<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
============== ==============
June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
First mortgage bonds-at fair value $ 654,058,000 $ 587,892,000
Other bond related investments-at fair value 360,000 560,000
Temporary investments 30,355,000 45,541,000
Cash and cash equivalents 43,161,634 8,653,503
Cash and cash equivalents-restricted 1,932,442 1,028,209
Interest receivable, net 3,362,667 2,803,278
Promissory notes receivable 10,030,231 10,148,060
Deferred costs, net 16,049,072 14,222,451
Goodwill, net 2,502,967 2,674,626
Other assets 417,327 268,097
-------------- --------------
Total assets $ 762,229,340 $ 673,791,224
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Secured borrowings $ 80,719,580 $ 80,769,616
Accounts payable, accrued expenses and
other liabilities 3,096,185 2,306,306
Due to Manager and affiliates 1,163,591 1,218,211
Distributions payable to preferred shareholders
of subsidiary 1,490,625 1,490,625
Distributions payable to convertible
preferred shareholders 294,680 0
Distributions payable to shareholders 5,454,396 5,453,971
-------------- --------------
Total liabilities 92,219,057 91,238,729
-------------- --------------
Minority interest in subsidiary
(subject to mandatory redemption) 250,000,000 177,000,000
-------------- --------------
Preferred shares of subsidiary (subject to mandatory
repurchase) 90,000,000 90,000,000
-------------- --------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Convertible Preferred Shares 25,580,217 0
Beneficial owner's equity-manager 561,435 441,878
Beneficial owners' equity-other shareholders
(50,000,000 shares authorized; 20,591,017 issued
and 20,582,617 outstanding and 20,589,375
shares issued and 20,580,975 outstanding in
2000 and 1999, respectively) 313,748,296 312,800,380
Treasury shares of beneficial interest (8,400 shares) (103,359) (103,359)
Accumulated other comprehensive income (loss) (9,776,306) 2,413,596
-------------- --------------
Total shareholders' equity 330,010,283 315,552,495
-------------- --------------
Total liabilities and shareholders' equity $ 762,229,340 $ 673,791,224
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
=========================== ==================================
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Revenues:
Interest income:
First mortgage bonds $ 12,473,995 $ 8,499,941 $ 23,679,352 $ 16,420,944
Other bond related
investments 80,469 22,378 216,216 22,378
Temporary investments 656,738 155,475 1,124,392 257,997
Promissory notes 240,633 166,654 482,844 331,813
------------ ------------ ------------ ------------
Total revenues 13,451,835 8,844,448 25,502,804 17,033,132
------------ ------------ ------------ ------------
Expenses:
Interest expense 1,063,484 365,110 1,977,759 373,478
Recurring fees relating to the
Private Label Tender Option
Program 529,478 348,919 956,456 668,669
Loan servicing and asset
management fees 429,305 307,107 825,809 594,856
General and administrative 472,187 342,407 920,386 677,476
Amortization 126,230 85,814 236,929 164,326
------------ ------------ ------------ ------------
Total expenses 2,620,684 1,449,357 4,917,339 2,478,805
------------ ------------ ------------ ------------
Income before minority interest and
loss on repayment of
first mortgage bond 10,831,151 7,395,091 20,585,465 14,554,327
Loss on repayment of first
mortgage bond 0 0 0 (25,493)
------------ ------------ ------------ ------------
Income before minority interests 10,831,151 7,395,091 20,585,465 14,528,834
Income allocated to preferred
shareholders of subsidiary (1,490,625) (33,125) (2,981,250) (33,125)
Minority interest in income of
subsidiary (2,718,458) (1,409,729) (4,411,758) (2,537,950)
------------ ------------ ------------ ------------
Net income 6,622,068 5,952,237 13,192,457 11,957,759
Income allocated to convertible
preferred shareholders (294,680) 0 (294,680) 0
------------ ------------ ------------ ------------
Income allocated to Manager
and shareholders $ 6,327,388 $ 5,952,237 $ 12,897,777 $ 11,957,759
============ ============ ============ ============
Allocation of income to Manager and shareholders:
Special distribution to Manager $ 641,425 $ 462,618 $ 1,236,181 $ 894,241
============ ============ ============ ============
Manager $ 56,860 $ 54,896 $ 116,616 $ 110,635
============ ============ ============ ============
Shareholders $ 5,629,103 $ 5,434,723 $ 11,544,980 $ 10,952,883
============ ============ ============ ============
Net income per share
Basic $ .27 $ .26 $ .56 $ .53
============ ============ ============ ============
Diluted $ .27 $ .26 $ .56 $ .53
============ ============ ============ ============
Weighted average shares
Outstanding
Basic 20,582,617 20,580,975 20,582,211 20,580,533
============ ============ ============ ============
Diluted 21,694,617 20,580,975 21,138,211 20,580,533
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Beneficial
Beneficial Owners' Treasury Accumulated
Convertible Owner's Equity- Shares of Other
Preferred Equity - Other Beneficial Comprehensive Comprehensive
Shares Manager Shareholders Interest Income Income Total
------ ------- ------------ -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 441,878 $312,800,380 $(103,359) $ 2,413,596 $315,552,495
Comprehensive income:
Net income 1,355,744 11,836,713 0 $13,192,457 0 13,192,457
Other comprehensive loss:
Net unrealized loss on
first mortgage
bonds and bond
related investments:
Net unrealized holding
loss arising during the
period (12,189,902) (12,189,902) (12,189,902)
Comprehensive income $ 1,002,555
============
Issuance of shares of
beneficial interest 0 20,000 0 0 20,000
Issuance of Convertible
Preferred Shares $25,874,897 25,874,897
Income allocated to
Convertible Preferred
Shareholders (294,680) (294,680)
Distributions 0 (1,236,187) (10,908,797) 0 0 (12,144,984)
------------- ---------- ------------ ---------- ------------- -----------
Balance at June 30, 2000 $25,580,217 $ 561,435 $313,748,296 $(103,359) $(9,776,306) $330,010,283
============= ========== ============ ========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
=================================
Six Months Ended
June 30,
---------------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,192,457 $11,957,759
---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on repayment of first mortgage bond 0 25,493
Loss on disposition of other bond related
investment 35,073 0
Amortization 236,929 330,054
Amortization of goodwill 171,659 123,603
Amortization of bond selection costs 363,599 0
Accretion of deferred income (26,486) (33,106)
Income allocated to preferred shareholders
of subsidiary 1,490,625 33,125
Income allocated to convertible preferred
shareholders 294,680 0
Changes in operating assets and liabilities:
Interest receivable (559,389) (278,005)
Other assets (149,230) (335,593)
Accounts payable, accrued expenses and
other liabilities 809,757 (5,838,424)
Due to Manager and
affiliates 73,164 (17,192)
---------- ----------
Total adjustments 2,740,381 (5,990,045)
---------- ----------
Net cash provided by operating activities 15,932,838 5,967,714
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of first mortgage bonds 84,060 5,100,000
Purchase of first mortgage bonds (78,441,600) (42,515,000)
Proceeds from repayment of other bond
related investment 5,000 0
Purchase of other bond related investments (9,000) (540,178)
Increase in deferred bond selection costs (1,780,683) (1,201,186)
Net sale (purchase) of temporary investments 15,186,000 (51,581,000)
Increase in other deferred costs (197,039) 0
Loans made to property 0 (307,185)
Principal payments received from loans made to
properties 117,829 89,451
Increase in other assets 0 (251,500)
---------- ----------
Net cash used in investing activities (65,035,433) (91,206,598)
---------- ----------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements
5
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
====================================
Six Months Ended
June 30,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to the Manager and shareholders
of the Company (12,087,543) (10,751,017)
Distributions paid to preferred shareholders
of subsidiary (1,490,625) 0
Increase in cash and cash equivalents - restricted (904,233) (614,320)
Proceeds from secured borrowings 0 52,807,000
Principal repayments of secured borrowings (50,036) 0
Increase in minority interest in subsidiary 73,000,000 7,000,000
Increase in deferred costs relating to the
Private Label Tender Option Program (497,766) (311,936)
Issuance of preferred stock of subsidiary 0 90,000,000
Issuance of convertible preferred shares 25,652,256 0
Increase in deferred costs relating to
the issuance of preferred stock of subsidiary (11,327) (3,400,000)
------------- -------------
Net cash provided by financing activities 83,610,726 134,729,727
------------- -------------
Net increase in cash and
cash equivalents 34,508,131 49,490,843
Cash and cash equivalents at the
beginning of the period 8,653,503 13,093,023
------------- -------------
Cash and cash equivalents at the
end of the period $ 43,161,634 $ 62,583,866
============= =============
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,984,289 $ 147,596
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Payable to trustees liquidated through the issuance
of shares of beneficial interest $ 20,000 $ 20,000
============= =============
Adjustment to goodwill due to the
Discounted Cash Settlement:
Decrease in goodwill $ 0 $ 1,698,986
Decrease in accounts payable, accrued
expenses and other liabilities 0 (1,698,986)
------------- -------------
$ 0 $ 0
============= =============
Deferred costs reclassified to Convertible
Preferred Shares $ 72,039 $ 0
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 1 - GENERAL
Charter Municipal Mortgage Acceptance Company (the "Company") is a Delaware
business trust which is engaged in the acquisition and ownership (either
directly or indirectly) of tax-exempt participating and non-participating first
mortgage bonds ("FMBs") issued by various state or local governments or other
agencies or authorities and secured by participating and non-participating
mortgage loans on the underlying properties ("Underlying Properties"). FMBs that
contain provisions for participating interest are referred to as
"participating"; FMBs lacking this provision are "non-participating". As of June
30, 2000 the Company owned a portfolio of 82 FMBs.
The Company is governed by a board of trustees comprised of three independent
managing trustees and four managing trustees who are affiliated with Related
Capital Company ("Related"), a nationwide, fully integrated real estate services
firm. The Company has engaged Related Charter LP (the "Manager"), an affiliate
of Related, to manage its day-to-day affairs.
The consolidated financial statements include the accounts of the Company and
four majority owned subsidiary business trusts which it controls: CM Holding
Trust, Charter Mac Equity Issuer Trust, Charter Mac Origination Trust I and
Charter Mac Owner Trust I (see Notes 6 and 7). All intercompany accounts and
transactions have been eliminated in consolidation.
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 June 30, 2000 and the results of its
operations for the three and six months ended June 30, 2000 and 1999 and its
cash flows for the six months ended June 30, 2000 and 1999. 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 generally accepted accounting
principles ("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/A-1 for the year ended
December 31, 1999.
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.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
In December of 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company's management believes that the guidance expressed in the
bulletin does not affect the Company's current revenue recognition policies.
7
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 2 - FIRST MORTGAGE BONDS
As of June 30, 2000, the Company and its consolidated subsidiaries owned 82 FMBs
(22 participating FMBs (see Footnote K below) and 60 non-participating FMBs).
Five of the FMBs are taxable FMBs acquired in connection with the purchase of
tax-exempt FMBs. The taxable FMBs are secured by the same Underlying Properties
which secure the associated tax-exempt FMBs. The following table provides
certain information with respect to each of the FMBs.
TABLE OF INVESTMENTS
<TABLE>
<CAPTION>
Stated
Closing Interest
Property Location Date Rate
-------------------------------------------- ------------------ ---------- ---------------
<S> <C> <C> <C>
TAX-EXEMPT FIRST MORTGAGE BONDS
OWNED BY THE COMPANY (NOT INCLUDING
ITS CONSOLIDATED SUBSIDIARIES)
Highpointe Club (K)(N) Harrisburg, PA 7/29/86 8.50%
OWNED BY CHARTER MAC EQUITY ISSUER TRUST (H)
Barnaby Manor (P)(S)(X) Washington, DC 11/23/99 7.375
Casa Ramon (P)(X) Orange County, CA 6/8/99 7.50
Del Monte Pines (R)(P)(X) Fresno, CA 5/6/99 6.80
Douglas Pointe(O)(S)(R)(X) Miami, FL 9/28/99 7.00
Forest Hills (R)(P)(X) Garner, NC 12/15/98 7.125
Fort Chaplin (P)(X) Washington, DC 12/21/99 6.90
Franciscan Riviera (P)(R)(X) Antioch, CA 8/24/99 7.125
Garfield Park (P) Washington, DC 8/31/99 7.25
Grace Townhomes (O) Ennis, TX 5/23/00 7.50
Greenbriar (M)(P)(X) Concord, CA 5/6/99 6.875
Hamilton Gardens (R)(P)(X) Hamilton, NJ 3/26/99 (U)
Lake Jackson (R)(X) Lake Jackson, TX 12/22/98 7.00
Lakemoor (O)(S) Durham, NC 12/23/99 7.25
Lake Park (P)(X) Turlock, CA 6/8/99 (T) 7.25
Lakes Edge At Walden (P)(M) Miami, FL 7/1/99 6.90
Lennox Park (O)(S)(M)(X) Gainesville, GA 7/29/99 6.80
Lewis Place (O)(S)(M)(X) Gainsville, FL 6/22/99 (I)
Mountain Ranch (R)(O)(X) Austin, TX 12/23/98 7.125
Newark Commons (O)(X) New Castle, DE 5/17/00 7.30
Oaks at Hampton (X) Dallas, TX 4/27/00 7.20
Princess Anne House (O)(X) Virginia Beach, VA 4/6/00 7.50
San Marcos (O)(X) San Marcos, TX 5/23/00 7.375
Standiford (P)(R)(X) Modesto, CA 9/20/99 7.125
Summerlake (O)(S)(X) Davie, FL 3/14/00 7.40
Sunset Creek (M)(Y) Lancaster, CA 3/25/88 8.50
Sunset Village (M)(Y) Lancaster, CA 3/25/88 8.50
Sycamore Woods (R)(P)(X) Antioch, CA 5/6/99 6.875
Tallwood (O)(S)(R)(X) Virginia Beach, VA 9/30/99 7.25
<CAPTION>
Fair Value
Face Amount at June 30,
Property Call Date Maturity Date of FMB 2000 (A)
-------------------------------------------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
TAX-EXEMPT FIRST MORTGAGE BONDS
OWNED BY THE COMPANY (NOT INCLUDING
ITS CONSOLIDATED SUBSIDIARIES)
Highpointe Club (K)(N) (Z) June 2006 $ 8,900,000 $ 5,634,000
------------ ------------
OWNED BY CHARTER MAC EQUITY ISSUER TRUST (H)
Barnaby Manor (P)(S)(X) May 2017 May 2032 4,500,000 4,452,000
Casa Ramon (P)(X) Oct. 2016 Sep. 2035 50,000(Q) 50,000
Del Monte Pines (R)(P)(X) May 2017 May 2036 11,000,000 10,034,000
Douglas Pointe(O)(S)(R)(X) Oct. 2026 Sept. 2041 7,100,000 6,667,000
Forest Hills (R)(P)(X) June 2016 June 2034 5,930,000 6,182,000
Fort Chaplin (P)(X) Jan. 2016 Jan. 2036 25,800,000 23,881,000
Franciscan Riviera (P)(R)(X) Apr. 2016 Aug. 2036 6,587,500 6,296,000
Garfield Park (P) Aug. 2017 Aug. 2031 3,260,000 3,171,000
Grace Townhomes (O) June 2017 June 2042 5,225,600 5,226,000
Greenbriar (M)(P)(X) May 2017 May 2036 9,585,000 8,840,000
Hamilton Gardens (R)(P)(X) Apr. 2015 Mar. 2035 6,400,000 6,917,000
Lake Jackson (R)(X) Jan. 2018 Jan. 2041 10,934,000 10,267,000
Lakemoor (O)(S) Jan. 2017 Dec. 2041 9,000,000 8,753,000
Lake Park (P)(X) Oct. 2015 Sep. 2035 3,638,000 3,538,000
Lakes Edge At Walden (P)(M) June 2016 May 2035 14,850,000 13,746,000
Lennox Park (O)(S)(M)(X) Aug. 2021 July 2041 13,000,000 11,859,000
Lewis Place (O)(S)(M)(X) June 2016 June 2041 4,000,000 3,622,000
Mountain Ranch (R)(O)(X) Jan. 2018 Jan. 2041 9,128,000 8,725,000
Newark Commons (O)(X) Nov. 2017 May 2043 14,300,000 14,300,000
Oaks at Hampton (X) Mar. 2017 Mar. 2040 9,535,000 9,535,000
Princess Anne House (O)(X) Apr. 2027 Apr. 2042 7,500,000 7,500,000
San Marcos (O)(X) Mar. 2017 Mar. 2042 7,231,000 7,231,000
Standiford (P)(R)(X) Apr. 2016 Aug. 2036 9,520,000 9,099,000
Summerlake (O)(S)(X) Apr. 2027 Mar. 2042 5,600,000 5,559,000
Sunset Creek (M)(Y) (Z) Mar. 2008 8,275,000 6,079,000
Sunset Village (M)(Y) (Z) Mar. 2008 11,375,000 8,357,000
Sycamore Woods (R)(P)(X) May 2017 May 2036 9,415,000 8,683,000
Tallwood (O)(S)(R)(X) Nov. 2017 Oct. 2041 6,205,000 6,035,000
------------ ------------
238,944,100 224,604,000
------------ ------------
</TABLE>
8
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 2 - FIRST MORTGAGE BONDS (continued)
<TABLE>
<CAPTION>
Stated Fair Value
Closing Interest Face Amount at June 30,
Property Location Date Rate Call Date Maturity Date of FMB 2000 (A)
-------- -------- -------- -------- --------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED BY CHARTER MAC ORIGINATION TRUST I (H)(L)
Bay Club (K) Mt. Pleasant, SC 9/11/86 8.25 Sep. 2000 Sep. 2006 6,400,000 7,083,000
Clarendon Hills (K) Hayward, CA 12/08/86 5.52 Dec. 2003 Dec. 2003 17,600,000 13,281,000
Cypress Run (K) Tampa, FL 8/14/86 8.50 (Z) Aug. 2006 15,402,428 13,258,000
East Ridge (K) Mt. Pleasant, SC 5/20/86 8.25 Mar. 2000 May 2010 8,700,000 9,629,000
Greenway Manor (K)(N) St. Louis, MO 10/09/86 8.50 (Z) Sept. 2006 12,850,000 14,652,000
The Lakes (K) Kansas City, MO 12/30/86 4.87 Dec. 2006 Dec. 2006 13,650,000 9,592,000
Loveridge (K)(N) Contra Costa, CA 11/13/86 8.00 (Z) Nov. 2006 8,550,000 6,308,000
Martin's Creek (K) Summerville, SC 5/20/86 8.25 Mar. 2000 May 2010 7,300,000 8,079,000
------------ ------------
90,452,428 81,882,000
------------ ------------
</TABLE>
9
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 2 - FIRST MORTGAGE BONDS (continued)
<TABLE>
<CAPTION>
Stated Fair Value
Closing Interest Face Amount at June 30,
Property Location Date Rate Call Date Maturity Date of FMB 2000 (A)
-------- -------- -------- -------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED BY CHARTER MAC OWNER TRUST I (J) (H)
Bedford Square (X) Clovis, CA 8/25/98 (D) Sep. 2017 Aug. 2040 3,850,000 3,293,000
Bristol Village Bloomington, MN 7/31/87 7.50 Jan. 2010 Dec. 2027 17,000,000 17,104,000
Carrington Pointe (X) Los Banos, CA 9/24/98 6.375 Oct. 2017 Sep. 2040 3,375,000 2,886,000
Cedarbrook (X) Hanford, CA 4/28/98 7.125 May 2017 May 2040 2,840,000 3,040,000
Cedar Creek (K)(N) McKinney, TX 12/29/86 8.50 (Z) Dec. 2006 8,100,000 9,236,000
Cedar Pointe (K) Nashville, TN 4/22/87 7.00 Apr. 2006 Apr. 2017 9,500,000 8,921,000
Chapel Ridge of
Little Rock (O)(S)(X) Little Rock, AR 8/12/99 7.125 Aug. 2015 Aug. 2039 5,600,000 5,353,000
Chapel Ridge of
Texarkana (O)(S)(X) Texarkana, AR 9/29/99 7.375 Oct. 2016 Sept. 2041 5,800,000 5,738,000
College Park (O)(S) Naples, FL 7/15/98 (C) Jul. 2025 Jul. 2040 10,100,000 9,484,000
Columbia at Bells Ferry(O)(X) Cherokee Co., GA 4/19/00 7.40 Apr. 2017 Apr. 2042 13,000,000 13,000,000
Country Lake (P) West Palm Beach, FL 11/9/99 (V) June 2015 June 2032 6,255,000 6,255,000
Crowne Pointe (K) Olympia, WA 12/31/86 7.25 Sept. 2011 Aug. 2029 5,075,000 4,936,000
Falcon Creek (O)(S)(X) Indianapolis, IN 9/14/98 (F) Sep. 2016 Aug. 2038 6,144,600 5,976,000
Gulfstream (P)(X) Dania, FL 7/22/98 7.25 Apr. 2016 Jul. 2038 3,500,000 3,575,000
Highland Ridge (K) St. Paul, MN 2/02/87 7.25 June 2010 June 2018 15,000,000 14,589,000
Jubilee Courtyards (X) Florida City, FL 9/15/98 (G) Oct. 2025 Sep. 2040 4,150,000 3,967,000
Lakepoint (K) Stone Mountain, GA 11/18/87 6.00 Jul. 2005 June 2017 15,100,000 12,154,000
Madalyn Landing (X) Palm Bay, FL 11/13/98 7.00 Dec. 2017 Nov. 2040 14,000,000 13,147,000
The Mansion Independence, MO 5/13/86 7.25 Jan. 2011 April 2025 19,450,000 19,218,000
Marsh Landings (X) Portsmouth, VA 5/20/98 7.25 Jul. 2017 Jul. 2030 6,050,000 5,884,000
Newport Village (K) Tacoma, WA 2/11/87 7.25 Sept. 2011 Aug. 2029 13,000,000 12,643,000
North Glen (K) Atlanta, GA 9/30/86 (W) Jul. 2005 June 2017 12,400,000 12,476,000
Northpointe Village (X) Fresno, CA 8/25/98 (E) Sep. 2017 Aug. 2040 13,250,000 13,331,000
Ocean Air (P)(S)(X) Norfolk, VA 4/20/98 7.25 Jan. 2016 Nov. 2030 10,000,000 9,726,000
Orchard Hills (K) Tacoma, WA 12/31/86 7.25 Sept. 2011 Aug. 2029 5,650,000 5,495,000
Orchard Mill (K) Atlanta, GA 12/31/86 7.50 Jul. 2005 June 2017 10,500,000 10,271,000
Pelican Cove (K)(N) St. Louis, MO 2/27/87 8.00 (Z) Feb. 2007 18,000,000 19,317,000
Phoenix (X) Stockton, CA 4/28/98 7.125 Nov. 2016 Oct. 2029 3,250,000 3,525,000
River Run (K)(X) Miami, FL 8/7/87 8.00 (Z) Aug. 2007 7,200,000 7,727,000
Shannon Lake (K) Atlanta, GA 6/26/87 (B) Jul. 2005 June 2017 12,000,000 11,268,000
Silvercrest (X) Clovis, CA 9/24/98 7.125 Oct. 2017 Sep. 2040 2,275,000 2,174,000
South Congress (P)(X) Austin, TX 5/3/00 7.50 Sep. 2016 Sep. 2036 6,300,000 6,300,000
Stone Creek (X) Watsonville, CA 4/28/98 7.125 May 2017 Apr. 2040 8,820,000 8,778,000
Sunset Downs (Y) Lancaster, CA 2/11/87 8.00 (Z) May 2007 15,000,000 11,020,000
Sunset Terrace (Y) Lancaster, CA 2/12/87 8.00 (Z) May 2007 10,350,000 7,604,000
</TABLE>
10
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 2 - FIRST MORTGAGE BONDS (continued)
<TABLE>
<CAPTION>
Stated Fair Value
Closing Interest Face Amount at June 30,
Property Location Date Rate Call Date Maturity Date of FMB 2000 (A)
-------- -------- -------- -------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED BY CHARTER MAC OWNER TRUST I (J) (H)
Thomas Lake Eagan, MN 9/02/86 7.50 Jan. 2010 Dec. 2027 12,975,000 13,054,000
Walnut Creek (P) Austin, TX 5/4/00 7.50 Sep. 2016 Sep. 2036 3,240,000 3,240,000
Walnut Creek (P) Austin, TX 5/4/00 7.50 Sep. 2014 Sep. 2014 360,000 360,000
Walnut Park Plaza (X) Philadelphia, PA 4/11/00 7.50 Apr. 2010 May 2030 5,500,000 5,500,000
Willow Creek (K) Ames, IA 2/27/87 7.25 Jan. 2010 June 2022 6,100,000 5,933,000
------------- -------------
350,059,600 337,498,000
----------- -----------
Subtotal - Tax-Exempt First Mortgage Bonds 688,356,128 649,618,000
----------- -----------
<CAPTION>
Stated Fair Value
Closing Interest Face Amount at June 30,
Property Location Date Rate Call Date Maturity Date of FMB 2000 (A)
-------- -------- -------- -------- --------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
TAXABLE FIRST MORTGAGE BONDS
OWNED BY THE COMPANY (NOT INCLUDING ITS CONSOLIDATED SUBSIDIARIES)
Greenbriar (P) Concord, CA 5/6/99 9.00 May 2017 May 2036 2,015,000 2,015,000
Lake Park (P) Turlock, CA 7/15/99 9.00 Oct. 2015 Sep. 2035 375,000 375,000
Lakes Edge at Walden (P) Miami, FL 10/6/99 11.00 June 2000 Aug. 2010 1,400,000 1,400,000
Oaks at Hampton Dallas, TX 4/27/00 9.00 May 2010 May 2010 525,000 525,000
Princess Anne Virginia Beach, VA 5/31/00 9.50 Jan. 2006 Jan. 2006 125,000 125,000
------------ ------------
Subtotal - Taxable First Mortgage Bonds 4,440,000 4,440,000
------------ ------------
Total First Mortgage Bonds $692,796,128 $654,058,000
============ ============
</TABLE>
11
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 2 - FIRST MORTGAGE BONDS (continued)
(A) The FMBs are deemed to be available-for-sale debt securities and,
accordingly, are carried at their estimated fair values at June 30, 2000.
(B) Pursuant to a bond modification as of October 1, 1997, the base interest
rate was lowered to 6% through July 31, 2000 and 7% thereafter.
(C) The interest rates for College Park are 7% during the construction period
and 7.25% thereafter.
(D) The interest rates for Bedford Square are 7% during the construction period
and 6.375% thereafter.
(E) The interest rates for Northpointe Village are 7.965% through September 23,
1998, 8.125% during the remainder of the construction period and 7.5%
thereafter.
(F) The interest rates for Falcon Creek are 7% through August 31, 2000 and
7.25% thereafter.
(G) The interest rates for Jubilee Courtyards are 7% through September 30, 2000
and 7.125% thereafter.
(H) This entity is a consolidated subsidiary of the Company (see Notes 6 and
7).
(I) The interest rates for Lewis Place are 6.75% through May 31, 2001 and 7.00%
thereafter.
(J) These FMBs have been transferred to Charter Mac Owner Trust I in connection
with the Company's Private Label Tender Option Program (TOP) (see Note 6).
(K) These FMBs are participating FMBs which contain additional interest
features contingent on available cash flow. FMBs that contain provisions
for participating interest are referred to as "participating"; FMBs lacking
this provision are "non-participating".
(L) The FMBs are held as collateral in connection with the TOP (see Note 6).
(M) These FMBs are pledged as collateral in connection with the Merrill Lynch
RITES/P-FLOATS Program (see Note 4).
(N) The original owners of the Underlying Properties and the obligors of these
FMBs have been replaced with affiliates of the Manager.
(O) The Underlying Property is under construction. In the event construction is
not completed in a timely manner, the Company may "put" the FMB to the
construction lender at par.
(P) The Underlying Property is undergoing substantial rehabilitation. In the
event rehabilitation is not completed in a timely manner, the Company may
"put" the FMB to the construction lender at par.
(Q) Initial advance on an FMB which was fully funded on July 14, 2000 for a
total of $4,744,000.
(R) Held by Merrill Lynch as collateral for secured borrowings (see Note 4).
(S) All of the "puts" (see (O) and (P) above) are secured by a letter of credit
issued by the construction lender to the Company.
(T) Initial advance in the amount of $50,000 was funded on June 8, 1999. The
balance was funded on July 15, 1999.
(U) The interest rates for Hamilton Gardens are 7.625% during the construction
period and 7.125% thereafter.
(V) The interest rates for Country Lake are 6% until expected refunding in the
third quarter 2000 and 7.25% thereafter.
(W) Pursuant to a bond modification as of October 1, 1997, the base interest
rate was lowered to 7% through June 30, 2000 and 7.50% thereafter.
(X) The obligors of these mortgage bonds are partnerships in which affiliates
of the Manager are partners that own a controlling interest.
(Y) The Company sold an option to acquire the Sunset bonds for $35,250,000. The
right to exercise the option shall commence on January 1, 2001 and shall
continue as long as the bonds are outstanding.
(Z) The Company is permitted to call the bond due with six months written
notice.
12
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 2 - FIRST MORTGAGE BONDS (continued)
The weighted average interest rates recognized on the face amount of the
portfolio of FMBs for the three and six months ended June 30, 2000 and 1999 were
7.47% and 7.06% and 7.38% and 6.91%, respectively, based on weighted average
face amounts of approximately $668,143,084 and $486,743,423 and $641,966,804 and
$479,856,155, respectively.
The Company accounts for its investments in the FMBs 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 FMBs are carried at their estimated fair values,
with unrealized gains and losses reported in other comprehensive income.
Because the FMBs are not readily marketable, 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.
The original obligors and owners of the Underlying Properties of the Cedar
Creek, Highpointe, Pelican Cove and Loveridge FMBs have been replaced with
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 FMB. These
properties are generally paying as interest an amount equal to the net cash flow
generated by operations, which in some cases is less than the stated rate of the
FMB. The Company has no present intention of declaring a default on these FMBs.
The aggregate carrying value of these four FMBs at June 30, 2000 and December
31, 1999 was approximately $40,495,000 and $41,465,000, respectively, and the
income earned from them for the six months ended June 30, 2000 and 1999 was
approximately $2,457,000 and $1,484,000, respectively.
From time to time, the Company, as an alternative to foreclosure in the event of
a default, enters into forbearance agreements and/or permanent modifications
with certain borrowers. The determination as to whether it to enter into
permanent modifications or forbearance agreements on the FMBs, advance second
mortgages, or alternatively, to pursue remedies under the loan documents,
including foreclosure, is based upon several factors. These factors include, but
are not limited to, Underlying Property performance, market conditions, owner
cooperation and the projected costs of foreclosure and litigation, irrespective
of whether or not the obligor has an affiliation with the Manager. Payments
under each of the existing forbearance agreements are current as of June 30,
2000.
The obligors of (i) 41 FMBs, as noted in footnote X to the Table of Investments
above, and (ii) 2 RITES as noted under Other Bond Related Investments, are
partnerships in which affiliates of the Manager are partners that own a
controlling interest. In addition, the original owners of underlying properties
and obligors of five FMBs, as noted in footnote N to the Table of Investments
above, have been replaced with affiliates of the Manager who have not made
equity investments. These affiliate entities could have interests which do not
coincide with, and may be adverse to, the interests of the
13
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
Company. Negotiations, if any, with respect to modifications of FMBs 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.
Seventeen of the Company's FMBs, with an aggregate face amount of $198,750,000,
have previously been modified (the modifications of four of such FMBs with an
aggregate face amount of $45,000,000 are pending subject to issuer approval).
These modifications have generally encompassed extensions of the maturities of
the FMB's and extensions of prepayment lock out features and/or prepayment
penalties as well as extensions of the mandatory redemption features. Stated
interest rates have also been adjusted together with changes in the contingent
interest features. Base interest rates, contingent interest, prepayment
lock-outs, mandatory redemption and maturity features are arrived at through
negotiations between the Company and the obligors under the FMB's and vary
dependent on the facts of a particular FMB, 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 always has the
option to pursue its remedies including acceleration and foreclosure. In the
future, the Company may modify other FMBs to reflect generally 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.
With respect to the FMBs which are subject to forbearance agreements with the
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) on FMBs 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 $1,062,000 and $1,426,000 for the six months ended June 30, 2000
and 1999, respectively.
In addition to the stated base rates of interest, 22 and 28 of the FMBs at June
30, 2000 and 1999, respectively, were participating FMB's, and so provided for
"contingent interest". During the six months ended June 30, 2000 and 1999, 8 and
4 FMBs paid contingent interest amounting to approximately $1,297,000 and
$344,000, respectively.
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
items. Such advances typically are secured by promissory notes and/or second
mortgages. As of June 30, 2000 the face amount of such advances was $15,197,043,
their rates range from 8% to 13% and their carrying value was $10,030,231, which
is net of purchase accounting adjustments, and a reserve for collectibility of
$138,000. Two advances with an aggregate face amount of $5,028,812, rates
ranging from 8% to 10% and an aggregate carrying amount of $0 were advanced to
two obligors which are affiliates of the Manager.
The amortized cost basis of the Company's portfolio of 82 FMBs at June 30, 2000
and 69 FMBs at December 31, 1999 was $663,838,257 and $585,474,109,
respectively. The net unrealized loss on FMBs in the amount of $9,780,257 at
June 30, 2000 consisted of gross unrealized gains and losses of $13,547,019 and
$23,327,276 respectively. The net unrealized gain on FMBs in the amount of
14
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
$2,417,891 at December 31, 1999 consisted of gross unrealized gains
and losses of $16,484,461 and $14,066,570, respectively.
NOTE 3 - SECURITIZATION TRANSACTIONS
To raise additional capital to acquire additional FMBs, the Company has
securitized certain FMBs through the Merrill Lynch Pierce Fenner & Smith
Incorporated ("Merrill Lynch") P-FLOATS/RITES program. Under this program, the
Company transfers certain FMBs to Merrill Lynch. Merrill Lynch then deposits
each FMB into an individual special purpose trust created to hold such asset,
together with a Credit Enhancement Guarantee ("Guarantee"). Two types of
securities are then issued by each trust, evidencing ownership in the FMBs and
the Guarantee: (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 by the Remarketing Agent, Merrill Lynch, to result in the sale of the
P-FLOAT security at par (up to 99% of the underlying face amount of the FMB);
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 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 FMBs from the trust. When the FMBs 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 FMBs from local issuers, deposit them in the
trust, sell the P-FLOAT security to qualified 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 FMBs to Merrill
Lynch through the P-FLOATS/RITES program as secured borrowings and, accordingly,
continues to account for the FMBs as its assets in the accompanying consolidated
balance sheets. When Merrill Lynch purchases FMBs directly and sells the RITES
to the Company, such RITES are classified as other bond related investments in
the accompanying consolidated balance sheets (See Note 4).
During the period May 1999 through December 1999, the Company transferred ten
FMBs with an aggregate face amount of $82,219,500 to Merrill Lynch through the
Merrill Lynch P-FLOATS/RITES program and received proceeds of $80,769,616. The
amortized cost basis of these FMB's at June 30, 2000 was $80,719,580.
During June 1999, Merrill Lynch purchased three FMBs with an aggregate face
amount of $22,430,000. The FMBs were placed into a trust by Merrill Lynch
whereby P-FLOATS and RITES were sold. The Company purchased the related RITES
interests with an aggregate face amount of $15,000 for an aggregate purchase
price of $579,118 which includes bond selection and other transaction costs.
During the three months ended June 30, 2000 one of the RITES terminated leaving
two RITES with a fair value of $360,000.
In order to facilitate the securitizations, the Company has pledged certain
additional FMBs, cash and cash equivalents and temporary investments as
collateral for the benefit of the credit enhancer or liquidity provider. At June
30, 2000, the total carrying amount of such additional FMBs, cash and cash
equivalents and temporary investments pledged as collateral was $90,523,000,
$1,932,442 and $30,355,000, respectively.
15
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
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 4.9%,
annualized, for the six months ended June 30, 2000.
NOTE 4 - OTHER BOND RELATED INVESTMENTS
The Company's other bond related investments consist of investments in RITES
(see Note 3). The following table provides certain information with respect to
each of the RITES.
<TABLE>
<CAPTION>
Face
Amount Amortized Fair
of RITES Cost Basis at Value at
FMB Date Face Amount Interest June June
Description/Location Purchased of FMB Purchased 30, 2000 30, 2000
-------------------- --------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
OWNED BY THE COMPANY (NOT INCLUDING ITS CONSOLIDATED SUBSIDIARIES)
RITES-Meadowview Park/
Santa Rosa, CA 6/17/99 $ 6,250,000 $ 5,000 $ 158,789 $ 160,000
RITES-The Courtyards/
Santa Rosa, CA 6/17/99 7,940,000 5,000 197,261 200,000
----------- ------- ---------- ----------
$14,190,000 $10,000 $ 356,050 $ 360,000
========== ====== ========== ==========
</TABLE>
Included in general and administrative expenses is approximately $35,000 of
acquisition fees and expenses written off as a result of the termination of the
RITES-Avalon Court/Oakley, CA. Bond selection fees incurred by the Company when
it purchased this RITE of approximately $165,000, paid to an affiliate have been
waived by the affiliate and are included as a reduction in amounts Due to
Manager and Affiliates.
NOTE 5 - DEFERRED COSTS
The components of deferred costs are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------------------
<S> <C> <C>
Deferred bond selection costs $ 11,685,366 $ 9,904,683
Deferred costs relating to the Private Label Tender
Option Program 4,112,393 3,614,627
Deferred costs relating to the issuance of preferred
shares of subsidiary 3,616,658 3,605,331
Other 297,039 172,039
------------ ------------
19,711,456 17,296,680
Less: Accumulated amortization (3,662,384) (3,074,229)
----------- -----------
$ 16,049,072 $ 14,222,451
=========== ===========
</TABLE>
16
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 6 - MINORITY INTEREST IN SUBSIDIARY
On May 21, 1998, the Company closed on its Private Label Tender Option Program
("TOP") in order to raise additional capital to acquire additional FMBs. In
March 2000, the Company negotiated an increase in the maximum amount of capital
that can be raised under the TOP to $300,000,000. As of June 30, 2000, the
Company has contributed 48 issues of FMBs in the aggregate principal amount of
approximately $440,512,000 to Charter Mac Origination Trust I (the "Origination
Trust"), a wholly-owned, indirect subsidiary of the Company, which has
contributed 40 of those FMBs, with an aggregate principal amount of
approximately $350,060,000, to Charter Mac Owner Trust I (the "Owner Trust")
which is controlled by the Company. The Owner Trust has issued two equity
certificates: (i) a Senior Certificate, with an outstanding face amount of
$250,000,000 at June 30, 2000, which has been deposited into another Delaware
business trust (the "Certificate Trust") which issued and sold Floater
Certificates representing proportional interests in the Senior Certificate to
new investors and (ii) a Residual Certificate representing the remaining
beneficial ownership interest in the Owner Trust, which has been issued to the
Origination Trust. The FMBs remaining in the Origination Trust (aggregate
principal amount of approximately $90,452,000) are a 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 Trust.
The effect of the TOP structure is that a portion of the interest received by
the Owner Trust on the FMBs it holds is distributed through the Senior
Certificate to the holders of the Floater Certificates in an amount determined
each week by the remarketing agent, Goldman Sachs & Co., at the distribution
amount that is required to enable the remarketing agent to sell the Floater
Certificates at par on any weekly determination date, with the residual interest
remitted to the Origination Trust via the Residual Certificate.
For financial accounting and reporting purposes, the Owner Trust, which is
controlled by the Company, is consolidated. The equity in the Owner Trust
represented by the Senior Certificate is classified as "minority interest in
subsidiary (subject to mandatory redemption)" in the accompanying consolidated
balance sheets. 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. Such allocation of income is
classified as "minority interest in income of subsidiary" in the accompanying
consolidated statements of income.
The Company's cost of funds relating to the TOP (calculated as income allocated
to the minority interest plus recurring fees as a percentage of the weighted
average amount of the outstanding Senior Certificate) was approximately 5.4% and
4.2% for the six months ended June 30, 2000 and 1999, respectively.
NOTE 7 - PREFERRED SHARES OF SUBSIDIARY
On June 29, 1999 a subsidiary of the Company completed a $90 million tax-exempt
preferred equity offering (the "Preferred Offering") comprising 45 shares
("Series A Cumulative Preferred Shares") which were purchased by Merrill Lynch,
Legg Mason Wood Walker, Inc. and McDonald Investments,
17
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
Inc. (the "Initial Purchasers"). The Initial Purchasers then sold the Series A
Cumulative Preferred Shares to qualified institutional investors.
In connection with this transaction, the Company caused 100% of the ownership of
the Origination Trust to be transferred to Charter Mac Equity Issuer Trust (the
"Issuer"), a newly formed Delaware business trust and an indirectly owned
subsidiary in which the Company owns 100% of the common equity. The Issuer then
issued the Series A Cumulative Preferred Shares. As a result of such
transaction, the Issuer became the direct and indirect owner of the entire
outstanding issue of 40 FMBs held by the Origination Trust and Owner Trust, its
two directly and indirectly owned subsidiaries (see Note 6). In addition to
contributing the ownership of the Origination Trust, the Company also
contributed eight FMBs to the Issuer. As of the closing, the aggregate par value
of FMBs held directly or indirectly by the Issuer or its subsidiaries was
$463,699,028. Net proceeds of approximately $86,391,000 from the Preferred
Offering have been used to invest in or acquire additional tax-exempt assets for
the Issuer.
The Series A Cumulative Preferred Shares have an annual preferred dividend rate
of 6 5/8% through June 30, 2009, payable quarterly in arrears on January 31,
April 30, July 31 and October 31 of each year, commencing October 31, 1999 and
payable upon declaration thereof by the Issuer's Board of Trustees, but only to
the extent of the Issuer's tax-exempt income (net of expenses) for the
particular quarter ("Quarterly Net Income"). The Series A Cumulative Preferred
Shares are subject to mandatory tender by the holders thereof for remarketing
and purchase on June 30, 2009 and each remarketing date thereafter at a price
equal to the Liquidation Amount of $2,000,000 per share plus, to the extent of
the Issuer's Quarterly Net Income, an amount equal to all distributions accrued
but unpaid on the Series A Cumulative Preferred Shares. Since inception, all
quarterly distributions have been declared at an annualized rate of 6 5/8% and
all distributions due have been paid.
Holders of the Series A Cumulative Preferred Shares may elect to retain their
shares upon a remarketing, with a distribution rate to be determined immediately
prior to the remarketing date by the remarketing agent. Each holder of the
Series A Cumulative Preferred Shares will be required to tender its shares to
the Issuer for mandatory repurchase on June 30, 2049, unless the Issuer decides
to remarket the shares on such date. The Issuer may not redeem the Series A
Cumulative Preferred Shares before June 30, 2009. After that date, all or a
portion of the shares may be redeemed, subject to certain conditions. The Series
A Cumulative Preferred Shares are not convertible into common shares of the
Issuer or of the Company.
The Series A Cumulative Preferred Shares rank, with respect to payment of
distributions and amounts upon liquidation, dissolution or winding-up of the
Issuer, senior to all classes or series of the Company's common shares and the
Company's Convertible Preferred Shares.
For financial accounting and reporting purposes, the Series A 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 the Series A 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.
18
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 8 - CAPITAL SHARES
The Company has adopted an incentive stock option plan (the "Incentive Share
Option Plan"), the purpose of which is to (i) attract and retain qualified
persons as directors and officers and (ii) to incentivize and more closely align
the financial interests of the Manager and its affiliates and their respective
employees and officers with the interests of the shareholders by providing the
Manager and its affiliates 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 $.9517 per share,
the Compensation Committee has the authority to issue options to purchase, in
the aggregate, that number of common shares which is equal to 3% of the 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 shares outstanding on October 1,
1997 (2,058,747 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 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 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. The
Company's distributions per common share for the years ended December 31, 1997
and 1998 did not exceed $.9517 per share. In 1999, the Company distributed $.995
per common share, thus enabling the Compensation Committee, at their discretion,
to issue options. Three percent of the shares outstanding as of December 31,
1999 is equal to 617,430 shares.
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 whom 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 will
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 compensation cost will be amortized over the vesting period of
the options. The 297,830 options granted on May 1, 2000 had an estimated fair
value at that date of $.55 per option grant, or a total of $163,807. 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 2000:
dividend yield of 9.02%, expected volatility of 18%, risk-free interest rate of
7.478% and expected lives of ten years. None of the options granted during 2000
were exercised or expired. The Company recorded compensation cost of $16,730
during the six months ended June 30, 2000 relating to these option grants.
19
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
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 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 June
30, 2000 and December 31, 1999, 3,552 and 1,910 Shares, respectively, having an
aggregate value at the date of issuance of $45,000 and $25,000, respectively,
have been issued to the independent trustee as compensation for their services.
Effective May 3, 2000, the Company implemented a dividend reinvestment and share
repurchase 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 will begin
with the distributions paid in August 2000. In order to participate in the
"voluntary share purchase" part of the Plan, a shareholder must participate in
the "dividend reinvestment" part of the Plan.
NOTE 9 - CONVERTIBLE PREFERRED SHARES
On May 10, 2000, the Company completed a $27,496,980 private placement ( the
"Convertible Preferred Offering") of convertible preferred shares (the
"Convertible Preferred Shares") to three financial institutions (1,946,000
Convertible Preferred Shares priced at $14.13 per share). The Company incurred
an Initial Purchasers' Discount of $1,109,220 and other related costs of
$512,863 resulting in net proceeds of $25,580,217.
The Convertible Preferred Offering enables financial institutions to receive
certain regulatory benefits in connection with their investment. Other than for
this regulatory benefit feature, the Convertible Preferred Shares are
economically similar to Common Shares. The Company has developed a proprietary
method for specially allocating these regulatory benefits to specific financial
institutions that invest in the Convertible Preferred Shares. In addition to the
preferred allocation of regulatory benefits, the preferred investors receive the
same economic benefits as common shareholders of the Company. The preferred
investors, at their option, have the ability to convert their Convertible
Preferred Shares into common shares at a predetermined conversion price of
$15.33 per common share which represents the Company's book value per common
share as of December 31, 1999. Upon conversion, the preferred investors will no
longer be entitled to a special allocation of the regulatory benefit.
NOTE 10 - RELATED PARTY TRANSACTIONS
Pursuant to the Management Agreement, the Manager receives (inclusive of fees
paid directly to the Manager by subsidiaries of the Company) (i) bond selection
fees equal to 2% of the principal amount of each FMB or other instrument
acquired or invested in by the Company; (ii) special distributions equal to
.375% per annum of the total invested assets of the Company; (iii) loan
servicing fees equal to .25% per annum of the outstanding principal amount of
FMBs held by the Company (not including its
20
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
consolidated subsidiaries) and .15% per annum of the outstanding principal
amount of FMBs held by the consolidated subsidiaries of the Company; (iv)
management fees equal to .10% per annum of the total invested assets of the
consolidated subsidiaries of the Company; (v) a liquidation fee based on the
gross sales price of assets sold by the Company in connection with a liquidation
of the Company's assets; and (vi) reimbursement of certain administrative costs
incurred by the Manager and its affiliates on behalf of the Company. Fees
payable to the Manager which are based on FMBs or assets of the Company include
such FMBs or assets which are either held directly by the Company or held by
other entities to whom the Company has transferred such FMBs or assets to
facilitate financing. In addition, the Manager receives bond placement fees from
the borrower in an amount up to 1.5% of the principal amount of each FMB or
other instrument acquired or invested in by the Company. Affiliates of the
Manager are part of a joint venture which has a development services agreement
with the obligors of five FMBs.
The costs, expenses and the special distributions incurred to the Manager and
its affiliates for the three and six months ended June 30, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
----------------------------------- ----------------------------------
<S> <C> <C> <C>
Bond selection fees $1,456,832 $1,170,900 $1,568,832 $1,298,900
Expense reimbursement 116,763 107,584 249,848 168,050
Loan servicing fees 260,839 307,107 501,897 594,856
Management fees 168,463 0 323,909 0
Special distribution 641,425 462,618 1,236,181 894,241
--------- ---------- --------- ----------
$2,644,322 $2,048,209 $3,880,667 $2,956,047
========= ========= ========= =========
</TABLE>
GENERAL
As of June 30, 2000, the obligors of the River Run, Ocean Air, Phoenix, Stone
Creek, Cedarbrook, Marsh Landings, Gulfstream, Bedford Square, Northpointe
Village, Falcon Creek, Jubilee Courtyards, Silvercrest, Carrington Pointe,
Madalyn Landing, Forest Hills, Lake Jackson, Mountain Ranch, Hamilton Garden,
Del Monte Pines, Greenbriar, Sycamore Woods, The Courtyards, Meadowview Park,
Casa Ramon, Lake Park, Lewis Place, Lennox Park, Chapel Ridge of Little Rock,
Franciscan Riviera, Standiford, Douglas Pointe, Chapel Ridge of Texarkana,
Tallwood, Barnaby Manor, Fort Chaplin, Summer Lake, Newark Commons, Oaks at
Hampton, Princess Anne House, San Marcos, Columbia at Bells Ferry, South
Congress and Walnut Park Plaza FMBs are local partnerships in which investment
partnerships, whose general partners are affiliates of the Manager, own a
controlling partnership interest. With respect to 12 of the above FMBs, the
Company owns the RITES, ten of which are accounted for as FMBs and secured
borrowings (see Notes 2 and 3) and two of which are accounted for as other bond
related investments (see Note 5). These affiliate entities could have interests
which do not coincide with, and may be adverse to, the interests of the Company.
Negotiations, if any, with respect to modifications of FMBs 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 June 30, 2000, the original owners of the Underlying Properties and
obligors of the Cedar Creek, Highpointe, Pelican Cove and Loveridge FMBs had
been replaced with affiliates of the Manager who have not made equity
investments. These entities have assumed the day-to-day responsibili
21
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
ties 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 FMB or otherwise buy the property and payoff all
or most of the FMB obligation.
NOTE 11 - 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 shareholders by weighted
average number of shares outstanding during the period. 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, and the dilutive effect of convertible preferred stock is
calculated using the "if converted" method.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 2000
-------------------------------------------------------
Income Shares Per - Share
(Numerator) (Denominator) Amount
-------------------------------------------------------
<S> <C> <C> <C>
Allocation of income
to shareholders $5,629,103
==========
Basic net income per share 5,629,103 20,582,617 $ 0.27
============
Effect of dilutive securities:
1,946,000 shares of Convertible
Preferred Shares 294,680 1,112,000
---------- -----------
Diluted net income per share $5,923,783 21,694,617 $ 0.27
========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 2000
-------------------------------------------------------
Income Shares Per - Share
(Numerator) (Denominator) Amount
-------------------------------------------------------
<S> <C> <C> <C>
Allocation of income
to shareholders $11,544,980
==========
Basic net income per share 11,544,980 20,582,211 $ 0.56
============
Effect of dilutive securities:
1,946,000 shares of Convertible
Preferred Shares 294,680 556,000
---------- ------------
Diluted net income per share $11,839,660 21,138,211 $ 0.56
========== ========== ============
</TABLE>
22
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
The Company's stock options issued during 2000 were antidilutive. For the three
and six months ended June 30, 1999, the Company had no stock options or
preferred stock outstanding, so basic and diluted earnings per share are the
same.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
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 a
merger agreement pursuant to which ATEBT would merge with and into CM Holding
Trust, a wholly-owned subsidiary of the Company. Following the merger, CM
Holding Trust would continue to be a wholly-owned subsidiary of the Company.
ATEBT is a Delaware business trust which owns four tax-exempt first mortgage
bonds and had total assets of approximately $26,691,000 and net assets of
approximately $25,262,000 at June 30, 2000. The four tax-exempt first mortgage
bonds have an aggregate outstanding loan balance of $23,775,000 at June 30,
2000, have interest rates of 9% and have underlying properties located in four
different states.
Under the terms of the merger agreement, each share of beneficial ownership in
ATEBT outstanding on the effective date of the proposed merger (1,501,481 shares
at June 30, 2000) will be converted into the right to receive 1.43112 Shares of
the Company. In addition, the manager of ATEBT (which owns a 1% interest in
ATEBT not currently represented by ATEBT shares) will receive 21,156 shares of
the Company. Following the merger, current ATEBT shareholders will own
approximately 9.3% of the outstanding common shares of the Company.
Consummation of the merger is subject to several conditions, including approval
by ATEBT shareholders. In addition, either entity has the ability to opt out of
the transaction if the 30-day average trading price of the Company's common
shares preceding the closing of the transaction is outside of the Company's
historical trading range of $11.13 to $14.50. Subject to ATEBT shareholder
approval, the Company and ATEBT expect that this transaction will close during
the fourth quarter of 2000.
23
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 13 - SUBSEQUENT EVENTS
Acquisitions
During the period July 1, 2000 through August 11, 2000 the Company fully funded
the Casa Ramon FMB (see Note 2). In addition, the Company acquired seven FMBs
for an aggregate purchase price of $50,625,758, not including bond selection
fees and expenses of approximately $1,013,000. One of the FMBs is a taxable FMB
acquired in connection with the purchase of a tax-exempt FMB. The taxable FMB is
secured by the same Underlying Property which secures the associated tax-exempt
FMB. Further information regarding the FMBs is as follows:
<TABLE>
<CAPTION>
Stated Face No. of
Closing Interest Call Date/ Amount Rental
Property/Location Date Rate Maturity Date of FMB Units
----------------- ------- -------- ------------- ------ ------
<S> <C> <C> <C> <C> <C>
TAX-EXEMPT FIRST MORTGAGE BONDS
OWNED BY CHARTER MAC EQUITY ISSUER TRUST
Parks at Westmoreland/ 7/17/00 8.5% 7/1/17 9,535,000 250
DeSota, TX 7/1/40
King's Villages/ 7/26/00 8.5% 12/1/16 17,650,000 313
Pasadena, CA 12/1/36
Bay Colony/ 8/9/00 7.5% 7/15/17 10,100,000 248
League City, TX 7/15/42
Autumn Ridge/ 8/11/00 8.0% 8/1/27 9,304,230 192
San Marcos, CA 8/1/37
Village Green/ 8/11/00 8.5% 1/1/17 3,078,000 128
Merced, CA 1/1/37
Village Green/ 8/11/00 8.5% 1/1/14 503,528 128
Merced, CA 1/1/14
-------------
$50,170,758
=============
TAXABLE FIRST MORTGAGE BONDS
OWNED BY THE COMPANY (NOT INCLUDING ITS CONSOLIDATED SUBSIDIARIES)
Parks at Westmoreland/ 7/17/00 9.0% 11/1/09 $ 455,000 250
DeSota, TX 11/1/09 ============
</TABLE>
SECURITIES OFFERING BY SUBSIDIARY
24
<PAGE>
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
On July 21, 2000, a subsidiary of the Company completed a $79 million tax-exempt
preferred equity offering comprising 48 "Series A-1 Cumulative Preferred Shares"
with an aggregate liquidation amount of $24 million and 110 "Series B
Subordinate Cumulative Preferred Shares" with an aggregate liquidation amount of
$55 million. The shares were purchased by Merrill Lynch & Co. and then sold to
qualified institutional investors. The Company received net proceeds of
approximately $76,141,000 from this offering.
The Series A-1 Cumulative Preferred Shares rank senior to the Company's common
shares and the Company's Convertible Preferred Shares and pari passu with the
Issuer's Series A Cumulative Preferred Shares (see Note 7) and senior to the
Series B Subordinate Cumulative Preferred Shares. The Series A-1 Cumulative
Preferred Shares have identical terms to the Series A Cumulative Preferred
shares except as to the annual preferred dividend rate of 7.10% and the
Liquidation Amount of $500,000 per share.
The Series B Subordinate Cumulative Preferred Shares rank senior to the
Company's common shares and the Company's Convertible Preferred Shares and
junior to the Issuer's Series A and Series A-1 Cumulative Preferred Shares. The
shares have an annual preferred dividend rate of 7.60% through November 30, 2010
payable quarterly in arrears on January 31, April 30, July 31 and October 31 of
each year commencing October 31, 2000 but only after payment of all
distributions payable with respect to the Series A and Series A-1 Cumulative
Preferred Shares and any other senior securities. The Series B Subordinate
Cumulative Preferred Shares are subject to mandatory tender by the holders at
the Liquidation Amount of $500,000 per share thereof for remarketing and
purchase on November 30 2010 under the same terms as the Series A and Series A-1
Cumulative Preferred Shares.
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Charter Municipal Mortgage Acceptance Company (the "Company") is a Delaware
business trust which is engaged in the acquisition and ownership (either
directly or indirectly) of tax-exempt participating and non-participating first
mortgage bonds ("FMBs") issued by various state or local governments or other
agencies or authorities and secured by participating and non-participating
mortgage loans on the underlying properties ("Underlying Properties"). FMBs that
contain provisions for participating interest are referred to as
"participating"; FMBs lacking this provision are "non-participating". As of June
30, 2000, the Company owned a portfolio of 82 FMBs and had net assets of
approximately $330,000,000.
In order to generate increased tax exempt income and, as a result, enhance the
value of the Company's Shares, the Company intends to invest in or acquire
additional tax-exempt 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 Company has designed a Direct Purchase Program
specifically designed to appeal to developers of such properties. In general,
these properties are smaller than traditional multifamily housing properties,
averaging 150 units. The traditional method of financing tax-exempt properties
requires the involvement of credit enhancement, rating agencies and investment
bankers. Therefore, the up-front cost of such financing is generally much higher
than traditional multifamily financing. Through its Direct Purchase Program, the
Company will invest in or acquire tax-exempt bonds without the cost associated
with credit enhancement, rating agencies and investment bankers. The Company
believes that the up-front cost savings to the developer will translate into a
higher than market interest rate on the bonds acquired by the Company.
The Company believes that it is well positioned to market its Direct Purchase
Program as a result of the Manager's affiliation with Related Capital Company
("Related"), a nationwide, fully integrated real estate services firm. The
Manager is a single purpose affiliate of Related which is controlled by the same
individuals and entities which own Related. The Manager benefits from its
affiliation with Related because the Manager is able to utilize Related's
resources and relationships in the multifamily affordable housing finance
industry to source potential borrowers of first mortgage bonds the Company could
invest in or acquire. Related and its predecessor companies have specialized in
offering debt and equity products to mid-market multifamily owners and
developers for over 25 years. Related has provided debt and equity financing to
properties valued at over $9 billion. According to the 1999 National
Multihousing Council survey, Related is the third largest owner of apartments in
the United States.
The Company does not operate as a mortgage REIT, which generally utilize high
levels of leverage and acquire subordinated interests in commercial and/or
residential mortgage-backed securities. Rather, the Company utilizes low levels
of leverage and generally invests in or acquires long-term, fixed-rate,
tax-exempt FMBs. As a result, the Company did not experience the ill effects
associated with the volatile interest rate environment during 1999 and 1998.
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. Mortgage REITs typically incur
leverage at ratios ranging from between 3:1 to 10:1.
26
<PAGE>
In general, the FMBs that the Company either invests in or acquires 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.
Consistent with the foregoing, the Company focuses on providing investors with a
stable level of distributions, even through unstable markets.
The Company requires long-term financing in order to invest in and hold its
portfolio of FMBs. To date, this long-term liquidity has come from the Company's
Private Label Tender Option Program, preferred equity offerings by a subsidiary,
the issuance of convertible preferred shares and secured borrowings under
securitization transactions (see "Capital Raising Transactions" below). These
financing sources have expected lives equal to the expected lives of the FMBs
used to collateralize them although, in accordance with prudent business
practice and industry standards, the surety and liquidity commitment relating to
the Private Label Tender Option Program have shorter terms. The surety
commitment has three years remaining on its five year term and the liquidity
commitment is a one year renewable commitment. The Company expects to renew or
replace such commitments upon expiration of their terms. On a short-term basis,
the Company requires funds to pay its operating expenses and to make
distributions to its shareholders. The primary sources of the Company's
short-term liquidity are the interest income from the FMBs and promissory notes
in excess of the related financing costs, and interest income from cash and
temporary investments. The Company believes that its long-term financing
sources, explained in more detail below, and its short-term liquidity are
adequate to meet its current and projected long-term and short-term liquidity
requirements.
During the six months ended June 30, 2000 cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $34,508,000.
The increase was primarily due to cash provided by operating activities
($15,933,000), the net sale of temporary investments ($15,186,000), principal
payments received from loans made to properties ($118,000), an increase in
minority interest in subsidiary ($73,000,000), and the issuance of convertible
preferred shares ($25,652,000). Uses of cash included the purchase of first
mortgage bonds ($78,442,000), an increase in deferred bond selection costs
($1,781,000), an increase in other deferred costs ($197,000), distributions paid
to the Manager and shareholders of the Company and to preferred shareholders of
subsidiary ($13,578,000), an increase in restricted cash and cash equivalents
($904,000) and an increase in deferred costs relating to the Private label
Tender Option Program ($498,000). Included in the adjustments to reconcile the
net income to cash provided by operating activities is a loss on a disposition
of other bond related investment ($35,000) and net amortization of ($746,000).
The Company, as an alternative to foreclosure in the event of a default, has
entered into forbearance agreements on several FMBs and may be required to
extend these agreements or enter into new agreements in the future. Such
agreements may adversely impact liquidity; however, interest payments from FMBs
and RITES are anticipated to provide sufficient liquidity to fund the Company's
operating expenditures, debt service and distributions in future years.
The determination as to whether it is in the best interest of the Company to
enter into forbearance agreements on the FMBs or, alternatively, to pursue its
remedies under the loan documents, including foreclosure, is based upon several
factors including, but not limited to, Underlying Property performance, owner
cooperation and projected legal costs irrespective of whether the obligor has an
affiliation with the Manager or not.
The difference between the stated interest rates and the rates paid by FMBs is
not accrued as interest income for financial reporting 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. Interest
27
<PAGE>
income of approximately $378,000 and $702,000 and $1,062,000 and $1,426,000 was
not recognized for the three and six months ended June 30, 2000 and 1999,
respectively.
In July and August 2000, distributions of $1,490,625 ($33,125 per preferred
share), $294,680 ($.151 per cumulative preferred share) and $5,454,394 ($.242
per share), respectively, which were declared in June 2000, were paid to the
preferred shareholders of subsidiary and shareholders of the Company,
respectively, from cash flow from operations for the quarter ended June 30,
2000.
The Company sold an option to acquire the Sunset bonds for $35,250,000. The
right to exercise the option shall commence on January 1, 2001 and shall
continue as long as the bonds are outstanding.
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.
CAPITAL RAISING TRANSACTIONS
(i) 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 FMBs. As of
March 31, 1999, the maximum amount of capital which could be raised under the
TOP ($150,000,000) had been raised. In April 1999 and March 2000, the Company
successfully negotiated increases in its TOP to $200,000,000 and $300,000,000,
respectively. As of June 30, 2000, the Company has contributed 48 issues of FMBs
in the aggregate principal amount of approximately $440,512,000 to Charter Mac
Origination Trust I (the "Origination Trust"), a wholly-owned, indirect
subsidiary of the Company, which has contributed 40 of those FMBs, with an
aggregate principal amount of approximately $35,006,000, to Charter Mac Owner
Trust I (the "Owner Trust") which is controlled by the Company. The Owner Trust
has issued two equity certificates: (i) a Senior Certificate, with an
outstanding face amount of $250,000,000 at June 30, 2000, which has been
deposited into another Delaware business trust (the "Certificate Trust") which
issued and sold Floater Certificates representing proportional interests in the
Senior Certificate to new investors and (ii) a Residual Certificate representing
the remaining beneficial ownership interest in the Owner Trust, which has been
issued to the Origination Trust. The FMBs remaining in the Origination Trust
(aggregate principal amount of approximately $90,452,000) are a 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 Trust.
The effect of the TOP structure is that a portion of the interest received by
the Owner Trust on the FMBs it holds is distributed through the Senior
Certificate to the holders of the Floater Certificates in an amount determined
each week by the remarketing agent, Goldman Sachs & Co., at the distribution
amount that is required to enable the remarketing agent to sell the Floater
Certificates at par on any weekly determination date, with the residual interest
remitted to the Origination Trust via the Residual Certificate.
The Company's cost of funds relating to the TOP (calculated as income allocated
to the minority interest plus recurring fees as a percentage of the weighted
average amount of the outstanding Senior Certificate) was approximately 5.4% and
4.2% for the six months ended June 30, 2000 and 1999, respectively.
28
<PAGE>
(ii) PREFERRED EQUITY ISSUANCE BY SUBSIDIARY
On June 29, 1999 a subsidiary of the Company completed a $90 million tax-exempt
preferred equity offering (the "Preferred Offering") comprising 45 shares
("Series A Cumulative Preferred Shares") which were purchased by Merrill Lynch,
Legg Mason Wood Walker, Inc. and McDonald Investments, Inc. (the "Initial
Purchasers"). The Initial Purchasers then sold the Series A Cumulative Preferred
Shares to qualified institutional investors.
In connection with this transaction, the Company caused 100% of the ownership of
the Origination Trust to be transferred to Charter Mac Equity Issuer Trust (the
"Issuer"), a newly formed Delaware business trust and an indirectly owned
subsidiary in which the Company owns 100% of the common equity. The Issuer then
issued the Series A Cumulative Preferred Shares. As a result of such
transaction, the Issuer became the direct and indirect owner of the entire
outstanding issue of 40 FMBs held by the Origination Trust and Owner Trust, its
two directly and indirectly owned subsidiaries (see (i) Private Label Tender
Option Program, above). In addition to contributing the ownership of the
Origination Trust, the Company also contributed eight FMBs to the Issuer. As of
the closing, the aggregate par value of FMBs held directly or indirectly by the
Issuer or its subsidiaries was $463,699,028. Net proceeds of approximately
$86,391,000 from the Preferred Offering have been used to invest in or acquire
additional tax-exempt assets for the Issuer.
The Series A Cumulative Preferred Shares have an annual preferred dividend rate
of 6 5/8% through June 30, 2009, payable quarterly in arrears on January 31,
April 30, July 31 and October 31 of each year, commencing October 31, 1999 and
payable upon declaration thereof by the Issuer's Board of Trustees, but only to
the extent of the Issuer's tax-exempt income (net of expenses) for the
particular quarter ("Quarterly Net Income"). The Series A Cumulative Preferred
Shares are subject to mandatory tender by the holders thereof for remarketing
and purchase on June 30, 2009 and each remarketing date thereafter at a price
equal to the $2,000,000 per share plus, to the extent of the Issuer's Quarterly
Net Income, an amount equal to all distributions accrued but unpaid on the
Series A Cumulative Preferred Shares. Since inception, all quarterly
distributions have been declared at an annualized rate of 6 5/8% and all
distributions due have been paid.
Holders of the Series A Cumulative Preferred Shares may elect to retain their
shares upon a remarketing, with a distribution rate to be determined immediately
prior to the remarketing date by the remarketing agent. Each holder of the
Series A Cumulative Preferred Shares will be required to tender its shares to
the Issuer for mandatory repurchase on June 30, 2049, unless the Issuer decides
to remarket the shares on such date. The Issuer may not redeem the Series A
Cumulative Preferred Shares before June 30, 2009. After that date, all or a
portion of the shares may be redeemed, subject to certain conditions. The Series
A Cumulative Preferred Shares are not convertible into common shares of the
Issuer or Shares of the Company.
The Series A Cumulative Preferred Shares rank, with respect to payment of
distributions and amounts upon liquidation, dissolution or winding-up of the
Issuer, senior to all classes or series of common shares of the Issuer and
therefore, of the Company.
(iii) CONVERTIBLE PREFERRED SHARES
On May 10, 2000, the Company completed a $27,496,980 private placement ( the
"Convertible Preferred Offering") of convertible preferred shares (the
"Convertible Preferred Shares") to three financial institutions (1,946,000
Convertible Preferred Shares priced at $14.13 per share). The Company in-
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curred an Initial Purchasers' Discount of $1,109,220 and other related costs
of $512,863 resulting in net proceeds of $25,580,217.
The Convertible Preferred Offering enables financial institutions to receive
certain regulatory benefits in connection with their investment. Other than for
this regulatory benefit feature, the Convertible Preferred Shares are
economically similar to Common Shares. The Company has developed a proprietary
method for specially allocating these regulatory benefits to specific financial
institutions that invest in the Convertible Preferred Shares. In addition to the
preferred allocation of regulatory benefits, the preferred investors receive the
same economic benefits as common shareholders of the Company. The preferred
investors, at their option, have the ability to convert their Convertible
Preferred Shares into common shares at a predetermined conversion price of
$15.33 per common share which represents the Company's book value per common
shares as of December 31, 1999. Upon conversion, the preferred investors will no
longer be entitled to a special allocation of the regulatory benefit.
The Company expects to 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 Convertible Preferred Shares.
While the Company expects that these future offerings will be a source of
liquidity, it is only one of many sources of potential liquidity. Furthermore,
there is no assurance that the Company will be able to consummate such
transactions or the price or terms on which the offering may be consummated. If
the federal regulatory agencies which monitor these regulatory benefits were to
determine that an investment in the Convertible Preferred Shares did not result
in the financial institutions being able to receive these regulatory benefits,
the Company would lose this potential source of liquidity.
(iv) SECURITIZATION TRANSACTIONS
To raise additional capital to acquire additional FMBs, the Company has
securitized certain FMBs through the Merrill Lynch Pierce Fenner & Smith
Incorporated ("Merrill Lynch") P-FLOATS/RITES program. Under this program, the
Company transfers certain FMBs to Merrill Lynch. Merrill Lynch then deposits
each FMB into an individual special purpose trust created to hold such asset,
together with a Credit Enhancement Guarantee ("Guarantee"). Two types of
securities are then issued by each trust, evidencing ownership in the FMBs and
the Guarantee: (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 by the Remarketing Agent, Merrill Lynch, to result in the sale of the
P-FLOAT security at par (up to 99% of the underlying face amount of the FMB);
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 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 FMBs from the trust. When the FMBs 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 FMBs from local issuers, deposit them in the
trust, sell the P-FLOAT security to qualified investors and then the RITES to
the Company.
During the period May 1999 through December 1999, the Company transferred ten
FMBs with an aggregate face amount of $82,219,500 to Merrill Lynch through the
Merrill Lynch P-FLOATS/RITES program and received proceeds of $80,769,616. The
amortized cost basis of these FMB's at June 30, 2000 was $80,719,580.
During June 1999, Merrill Lynch purchased three FMBs with an aggregate face
amount of $22,430,000. The FMBs were placed into a trust by Merrill Lynch
whereby P-FLOATS and RITES
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were sold. The Company purchased the related RITES interests with an aggregate
face amount of $15,000 for an aggregate purchase price of $579,118 which
includes bond selection and other transaction costs.
In order to facilitate the securitizations, the Company has pledged certain
additional FMBs, cash and cash equivalents and temporary investments as
collateral for the benefit of the credit enhancer or liquidity provider. At June
30, 2000, the total carrying amount of such additional FMBs, cash and cash
equivalents and temporary investments pledged as collateral was $90,523,000,
$1,932,442 and $30,355,000, respectively.
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 4.9%,
annualized, for the six months ended June 30, 2000.
ACQUISITIONS
During the period January 1, 2000 through August 11, 2000, the Company acquired
twenty FMBs for an aggregate purchase price of approximately $129,068,000, not
including bond selection fees and expenses of approximately $2,581,000. In
addition the Company fully funded approximately $4,690,000 of the remaining
balance of the Casa Ramon FMB. The purchases were financed by the TOP and
securitization transactions. Three of the FMBs are taxable FMBs acquired in
connection with the purchase of tax-exempt FMBs.
PROPOSED 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 a
merger agreement pursuant to which ATEBT would merge with and into CM Holding
Trust, a wholly-owned subsidiary of the Company. Following the merger, CM
Holding Trust would continue to be a wholly-owned subsidiary of the Company.
ATEBT is a Delaware business trust which owns four tax-exempt first mortgage
bonds and had total assets of approximately $26,691,000 and net assets of
approximately $25,262,000 at June 30, 2000. The four tax-exempt first mortgage
bonds have an aggregate outstanding loan balance of $23,775,000 at June 30,
2000, have interest rates of 9% and have underlying properties located in
different states.
Under the terms of the merger agreement, each share of beneficial ownership in
ATEBT outstanding on the effective date of the proposed merger (1,501,481 shares
at June 30, 2000) will be converted into the right to receive 1.43112 Shares of
the Company. In addition, the manager of ATEBT (which owns a 1% interest in
ATEBT not currently represented by ATEBT shares) will receive 21,156 shares of
the Company. Following the merger, current ATEBT shareholders will own
approximately 9.3% of the outstanding Shares of the Company.
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Consummation of the merger is subject to several conditions, including approval
by ATEBT shareholders. In addition, either entity has the ability to opt out of
the transaction if the 30-day average trading price of the Company's Shares
preceding the closing of the transaction is outside of the Company's historical
trading range of $11.13 to $14.50. Subject to ATEBT shareholder approval, the
Company and ATEBT expect that this transaction will close during the third
quarter of 2000.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2000 as compared to 1999, total
revenues, total expenses and net income increased due to the net result of the
acquisition of 28 FMBs during 2000 and 1999, and the repayment of two of three
FMBs repaid during 1999.
Interest income from FMBs increased approximately $3,974,000 and $7,258,000 for
the three and six months ended June 30, 2000 as compared to 1999. An increase of
$6,544,000 was due to the acquisition of 28 FMBs during 2000 and 1999 (the "2000
and 1999 Acquisitions") and a decrease of $489,000 was due to the repayment of
two of the three FMBs repaid during 1999 (the "1999 Repayments"). Excluding the
above increase and decrease, interest income from FMBs increased approximately
12% and 11% for the three and six months ended June 30, 2000 as compared to
1999. The increase was primarily due to the receipt of participating interest
from the Sunset Creek, Sunset Village, Sunset Downs, Sunset Terrace FMBs and
receipt of deferred Base interest relating to prior periods with respect to the
Pelican Cove FMB partially offset by a decrease in interest income from the
Cypress Run FMB.
Interest income from other bond related investments in the amount of
approximately $80,000 and $200,000 was recorded for the three and six months
ended June 30, 2000 relating to three RITES purchased in June 1999.
Interest income from temporary investments increased approximately $501,000 and
$866,000 for the three and six months ended June 30, 2000 as compared to 1999
primarily due to cash pledged as collateral in 2000 relating to securitization
transactions.
Interest income from promissory notes increased approximately $74,000 and
$151,000 for the three and six months ended June 30, 2000 as compared to 1999
primarily due to a loan made to the obligor of the Country Lake FMB in November
1999.
Interest expense increased approximately $698,000 and $1,604,000 for the three
and six months ended June 30, 2000 as compared to 1999 primarily due to
increases in secured borrowings during the period May 1999 through December
1999.
Recurring fees relating to the Private Label Tender Option program increased
approximately $181,000 and $288,000 for the three and six months ended June 30,
2000 as compared to 1999 primarily due to a higher outstanding balance of the
TOP in 2000.
Loan servicing and asset management fees increased approximately $122,000 and
$231,000 for the three and six months ended June 30, 2000 as compared to 1999
primarily due to an increase of $142,000 and $260,000 and a decrease of $23,000
and $34,000 relating to the 2000 and 1999 Acquisitions and the 1999 Repayments,
respectively.
General and administrative expenses increased approximately $130,000 and
$243,000 for the three and six months ended June 30, 2000 as compared to 1999
primarily due to an increase in public relations
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expenses, a loss on disposal of the Avalon Court RITE, an increase in other fees
and an increase in expense reimbursements to the Manager and its affiliates due
to the 2000 and 1999 Acquisitions.
Amortization increased approximately $40,000 for the three months ended June 30,
2000 as compared to 1999 primarily due to an increase in amortization of
deferred costs relating to the TOP and deferred costs relating to the issuance
of preferred shares of subsidiary.
A loss on repayment of one FMB in the amount of approximately $25,000 was
recorded for the six months ended June 30, 1999.
Income allocated to preferred shareholders of subsidiary for the three and six
months ended June 30, 2000 relates to the Preferred Offering executed on June
29, 1999.
Minority interest in income of subsidiary increased approximately $1,309,000 and
$1,874,000 for the three and six months ended June 30, 2000 as compared to 1999
primarily due to a higher outstanding balance of the TOP in 2000.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the availability and creditworthiness of prospective tenants,
lease rents and the terms and availability of financing; 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.
The FMBs 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, primarily Bond Market Association ("BMA") and are re-set weekly.
Thus, an increase in market interest rates would result in increased payments
under these financing programs, without a corresponding increase in cash flows
from the investments in FMBs. For example, based on the $330,719,580 outstanding
under these financing programs at June 30, 2000, the Company estimates that an
increase of 0.5% in the BMA rate would decrease the Company's annual net income
by approximately $1,654,000; a 1.0% increase in BMA would decrease annual net
income by approximately $3,308,000. For the same reasons, a decrease in market
interest rates would
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generally benefit the Company, as a result of decreased allocations to the
minority interest and interest expense without corresponding decreases in
interest received on the FMBs, in the same amounts as described above. During
June of 1999, a subsidiary of the Company completed a $90 million Preferred
Offering. These preferred shares carry a fixed dividend rate of 6 5/8% through
June 30, 2009, and so are not impacted by changes in market interest rates.
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. Although management has not engaged in any of these hedging
strategies in the past, it may do so in the future, depending on management's
analysis of the interest rate environment and the costs and risks of such
strategies.
Changes in market interest rates would also impact the estimated fair value of
the Company's portfolio of FMBs. The Company estimates the fair value for each
FMB 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 FMBs
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 FMBs from its June 30,
2000 value of $654,058,000 to approximately $577,473,000. A 1% decline in
interest rates would increase the value of the June 30, 2000 portfolio to
approximately $754,370,000. Changes in the estimated fair value of the FMBs 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.
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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
On May 10, 2000, the Company completed a private placement ( the
"Convertible Preferred Offering") of $27,496,980 convertible preferred
shares (the "Convertible Preferred Shares") to three financial
institutions (1,946,000 Convertible Preferred Shares priced at $14.13
per share). The Company incurred an Initial Purchasers' Discount of
$1,109,220 and the other related costs of $512,863 resulting in the
net proceeds of $25,874,897, prior to the declaration of dividends of
$294,680. The Convertible Preferred Offering enables 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 Preferred Shares. In
addition to the preferred allocation of regulatory benefits, the
preferred investors will receive the same economic benefits as common
shareholders of the Company. The preferred investors, at their option,
have the ability to convert their Convertible Preferred Shares into
Shares of the Company's common stock at a predetermined conversion
price of $15.33 per Share which represents the Company's book value
per Share as of December 31, 1999. Upon conversion, the preferred
investors will no longer be entitled to retain their preferential
regulatory benefits.
The Company expects to 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 Convertible Preferred Shares. While the Company expects that these
future offerings will be a source of liquidity, it is only one of many
sources of potential liquidity. Furthermore, you should be aware, that
there is no assurance that the Company will be able to consummate such
transactions or the price or terms on which the offering may be
consummated. Of course, in the federal regulatory agencies which
monitor these regulatory benefits were to determine that an investment
in the Convertible Preferred Shares did not result in the financial
institutions being able to receive these regulatory benefits, the
Company would lose this potential source of liquidity.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
John B. Roche ceased to serve as Chief Financial Officer effective May
15, 2000. Alan P. Hirmes was appointed interim Chief Financial Officer
effective May 15, 2000. Michael I. Wirth has been appointed to the
position of Chief Financial Officer and will replace Alan P. Hirmes
effective August 16, 2000.
Effective May 3, 2000, the Company implemented a dividend reinvestment
and share repurchase plan (the "Plan"). Under the Plan, common
shareholders may elect to have
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their distributions from the Company automatically reinvested in
additional 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 Shares through quarterly voluntary cash payments
with a minimum contribution of $500. There are no commissions for
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 will begin with the
distributions paid in August 2000. In order to participate in the
"voluntary share purchase" part of the Plan, a shareholder must
participate in the "dividend reinvestment" part of the Plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during this quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: August 13, 2000 By:/s/ Stuart J. Boesky
-------------------------------
Stuart J. Boesky
Managing Trustee, President
and Chief Executive Officer
Date: August 13, 2000 By:/s/ Alan P. Hirmes
-------------------------------
Alan P. Hirmes
Interim Chief Financial Officer
