SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
---------------------------------------------
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
----------- ------------
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
Revenue Bonds-at fair value $ 1,122,301 $ 1,137,715
Temporary investments 88,570 --
Investment in ARCap 19,047 18,950
Guaranteed investment contracts 18,360 18,406
Mortgage servicing rights 36,414 35,646
Cash and cash equivalents 145,161 105,364
Cash and cash equivalents-restricted 4,529 4,670
Interest receivable, net 6,845 6,458
Promissory notes and mortgages receivable 56,026 45,022
Deferred costs, net 31,630 31,796
Goodwill 9,869 9,842
Other intangible assets 3,037 3,154
Other assets 3,171 3,103
----------- -----------
Total assets $ 1,544,960 $ 1,420,126
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 526,193 $ 541,796
Notes payable 74,137 56,586
Interest rate derivatives 1,936 2,958
Accounts payable, accrued expenses and other liabilities 14,932 13,820
Due to Manager and affiliates 2,046 2,266
Due to FNMA 18,359 18,406
Distributions payable to preferred shareholders
of subsidiary 3,764 3,693
Deferred tax liability 10,432 10,251
Reserve for possible DUS losses 1,992 1,937
Distributions payable to Convertible CRA Shareholders 584 565
Distributions payable to common shareholders 12,757 10,448
----------- -----------
Total liabilities 667,132 662,726
----------- -----------
Preferred shares of subsidiary (subject to mandatory
repurchase) 218,500 218,500
----------- -----------
Minority interest in consolidated subsidiary 3,955 3,652
----------- -----------
Commitments and contingencies
Shareholders' Equity:
Beneficial owners' equity - convertible CRA share-
holders (1,882,364 shares, issued and outstanding
in 2002 and 2001, respectively) 25,790 25,522
Beneficial owner's equity-manager 1,246 1,069
Beneficial owners' equity-other common shareholders
(50,000,000 shares authorized; 41,161,138 issued
and 41,152,738 outstanding and 34,834,308
shares issued and 34,825,908 outstanding in
2002 and 2001, respectively) 608,023 511,456
Treasury shares of beneficial interest (8,400 shares) (103) (103)
Accumulated other comprehensive income (loss) 20,417 (2,696)
----------- -----------
Total shareholders' equity 655,373 535,248
----------- -----------
Total liabilities and shareholders' equity $ 1,544,960 $ 1,420,126
=========== ===========
See accompanying notes to consolidated financial statements
-2-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
----------------------------
Three Months Ended
March 31,
----------------------------
2002 2001
----------------------------
Revenues:
Interest income:
Revenue bonds $ 22,920 $ 16,341
Temporary investments 220 225
Promissory notes 163 256
Equity in earnings of ARCap 547 --
Mortgage banking fees 1,656 --
Servicing fees 1,853 --
Other income 1,991 35
------------ ------------
Total revenues 29,350 16,857
------------ ------------
Expenses:
Interest expense 3,991 3,414
Recurring fees relating to the Private Label Tender
Option Program 727 564
Bond servicing 766 542
General and administrative 5,599 742
Amortization 2,240 199
Minority interest expense 302 --
Provision for loss under FNMA DUS product line 326 --
------------ ------------
Total expenses 13,951 5,461
------------ ------------
Income before gain on repayment of revenue bonds 15,399 11,396
Gain on sale of loans 3,613 --
Gain on repayment of revenue bonds 3,757 102
------------ ------------
Income before allocation to preferred shareholders
of subsidiary 22,769 11,498
Income allocated to preferred shareholders
of subsidiary (3,764) (2,962)
------------ ------------
Net income before provision for income taxes 19,005 8,536
------------ ------------
Provision for income taxes 181 --
------------ ------------
Net income $ 18,824 $ 8,536
============ ============
Allocation of net income to:
Special distribution to Manager $ 1,088 $ 828
============ ============
Manager $ 177 $ 77
============ ============
Common shareholders $ 16,707 $ 6,850
Convertible CRA shareholders 852 781
------------ ------------
Total for shareholders $ 17,559 $ 7,631
============ ============
Net income per share
Basic $ .45 $ .30
============ ============
Diluted $ .45 $ .30
============ ============
Weighted average shares
outstanding:
Basic 38,781,464 25,289,651
============ ============
Diluted 38,845,985 25,350,314
============ ============
See accompanying notes to consolidated financial statements
-3-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Accumulated
Beneficial Beneficial Other
Owners'Equity Beneficial Owners' Treasury Compre-
- Convertible Owner's Equity- Shares of hensive
CRA Equity - Other Beneficial Comprehen- (Loss)
Shareholders Manager Shareholders Interest sive Income Income Total
------------ ------- ------------ -------- ----------- ------ -----
Balance at January 1, 2002 $25,522 $1,069 $511,456 $(103) $(2,696) $535,248
Comprehensive income:
Net income 852 1,265 16,707 -- $ 18,824 -- 18,824
--------
Other comprehensive gain (loss):
Net unrealized loss on (2,152)
interest rate derivatives
Net unrealized gain on revenue bonds:
Unrealized holding gain arising 29,022
during the period
Less: Reclassification adjustment for
net gain included in net income (3,757)
--------
Other comprehensive gain 23,113 23,113 23,113
--------
Comprehensive income $ 41,937
========
Issuance of common shares -- -- 92,617 -- -- 92,617
Distributions (584) (1,088) (12,757) -- -- (14,429)
------- ------ -------- ----- ------- --------
Balance at March 31, 2002 $25,790 $1,246 $608,023 $(103) $20,417 $655,373
======= ====== ======== ===== ======= ========
See accompanying notes to consolidated financial statements
-4-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
-----------------------
Three Months Ended
March 31,
-----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,824 $ 8,536
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on repayment of revenue bonds (3,757) (102)
Other amortization 239 200
Amortization of other intangible assets 118 121
Amortization of bond selection costs 599 417
Accretion of deferred income and purchase
accounting adjustment (39) (109)
Income allocated to preferred shareholders
of subsidiary 3,764 2,962
Equity in earnings of ARCap, in excess of
distributions received (97) --
Income on interest rate cap (216) --
Changes in operating assets and liabilities:
Interest receivable (388) 133
Other assets (61) 151
Decrease in cash & cash equivalents-restricted 141 --
Accounts payable, accrued expenses and
other liabilities 1,121 23
Increase in reserve for possible DUS losses 54 --
Deferred tax liability 181 --
Due to Manager and
affiliates 49 203
-------- --------
Net cash provided by operating activities 20,532 12,535
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of revenue bonds 75,650 12,820
Periodic principal payments of revenue bonds 968 331
Purchase of revenue bonds (28,375) (11,000)
Increase in deferred bond selection costs (859) (345)
Net purchase of temporary investments (88,570) (1,000)
Increase in other deferred costs --
Decrease in guaranteed investment contracts 47 --
Increase in due to FNMA (47) --
Increase in mortgage servicing rights (768) --
Increase in minority interest in subsidiary 302 --
Increase in goodwill (27) --
Increase in mortgage receivable (17,551) --
Loans made to properties (862) (550)
Principal payments received from loans made to
properties 809 49
-------- --------
Net cash (used in) provided by investing activities (59,283) 305
-------- --------
Continued
- 5 -
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
----------------------
Three Months Ended
March 31,
----------------------
2002 2001
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issuance 92,587 --
Distributions paid to the Manager and Common
shareholders (11,476) (7,043)
Distributions paid to preferred shareholders
of subsidiary (3,693) (2,962)
Distributions paid to Convertible CRA
shareholders (565) (558)
Principal repayments of secured borrowings (15,603) (8,518)
Increase in notes payable - PWF warehouse 17,551 --
Increase in deferred costs relating to the
Private Label Tender Option Program (35) (50)
Increase in deferred costs relating to
the issuance of preferred stock of subsidiary --
Increase in other deferred costs (218) --
Increase in costs of Convertible CRA Shares -- (66)
-------- --------
Net cash provided by (used in) financing activities 78,548 (19,197)
-------- --------
Net increase (decrease) in cash and
cash equivalents 39,797 (6,357)
Cash and cash equivalents at the
beginning of the period 105,364 36,116
-------- --------
Cash and cash equivalents at the
end of the period $145,161 $ 29,759
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 2,502 $ 1,187
======== ========
See accompanying notes to consolidated financial statements
- 6 -
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 1 - GENERAL
Charter Municipal Mortgage Acceptance Company ("Charter Mac") 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").
Charter Mac is governed by a board of trustees comprised of three independent
managing trustees and five managing trustees who are affiliated with Related
Capital Company ("Related"), a nationwide, fully integrated real estate services
firm. Charter Mac, through a wholly-owned subsidiary, has engaged Related
Charter L.P. (the "Manager"), an affiliate of Related, to manage its day-to-day
affairs.
The consolidated financial statements include the accounts of Charter Mac and
five majority owned subsidiary business trusts which it controls: CharterMac
Corporation, CM Holding Trust, Charter Mac Equity Issuer Trust, Charter Mac
Origination Trust I and Charter Mac Owner Trust I. CharterMac Corporation owns
80% of PW Funding Inc. ("PWF"), which is also included in the consolidated
financial statements. All intercompany accounts and transactions have been
eliminated in consolidation. Unless otherwise indicated, the "Company", as
hereinafter used, refers to Charter Municipal Mortgage Acceptance Company and
its consolidated subsidiaries.
The accompanying financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of March 31, 2002 and the results of
its operations and its cash flows for the three months ended March 31, 2002 and
2001. However, the operating results for the interim periods may not be
indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. It is suggested that these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2001.
The consolidated financial statements of the Company are prepared using the
accrual method of accounting in conformity with GAAP, which requires the Manager
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates in the financial statements include the
valuation of the Company's investments in Revenue Bonds, originated servicing
rights and interest rate swaps.
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. 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). 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. Management believes the implementation of SFAS No. 143
will not have a material impact on the Company's financial statements.
-7-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
In August of 2001, SFAS No. 144, "Accounting for the Impairment of Disposal of
Long Lived Assets". SFAS No. 144 supercedes existing accounting literature
dealing with impairment and disposal of long-lived assets, including
discontinued operations. It addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of, and
expands current reporting for discontinued operations to include disposals of a
"component" of an entity that has been disposed of or is classified as held for
sale. The Company implemented SFAS No. 144 on January 1, 2002. Implementation of
this statement did not have a material impact on the Company's financial
statements.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
NOTE 2 - REVENUE BONDS
The Company accounts for its investments in Revenue Bonds as available-for-sale
debt securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Accordingly, the Revenue Bonds are carried at their
estimated fair values, with unrealized gains and losses reported in other
comprehensive income (loss).
The weighted average interest rates recognized on the face amount of the
portfolio of Revenue Bonds for the three months ended March 31, 2002 and 2001
were 8.02% and 7.34%, respectively, based on weighted average face amounts of
approximately $1,142,812,000 and $890,036,000, respectively.
The amortized cost basis of the Company's portfolio of Revenue Bonds at March
31, 2002 and December 31, 2001 was $1,099,731,932 and $1,137,453,098,
respectively. The net unrealized gain on Revenue Bonds in the amount of
$22,569,069 at March 31, 2002 consisted of gross unrealized gains and losses of
$36,000,954 and $13,431,885, respectively. The net unrealized gain on Revenue
Bonds of $261,902 at December 31, 2001 consisted of gross unrealized gains and
losses of $20,202,713 and $19,940,811, respectively.
2002 TRANSACTIONS
The following table provides information regarding the Company's acquisitions
during the first quarter.
Weighted Weighted
Average Average
Aggregate Construction Permanent
Face Amount Purchase Price Interest Rate Interest Rate
----------------------------------------------- ------------------ ----------------- ---------------- ----------------
Non-participating Revenue Bonds
Construction/rehabilitation properties $28,375,000 $28,945,000 7.683% 7.287%
During the first quarter of 2002, seven Revenue Bonds were repaid. The Revenue
Bonds had a face amount of $78,800,000, and a carrying value of $79,014,000. The
Company recognized a gain on these transactions of approximately $3.8 million.
Additionally, one note was repaid at par in the amount of $6.6 million.
-8-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 3 - DEFERRED COSTS
The components of deferred costs are as follows:
March 31, December 31,
2002 2001
----------- ------------
Deferred bond selection costs $25,027,503 $25,355,551
Deferred costs relating to the Private Label
Tender Option Program 6,823,197 6,788,462
Deferred costs relating to the issuance of preferred
shares of subsidiary 8,376,806 8,376,806
Deferred financing costs PWF acquisition and
warehouse debt 766,885 332,285
----------- -----------
40,994,391 40,853,104
Less: Accumulated amortization (9,364,343) (9,056,690)
----------- -----------
$31,630,048 $31,796,414
=========== ===========
NOTE 4 - GOODWILL AND OTHER ASSETS
The Company has adopted SFAS 141 on July 1, 2001 and SFAS 142, effective January
1, 2002. The Company has determined that the amounts previously capitalized as
goodwill relating to the initial formation of the Company and to the merger of
ATEBT meet the criteria in SFAS 141 for recognition as intangible assets apart
from goodwill, and accordingly will continue to be amortized over their
remaining useful lives, subject to impairment testing. The following table
provides further information regarding these intangible assets:
Initial Formation ATEBT Merger Total
------------------- -------------- -------------
Balance at March 31, 2002 $3,106,841 $1,319,360 $4,426,201
Accumulated Amortization (1,207,743) (181,771) (1,389,514)
---------- ---------- ----------
Net balance at March 31, 2002 $1,899,098 $1,137,589 $3,036,687
========== ========== ==========
Amortization Expense for 3 months ended
March 31, 2002 $ 85,119 $ 32,532 $ 117,651
========== ========== ==========
Estimated amortization expense per year for next
five years $ 345,205 $ 131,936 $ 477,141
========== ========== ==========
The amortization is included as an offset to Revenue Bond interest.
The amount indicated as goodwill in the accompanying financial statements is
related to the acquisition, on December 2001, of PW Funding Inc. This amount
represents goodwill under SFAS 142, and therefore, is not being amortized.
The increase in goodwill represents an adjustment to the purchade price at
PWF.
The Company is in the process of determining the value of PWF's licenses with
Fannie Mae and Freddie Mac. Once determined, these items will be reclassified as
intangible assets separate from goodwill, however, since the licenses have
unlimited lives, the resulting intangible assets will not be amortized.
-9-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 5 - 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 fee 2% of the face amount of each asset invested in or acquired by the
Company
II. Special 0.375% per annum of the total invested assets of the Company
distribution/Investment
Management fee
III. Loan servicing fee 0.25% per annum of the outstanding face amount of Revenue Bonds or
other investments owned by the Company
IV. Liquidation fee 1.5% of the gross sales price of assets sold by the Company
V. Operating expense For direct expenses incurred by the Manager or CM Corp., in an amount
Reimbursements not to exceed $556,331 per annum
(subject to increases based on
increases in the Company's assets and
to annual increases based upon
increases in the Consumer Price index)
VI. Incentive share options The Manager may
receive options to acquire additional
shares of the Company pursuant to the
incentive share option plan to the
extent distributions in any year exceed
$0.9517 per common share, and the
compensation committee of the Company's
board of trustees determines to grant
such options
Fees payable to the Manager 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.
The costs, expenses and the special distributions incurred to the Manager and
its affiliates for the three months ended March 31, 2002 and 2001 were as
follows:
Three Months Ended
March 31,
---------------------------
2002 2001
---------------------------
Bond selection fees $ 567,500 $ 190,000
Expense reimbursement 309,302 165,369
Bond servicing fees 766,288 541,886
Special distribution 1,087,516 827,652
----------- ----------
$ 2,730,606 $1,724,907
=========== ==========
NOTE 6 - EARNINGS PER SHARE
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") by the weighted average number of common and
convertible CRA shares outstanding during the
-10-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
period. The convertible CRA shares are included in both the basic and dilutive
calculation of shares because they are entitled to the same economic benefits as
common shareholders, including receipt of the same dividends per share pari
passu with common shareholders. Diluted income per share is calculated using the
weighted average number of shares outstanding during the period plus the
additional dilutive effect of common stock equivalents. The dilutive effect of
outstanding 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.
Pursuant to the Company's Trust Agreement and the management agreement, the
Manager is entitled, in its capacity as the general partner of the Company, to a
special distribution equal to .375% per annum of the Company's total invested
assets (which equals the face amount of the Revenue Bonds and other
investments), payable quarterly. After allocation of the special distributions,
the net remaining profits or losses, after a special allocation of 1% to the
Manager, are then allocated to shareholders in accordance with their percentage
interests.
Three Months Ended March 31, 2002
--------------------------------------------
Income Shares Per Share
Numerator Denominator* Amount
--------- ----------- ---------
Net income allocable to shareholders
(Basic EPS) $ 17,558,581 38,781,464 $ .45
=========
Effect of dilutive securities
228,262 stock options -- 64,521
------------ ----------
Diluted net income allocable to share-
holders (Diluted EPS) $ 17,558,581 38,845,985 $ .45
============ ========== =========
Three Months Ended March 31, 2001
-------------------------------------------
Income Shares Per Share
Numerator Denominator* Amount
--------- ----------- ---------
Net income allocable to shareholders
(Basic EPS) $ 7,631,470 25,289,651 $ .30
=========
Effect of dilutive securities
297,830 stock options -- 60,663
------------ ------------
Diluted net income allocable to share-
holders (Diluted EPS) $ 7,631,470 25,350,314 $ .30
============ ============ =========
*Includes common and Convertible CRA Shares
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
The Company, through PWF, originates and services multifamily mortgage loans for
Fannie Mae, Freddie Mac and FHA. Under the Fannie Mae DUS program, the Company
oversees responsibility for a portion of any loss that may result from borrower
defaults, based on the Fannie Mae loss sharing formula. The Company maintains a
loan loss allowance, which was approximately $3.8 million at March 31, 2002, for
loans originated under this program which management believes is adequate to
provide for estimated losses.
The Company has entered into a credit enhancement transaction with Merrill Lynch
("MLCS") Capital Services pursuant to which the Company receives a fee for
assuming MLCS's $46.9 million first loss position on a $351.9 million pool of
tax-exempt weekly variable rate multifamily mortgage loans. The Related
Companies, L.P. has provided the Company with an indemnity covering 50% of any
losses incurred by the Company. The Company monitors the portfolio on an ongoing
basis and at March 31, 2002, does not anticipate any losses to be incurred.
-11-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
Fees for the first quarter, included in other income, were approximately
$315,000.
NOTE 8 - FINANCIAL RISK MANAGEMENT AND DERIVATIVES
The Company's Revenue Bonds generally bear fixed rates of interest income, but
the P-FLOATS and TOP financing programs incur interest expense at variable rates
re-set weekly, thus the Company is exposed to interest rate risks.
In 2001, the Company entered into two interest rate swaps in order to reduce the
Company's growing exposure to increases in the floating interest rate on its TOP
and P-FLOATS programs. Under such interest rate swap agreements, the Company is
required to pay Merrill Lynch Capital Services (the "Counterparty") a fixed rate
on a notional amount of debt. In return, the Counterparty will pay the Company a
floating rate equivalent to the BMA Municipal Swap Index, an index of weekly
tax-exempt variable rate issues on which the Company's variable rate financing
programs are based. On January 5, 2001, the Company entered into a five-year
interest rate swap that fixes the BMA index to 3.98% on a notional amount of
$50.0 million. On February 5, 2001, the Company entered into a three-year
interest rate swap that fixes the BMA index to 3.64% on an additional notional
amount of $100.0 million.
The average BMA rate for the quarter ended March 31, 2002 and the year ended
December 31, 2001 was 1.27% and 2.61%, respectively. Net swap payments received
by the Company, if any, will be taxable income to the Company and, accordingly,
to shareholders. A possible risk of such swap agreements is the possible
inability of the Counterparty to meet the terms of the contracts with the
Company; however, there is no current indication of such an inability.
The Company adopted statement of Financial Accounting Standards No. 133, as
amended on January 1, 2001. Accordingly, the Company has documented its
established policy for risk management and its objectives and strategies for the
use of derivative instruments to potentially mitigate such risks. Currently, the
Company has a strategy to reduce its interest rate risk through the use of
interest rate swaps. At inception, the Company designated these interest rate
swaps as cash flow hedges on the variable interest payments on its floating rate
financing. Accordingly, the interest rate swaps are recorded at their fair
market values each accounting period, with changes in market values being
recorded in other comprehensive income to the extent that the hedge is effective
in achieving offsetting cash flows. The Company assesses, both at the inception
of the hedge and on an ongoing basis whether the swap agreements are highly
effective in offsetting changes in the cash flows of the hedged financing. Any
ineffectiveness in the hedging relationship is recorded in earnings. There was
no ineffectiveness in the hedging relationship during the first quarter of 2002,
and the Company expects that these hedging relationships will be highly
effective in achieving offsetting changes in cash flow throughout their terms.
Net amounts payable or receivable under the swap agreements are recorded as
adjustments to interest expense.
At March 31, 2002, the combined fair market value of the two interest rate swaps
was a liability of $2,151,832, included in interest rate derivatives on the
consolidated balance sheet. Interest paid or payable under the terms of the
swaps, of $864,549, is included in interest expense.
During January 2002, the Company entered into an interest rate cap agreement
with Fleet Bank, with a cap of 8% on a $30 million amount. The Company has not
designated this interest rate cap as a hedging instrument. At March 31, 2002,
the fair market value of this interest rate cap was an asset of $215,500,
included in interest rate derivatives on the consolidated balance sheet.
-12-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
Because the Company has not designated this derivative as a hedge, the change in
market value flows through the Consolidated Statement of Income, where it is
included in other income, also in the amount of $215,500.
NOTE 9 - BUSINESS SEGMENTS
As a result of the December 2001 acquisition of PWF, the Company has two
reportable business segments: an investing segment and an operating segment.
The investing segment consists of subsidiaries holding investments in Revenue
Bonds producing primarily tax-exempt interest income.
The operating segment generates taxable interest and fee income. Taxable
interest income is generated through the ownership of taxable bonds, certain
taxable loans and other investments. Taxable fee income includes loan
origination and loan servicing fees (through PWF) on portfolios for third
parties, fees earned and associated with the acquisition or origination of
Revenue Bonds, and fees for credit enhancement and guaranty services.
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
The reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately. Segment reporting is applicable beginning with the year ended
December 31, 2001; prior to the year ended December 31, 2001 all of the
Company's operations were attributable to the investing segment.
The following table provides more information regarding the Company's segments:
The Months Ended March 31, 2002
-----------------------------------
(Dollars in thousands)
----------------------
Investing Operating Total
--------- --------- -----
Revenues $ 24,490 $ 4,860 $ 29,350
Net Income $ 17,614 $ 1,210 $ 18,824
Identifiable Assets $1,416,220 $ 128,740 $ 1,544,960
NOTE 10 - SUBSEQUENT EVENTS
On April 4, 2002, the Company acquired a tax-exempt new construction Revenue
Bond, and a taxable Revenue Bond in the face amounts of $16,000,000 and
$500,000, secured by a 336-unit affordable multifamily apartment complex located
in Columbus, GA, known as Johnston Mill Apartments. The stated interest rate on
this Revenue Bond is 6.90% during the first 12 months and 6.95% thereafter. The
bond matures March 1, 2042, however the obligor may prepay the bond without
penalty beginning on November 1, 2017. The interest rate on the taxable revenue
bond is 8%.
On April 19, 2002, the Company acquired a tax-exempt new construction Revenue
Bond and a taxable Revenue Bond in the face amount of $8,255,000 and $375,000,
respectively, secured by a 250-unit affordable multifamily apartment complex
located in Hollywood, FL., to be known as Meridian Apartments. The tax-exempt
Revenue Bond bears interest at 7.5% during the construction period and 7.0%
thereafter and matures on April 1, 2044. The taxable Revenue Bond bears interest
at an annual rate of 8.75% and matures on July 1, 2018. Each bond may be prepaid
without penalty beginning on December 1, 2013.
On April 30, 2002, the Company acquired a tax-exempt new construction Revenue
Bond in the face amount of $5,358,800 secured by a 250-unit affordable
multifamily property in West Sacramento, CA, to be known as Bryte Gardens. The
stated annual interest rate on this Revenue Bond is 7.0% during construction and
7.0% thereafter. The bond matures March 1, 2039, however, it may be prepaid
without penalty beginning on May 1, 2018.
-13-
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
On May 2, 2002, the Company acquired a tax-exempt new construction Revenue Bond
in the face amount of $5,270,000 secured by a 100-unit affordable multifamily
property in St. Louis, MO, to be known as Stonebridge Townhomes. The stated
annual interest rate on this Revenue Bond is 7.0% during construction and 7.0%
thereafter. The bond matures October 1, 2038, however, it may be prepaid without
penalty beginning on October 1, 2018.
On May 13, 2002, the Company acquired a tax-exempt new construction Revenue
Bond, and a taxable Revenue Bond in the face amounts of $12,725,000 and
$1,200,000, secured by a 324-unit affordable multifamily apartment complex
located in Savannah, GA, known as Oaks at Brandlewood. The stated interest rate
on this Revenue Bond is 7.0%. The bond matures May 1, 2042, however the obligor
may prepay the bond without penalty beginning on June 1, 2019. The interest
rate on the taxable revenue bond, which matures March 1, 2017 is 8.75%.
On May 14, 2002, the Company acquired two tax-exempt Revenue Bonds in the face
amounts of $8,320,500 and $231,500, both secured by a 130-unit multi-family
affordable housing apartment complex located in Lansing, KS, to be known as
Lansing Heights. The bonds mature in March 1, 2045 and December 1, 2010,
respectively and both have a stated interest rate of 6.8%.
On May 15, 2002, the Company acquired a tax-exempt new construction Revenue
Bond, and a taxable Revenue Bond in the face amounts of $15,000,000 and
$125,000, secured by a 276-unit affordable multi-family apartment complex
located in Houston, TX, known as The Clearwood Villas Apartments. The stated
interest rate on this tax-exempt Revenue Bond is 7.0%. The bond matures
May 1, 2042, however the obligor may prepay the bond without penalty beginning
on April 1, 2019. The interest rate on the taxable revenue bond is 9.0%.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
-------
Charter Municipal Mortgage Acceptance Company (the "Company") is a Delaware
business trust principally engaged in the acquisition and ownership (either
directly or indirectly) of tax-exempt multifamily housing revenue bonds
("Revenue Bonds") and other instruments that produce tax-exempt income, issued
by various state or local governments, agencies, or authorities. Revenue Bonds
are secured by participating and non-participating first mortgage loans on
underlying properties ("Underlying Properties").
In order to generate tax-exempt income to pass through to the Company's
shareholders and, as a result, enhance the value of the Company's Common Shares,
the Company primarily invests in or acquires tax-exempt 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 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.
The Company believes that it is well positioned to market its Direct Purchase
Program as a result of the Manager's affiliation with Related Capital Company
("Related"), a nationwide, fully integrated real estate services firm, because
the Manager is able to utilize Related's resources and relationships in the
multifamily affordable housing finance industry to source potential borrowers of
Revenue Bonds. Related and its predecessor companies have specialized in
offering debt and equity products to mid-market multifamily owners and
developers for over 26 years. According to the 2000 National Multihousing
Council survey, Related is the third largest owner of apartments in the United
States.
As a result of the acquisition of PWF, the Company has diversified the range of
the Company's investment products and is able to offer developers fixed and
floating rate tax-exempt and taxable financing through Fannie Mae, Freddie Mac
and, to a lesser extent, FHA for affordable and market rate multifamily
properties. Combining this with the Company's core business of investing in
Revenue Bonds and its affiliation with Related Capital, the Company is able to
provide developers with financing for all aspects of their property's capital
structure. In addition, the Company has diversified its revenues with a fee
business that will grow in value over time and will insulate the Company from
the vagaries of the capital markets.
On January 14, 2002, the Company announced that its Board of Trustees had formed
a special committee to explore strategic alternatives for the Company's future
management structure, including internalization of management, and ways to
further diversify the Company's revenue sources. The special committee consists
of the independent members of the Board of Trustees, Peter T. Allen, Arthur P.
Fisch and Charles L. Edson. On April 17, 2002, the special committee retained
Dresdner Kleinwort Wasserstein as their financial advisor.
Liquidity and Capital Resources
-------------------------------
In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company has primarily used two sources of capital: collateralized
debt securitization and equity offerings. To date, the primary sources of
long-term liquidity have come from the Company's Private Label Tender Option
Program (TOP), common equity offerings and preferred equity offerings by the
Company or a subsidiary.
During the three months ended March 31, 2002 cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $39.8 million.
The increase was primar-
-15-
ily due to cash provided by operating activities ($20.5 million) issuance of
common shares ($92.6 million) and proceeds from the repayment of seven Revenue
Bonds and one Note ($75.7 million) less funds used to purchase four Revenue
Bonds ($28.4 million), a loan made to two properties ($900,000) purchase of
temporary investments ($88.6 million), principal payments on secured
borrowings ($15.6 million), and distributions to common, convertible CRA and
preferred shareholders ($15.7 million).
In April and May 2002, distributions declared in March 2002 were paid to
preferred shareholders of subsidiary Series A, A-1, A-2, B and B-1 in the
amounts of $1,490,625 ($33,125 per preferred share), $426,000 ($8,875 per
preferred share), $488,250 ($7,875 per preferred share), $1,045,000 ($9,500 per
preferred share), and $314,500 ($8,500 per preferred share), respectively. Also
paid were distributions of $13,340,885 ($.31 per share) to holders of common and
convertible CRA shares. All distributions were paid from cash flow from
operations for the quarter ended March 31, 2002.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
Acquisitions
------------
During the period January 1, 2002 through May 15, 2002 the Company acquired
sixteen Revenue Bonds for an aggregate purchase price of approximately
$101,736,000, not including bond selection fees and expenses of approximately
$2,035,000.
Results of Operations
---------------------
For the three months ended March 31, 2002 as compared to 2001, total revenues,
total expenses and net income increased due to the net result of the acquisition
of 45 Revenue Bonds during 2002 and 2001, and the repayment of seven Revenue
Bonds and one Note. Total revenues and expenses and net income also increased
due to the December 2001 acquisition of PWF.
Interest income from Revenue Bonds increased approximately $6,579,000 for the
three months ended March 31, 2002 as compared to 2001. This increase was
primarily due to an increase in interest income of approximately $5,843,000 on
new Revenue Bonds acquired during 2001 and 2002.
Total revenues for the three months ended March 31, 2002, increased by
approximately $12,493,000 including the increases in interest income from
Revenue Bonds noted above, $547,000 equity interest in the income of ARCap,
approximately $4,860,000 from PWF, and $315,000 in fees related to the credit
enhancement deal.
Interest expense and recurring fees increased approximately $577,000 for the
three months ended March 31, 2002 as compared to 2001 primarily due to increased
secured borrowings, a higher outstanding balance of the TOP during 2002, and
interest accrued under the terms of the interest rate swaps.
Bond servicing fees increased approximately $224,000 for the three months ended
March 31, 2002 as compared to 2001 primarily due to new acquisitions and the
corresponding increase in the Revenue Bond portfolio serviced.
General and administrative expenses increased approximately $4,857,000 for the
three months ended March 31, 2002 as compared to 2001 primarily due to the
addition of PWF's expenses.
The provision for possible DUS losses of $326,000 for the period ended March 31,
2002, is related to PWF's DUS line of business.
Minority interest expenses of approximately $302,000 represents PWF's continued
20% ownership.
Amortization increased approximately $2,041,000 for the three months ended March
31, 2002 primarily due to amortization of mortgage servicing rights at PWF.
Income allocated to preferred shareholders of subsidiary for the three months
ended March 31, 2002 increased approximately $802,000, related to the preferred
offerings consummated on June 29, 1999, July 21, 2000, and October 9, 2001.
During the three months ended March 31, 2002, the Company recorded a provision
for income taxes of approximately $181,000, related to the activity at PWF and
CM Corp.
-16-
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; adverse changes in the
real estate markets including, among other things, competition with other
companies; risks of real estate development and acquisition; governmental
actions and initiatives; and environment/safety requirements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
Inflation
---------
Inflation did not have a material effect on the Company's results for the
periods presented.
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The nature of the Company's investments and the instruments used to raise
capital for their acquisition expose the Company to gains and losses due to
fluctuations in market interest rates. Market interest rates are highly
sensitive to many factors, including governmental policies, domestic and
international political considerations and other factors beyond the control of
the Company.
Revenue Bonds generally bear interest at fixed rates, or pay interest according
to the cash flows of the Underlying Properties, which do not fluctuate with
changes in market interest rates. In contrast, payments required under the TOP
program and on the secured borrowings under the P-FLOATS program vary based on
market interest rates based on the Bond Market Association ("BMA") and are
re-set weekly.
Subsequent to December 31, 2001, with respect to the portion of the Company's
floating rate financing programs which are not hedged, a change in BMA rate
would result in increased or decreased payments under the financing programs,
without a corresponding change in cash flows from the investments in Revenue
Bonds. For example, based on the unhedged $376 million outstanding under these
financing programs at March 31, 2002, the Company estimates that an increase of
1.0% in the BMA rate would decrease annual net income by approximately
$3,760,000. Conversely, a decrease in market interest rates would generally
benefit the Company in the same amount describe above, as a result of decreased
allocations to the minority interest and interest expense without corresponding
decreases in interest received on the Revenue Bonds.
Various financial vehicles exist which would allow Company management to
mitigate the impact of interest rate fluctuations on the Company's cash flows
and earnings. Prior to December 31, 2000, management did not engage in any of
these hedging strategies. However, beginning in 2001, and upon management's
analysis of the interest rate environment and the costs and risks of such
strategies, the Company entered into two interest rate swaps in order to hedge
against increases in the floating interest rate on its TOP and P-FLOATS
programs. Under such interest rate swap agreements, the Company is required to
pay Merrill Lynch Capital Services (the "Counterparty") a fixed rate on a
notional amount of debt. In return, the Counterparty will pay the Company a
floating rate equivalent to the BMA Municipal Swap Index, an index of weekly
tax-exempt variable rate issues on which the Company's variable rate financing
programs are based. On January 5, 2001, the Company entered into a five-year
interest rate swap that fixes the BMA index to 3.98% on a notional amount of
$50.0 million. On February 5, 2001, the Company entered into a three-year
interest rate swap that fixes the BMA index to 3.64% on an additional notional
amount of $100.0 million. This effectively fixes $50 million and $100 million of
the Company's secured borrowings at 3.98% and 3.64%, respectively, protecting
the Company in case the BMA Municipal Swap Index rises. For the quarter ended
March 31, 2002, the Company's cost to borrow funds through the TOP and P-FLOATS
programs averaged 2.24% and 2.31%, respectively.
Changes in market interest rates would also impact the estimated fair value of
the Company's portfolio of Revenue Bonds. The Company estimates the fair value
for each Revenue Bond as
-17-
the present value of its expected cash flows, using a discount rate for
comparable tax-exempt investments. Therefore, as market interest rates for
tax-exempt investments increase, the estimated fair value of the Company's
Revenue Bonds will generally decline, and a decline in interest rates would be
expected to result in an increase in the estimated fair values. For example, the
Company projects that a 1% increase in market rates for tax-exempt investments
would decrease the estimated fair value of its portfolio of Revenue Bonds from
its March 31, 2002 value of $1,122,301,000 to approximately $993,136,000. A 1%
decline in interest rates would increase the value of the March 31, 2002
portfolio to approximately $1,078,234,000. Changes in the estimated fair value
of the Revenue Bonds do not impact the Company's reported net income, earnings
per share, distributions or cash flows, but are reported as components of other
comprehensive income and affect reported shareholders' equity.
The assumptions related to the foregoing discussion of market risk involve
judgments involving future economic market conditions, future corporate
decisions and other interrelating factors, many of which are beyond the control
of the Company and all of which are difficult or impossible to predict with
accuracy. Although the Company believes that the assumptions underlying the
forward-looking information are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
information included herein will prove to be accurate. Due to the significant
uncertainties inherent in forward-looking information, the inclusion of such
information should not be regarded as a representation of the Company that the
objectives and plans of the Company would be achieved.
-18-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -
The Company is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
On May 15, 2002, Michael Wirth will resign his position as Chief
financial Officer of the Company in order to pursue other endeavors.
The Company has begun a search for a new CFO and anticipate that the
position will be filled within 90 days. In the interim, Alan Hirmes,
the Executive Vice President of the Company, will function as the CFO.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Reports on Form 8-K
Current report on form 8-K relating to the acquisition of PW
Funding Inc., dated December 26, 2001 and filed January 7, 2002.
Current report on form 8-K relating to the formation of a special
committee of the board of trustees to evaluate the Company's
management structure, dated and filed January 14, 2002.
Current report on form 8-K relating to a press release issued by
the Related Capital Company, dated and filed January 25, 2002.
Current report on form 8-K relating to a press release issued by
the Company announcing the Company's activity for the year ended
December 31, 2001, dated and filed January 29, 2002.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: May 15, 2001 By: /s/ Stuart J. Boesky
-----------------------------
Stuart J. Boesky
Managing Trustee, President
and Chief Executive Officer
Date: May 15, 2001 By: /s/ Michael I. Wirth
-----------------------------
Michael I. Wirth
Chief Financial Officer and Chief
Accounting Officer