund operating deficits and
87
pay past due real estate taxes and deferred maintenance or other capital
items. These advances typically are evidenced by taxable promissory notes,
some of which are secured by second mortgages. As of December 31, 2001, the
Company advanced funds to obligors which are affiliates of the Manager at an
aggregate face amount of approximately $5 million, with rates ranging from 8%
to 10%.
INDEMNIFICATION RIGHTS WITH RESPECT TO CREDIT ENHANCEMENT TRANSACTIONS
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 multifamily 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 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. The Related
Companies, L.P. 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.
88
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Sequential
Page
----------
(a) 1. Financial Statements
Independent Auditors' Report 42
Consolidated Balance Sheets as of December 31, 2000 and 1999 43
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 44
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2001, 2000 and 1999 45
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 47
Notes to Consolidated Financial Statements 49
(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)
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 (filed herewith)
4.1 Specimen Copy of Share Certificate for shares of beneficial
interest of the Company (incorporated by reference to the
Company's
89
Sequential
Page
----------
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)
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)
90
Sequential
Page
----------
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)
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 (incorporated by
reference to the Company's current report on Form 8-K filed with
the Commission on April 29, 1999)
91
Sequential
Page
----------
(b) Reports on Form 8-K
Current report on Form 8-K relating to the approval by a majority
of the shareholders of American Tax Exempt Bond Trust to the terms
of the Merger Agreement with CM Holding Trust, the Company's
subsidiary, as the surviving trust was dated October 13, 2000 and
was filed on October 13, 2000.
Current report on Form 8-K relating to the merger of American Tax
Exempt Bond Trust into CM Holding Trust was dated November 29, 2000
and was filed on November 29, 2000.
Current report on Form 8-K filing the underwriting agreement, dated
May 10, 2001, entered into with UBS Warburg. LLC, regarding the
Company's offering of 7,900,000 Common Shares of beneficial
interest, was dated May 10, 2001 and filed October 22, 2001
Current report on Form 8-K relating to the Company's announcement
of a definitive agreement to acquire PW Funding, Inc., was dated
and filed October 26, 2001.
Current report on Form 8-K relating to Regulation FD disclosure
regarding supplemental information for the quarter ended September
30, 2001, posted on the Company's web page, was dated December 7,
2001 and filed December 13, 2001.
92
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 29, 2002 By:
---------------------------------
Stuart J. Boesky
Managing Trustee, President
and Chief Executive Officer
93
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
-------------------- --------------------------- ---------------
--------------------
Stuart J. Boesky Managing Trustee, President
and Chief Executive Officer March 29, 2002
--------------------
Stephen M. Ross Managing Trustee and
Chairman of the Board March 29, 2002
--------------------
Michael J. Brenner Managing Trustee March 29, 2002
--------------------
Alan P. Hirmes Managing Trustee, Executive
Vice President,
and Secretary March 29, 2002
--------------------
Michael I. Wirth Senior Vice President and Chief Financial
Officer March 29, 2002
--------------------
Peter T. Allen Managing Trustee March 29, 2002
--------------------
Arthur P. Fisch Managing Trustee March 29, 2002
--------------------
Thomas W. White Managing Trustee March 29, 2002
--------------------
Charles L. Edson Managing Trustee March 29, 2002
94
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 29, 2002 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee, President
and Chief Executive Officer
95
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
--------------------
Stuart J. Boesky Managing Trustee, President
and Chief Executive Officer March 29, 2002
/s/ Stephen M. Ross
--------------------
Stephen M. Ross Managing Trustee and
Chairman of the Board March 29, 2002
/s/ Michael J. Brenner
--------------------
Michael J. Brenner Managing Trustee March 29, 2002
/s/ Alan P. Hirmes
--------------------
Alan P. Hirmes Managing Trustee, Executive
Vice President,
and Secretary March 29, 2002
/s/ Michael I. Wirth
--------------------
Michael I. Wirth Senior Vice President and
Chief Financial Officer March 29, 2002
/s/ Peter T. Allen
--------------------
Peter T. Allen Managing Trustee March 29, 2002
/s/ Arthur P. Fisch
--------------------
Arthur P. Fisch Managing Trustee March 29, 2002
/s/ Thomas M. White
--------------------
Thomas M. White Managing Trustee March 29, 2002
/s/ Charles L. Edson
--------------------
Charles L. Edson Managing Trustee March 29, 2002
96
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,
----------------------------
2001 2000
----------- -----------
ASSETS
Revenue Bonds-at fair value $ 10,518,000 $ 12,104,055
Investment in ARCap 18,949,530 0
Cash and cash equivalents 17,376,178 9,952,594
Interest receivable, net 65,130 165,759
Promissory notes receivable 3,057,000 9,909,933
Investment in subsidiaries 485,902,564 341,376,758
Deferred costs, net 23,149,663 17,845,534
Goodwill, net 1,984,217 2,329,422
Other assets 597,793 409,595
----------- -----------
Total assets $561,600,075 $372,429,177
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities $ 1,373,015 $ 827,280
Due to Manager and affiliates 1,467,232 1,025,210
Due to subsidiaries 11,076,093 6,762,543
Distributions payable to common shareholders 10,447,756 6,242,046
Distributions payable to Convertible CRA Shareholders 564,709 558,250
----------- -----------
Total liabilities 24,928,805 15,415,329
----------- -----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity - Convertible CRA share- holders (1,882,364 and
2,590,000 shares issued and
outstanding in 2001 and 2000, respectively) 25,521,546 34,397,168
Beneficial owner's equity-manager 1,068,973 715,342
Beneficial owners' equity-other common shareholders
(50,000,000 shares authorized; 34,834,308 issued and
34,825,908 outstanding and 22,706,739 issued and
22,698,329 outstanding in 2001 and 2000, respectively) 511,456,297 344,870,761
Treasury shares of beneficial interest (8,400 shares) (103,359) (103,359)
Accumulated other comprehensive loss (1,272,186) (1,201,591)
----------- -----------
Total shareholders' equity 536,671,271 378,678,321
----------- -----------
Total liabilities and shareholders' equity $561,600,075 $394,093,650
=========== ===========
See accompanying notes to financial statements
97
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenues:
Interest income:
Revenue Bonds $ 1,439 $ 2,972,386 $ 6,050,931
Temporary investments 376,187 451,768 662,728
Promissory notes 819,752 1,001,681 702,991
Other income 443,921 0 0
Income from subsidiaries 40,919,666 28,307,718 18,177,128
Equity in earnings of ARCap 456,005 0 0
---------- ---------- ----------
Total revenues 43,016,970 32,733,553 25,593,778
---------- ---------- ----------
Expenses:
Interest expense 412,369 21,887 417,263
Bond servicing 42,494 33,694 135,767
General and administrative 2,629,996 2,062,719 1,406,501
Amortization 726,615 478,951 345,282
---------- ---------- ----------
Total expenses 3,811,474 2,597,251 2,304,813
---------- ---------- ----------
Income before loss on repayment of revenue
bonds 39,205,496 30,136,302 23,288,965
Loss on repayment of Revenue Bonds 220,322 45,246 107,147
---------- ---------- ----------
Net income $38,985,174 $30,091,056 $23,181,818
========== ========== ==========
Allocation of net income:
Special distribution to Manager $ 3,620,936 $ 2,743,465 $ 2,018,822
========== ========== ==========
Manager $ 353,642 $ 273,476 $ 211,630
========== ========== ==========
Common shareholders $32,555,334 $25,500,984 $20,951,366
Convertible CRA Shareholders 2,455,261 1,573,131 0
---------- ---------- ----------
Total for Shareholders $35,083,278 $27,074,115 $20,951,366
========== ========== ==========
See accompanying notes to financial statements
98
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 39,058,591 $ 30,091,056 $ 23,181,818
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on repayments of Revenue Bonds 220,322 45,245 107,147
Amortization 726,615 478,951 345,282
Amortization of goodwill 181,579 345,204 297,623
Amortization of bond selection costs 2,510,846 935,380 450,743
Income from investment in subsidiaries (40,982,583) (28,307,718) (18,177,128)
Distributions from subsidiaries 0 0 16,467,319
Equity in earnings of ARCap in excess of
distributions received (456,005) 0 0
Changes in operating assets and liabilities:
Interest receivable 100,629 33,789 105,165
Other assets (181,025) 20,323 656
Accounts payable, accrued expenses and
other liabilities 709,361 403,740 (5,918,615)
Due from subsidiaries 4,313,550 116,180 (208,887)
Due to subsidiaries 0 7,575,386 (1,328,176)
Due to Manager and affiliates 404,205 114,771 (343,960)
------------ ------------ ------------
Net cash provided by operating activities 6,600,585 11,852,307 14,978,987
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from repayments of Revenue Bonds 0 49,901 5,100,000
Periodic principal payments to Revenue Bonds 84,876 0 0
Purchase of Revenue Bonds (7,075,000) (2,405,000) (44,770,162)
Proceeds from secured borrowings 0 0 52,807,000
Investment in subsidiaries (82,762,716) (23,824,693) 13,507,000
Increase in deferred bond selection costs (7,899,327) (6,499,035) (3,906,784)
Net sale (purchase) of temporary investments (18,493,525) 19,790,000 (19,790,000)
Increase in other assets 0 (9,000) (251,500)
Increase in deferred costs 0 (545,632) (100,000)
Loans made to properties (11,971,000) (200,000) (2,847,185)
Principal payments received from loans made to
properties 99,232 438,127 328,045
------------ ------------ ------------
Net cash provided by (used in) investing activities (128,017,460) (13,205,332) 76,414
------------ ------------ ------------
(continued)
99
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
------------ ----------- ------------
Cash flows from financing activities:
Repayments of note payable $ 6,226,500 $ 0 $ 0
Increase in cash and cash equivalents-restricted 0 971,758 (971,758)
Distributions paid to the Manager and
shareholders of the Company (33,455,685) (24,343,782) (21,815,252)
Distributions paid to Convertible CRA
Shareholders (2,334,036) (810,370) 0
Increase in deferred costs relating to the
Private Label Tender Option Program (873,197) (2,300,639) (559,632)
Increase in other deferred costs 0 72,039 (72,039)
Issuance of Common Shares 168,263,854 0 0
Issuance of Convertible CRA Shares 0 34,192,657 0
Retirement of Convertible CRA shares (8,986,977) 0 0
------------ ----------- ------------
Net cash provided by (used in) financing
activities 128,840,459 7,781,663 (23,418,681)
------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents 7,423,584 6,428,638 (8,363,280)
Cash and cash equivalents at the beginning
of the year 9,952,594 3,523,956 11,887,236
------------ ----------- ------------
Cash and cash equivalents at the end of
the year $ 17,376,178 $ 9,952,594 $ 3,523,956
============ =========== ============
Supplemental information:
Interest paid $ 412,368 $ 21,887 $ 417,263
============ =========== ============
Supplemental disclosure of noncash activities:
Contribution of Revenue Bonds to
subsidiaries $ 8,345,223 0 13,507,000
============ =========== ============
Contribution of notes receivables to
subsidiaries $ 12,498,201 0 0
============ =========== ============
See accompanying notes to financial statements
100
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
The Company received distributions from its consolidated subsidiaries totaling
approximately $16,467,000 during the year ended December 31, 1999.
During the years ended December 31, 1999 and 1998, the Company contributed
Revenue Bonds with aggregate carrying value of approximately $115,567,000 and
$366,686,000, respectively, to its subsidiaries.
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 31,2001, 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
101