SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
--------------------------------------
Shares of Beneficial Interest
Name of each exchange on which registered:
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American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of June 28, 2002 was
$729,517,070, based on a price of $17.88 per share, the closing sales price for
the Registrant's shares of beneficial interest on the American Stock Exchange on
that date.
As of March 27, 2003 there were 41,220,138 outstanding shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
Part IV: Definitive proxy statement for the 2003 Annual Meeting of Shareholders,
to be file pursuant to Regulation 14A.
Index to exhibits may be found on page 90
Page 1 of 106
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
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PART I
Item 1. Business
General
Charter Municipal Mortgage Acceptance Company ("CharterMac"), along with its
consolidated subsidiaries (the "Company"), is a Delaware business trust
principally engaged in the acquisition and ownership (directly and indirectly)
of tax-exempt multi-family housing revenue bonds ("Revenue Bonds") and other
investments that produce tax-exempt income, issued by various state or local
governments, agencies, or authorities. Revenue Bonds are primarily secured by
participating and non-participating first mortgage loans on underlying
properties ("Underlying Properties"). The Company believes that it can earn
above market rates of interest on its Revenue Bond acquisitions by focusing its
efforts primarily on affordable housing. The Company utilizes the services and
advice of two managers, Charter Mac Corporation, the Company's wholly-owned
subsidiary and Related Charter L.P. (collectively the "Manager") which is an
affiliate of Related Capital Company ("Related"), a nationwide fully integrated
real estate services firm, to operate its day-to-day activities and advise it on
the selection and underwriting of investments. The Manager estimates that nearly
30% of all new multi-family housing development contains an affordable component
which produces tax credits pursuant to Section 42 of the Internal Revenue Code.
In addition, the Company believes it can earn above market rates of interest via
its "Direct Purchase Program". The traditional methods of financing affordable
housing with tax-exempt Revenue Bonds are complex and time consuming, and
involve the participation of many intermediaries. This process has been
streamlined with the Direct Purchase Program. The Company's Direct Purchase
Program removes all intermediaries from the financing process (except the
governmental issuer of the Revenue Bond) and enables developers to deal directly
with one source. Because the Company purchases its Revenue Bonds directly from
the governmental issuer, the need for underwriters and their counsel, rating
agencies and costly documentation is eliminated. This reduces the financing life
cycle, often by several months, and also reduces the bond issuance costs,
usually by 30% or more. In dealing directly with the Company, developers feel
more certain about the terms and timing of their financing. The Company believes
the savings in time and up-front costs and the certainty of execution that the
Direct Purchase Program offers to developers allows the Company to receive
above-market rates of interest on the Company's Revenue Bonds.
The Company believes that it is well positioned to market its Direct Purchase
Program as a result of the Manager's affiliation with Related, because the
Manager is able to utilize Related's resources and relationships in the
multi-family affordable housing finance industry to source potential borrowers
of Revenue Bonds. Related and its predecessor companies have specialized in
offering debt and equity products to mid-market multi-family owners and
developers for over 30 years.
Corporate Strategy
The Company focuses on providing shareholders with a stable investment by, in
part, operating at relatively low levels of leverage. The Company chose not to
operate as a mortgage REIT, which typically have leverage ratios ranging from
3:1 to 10:1. Pursuant to the Company's Trust Agreement, the Company is only able
to incur leverage or other financing up to 50% of its Total Market Value (as
defined in the Trust Agreement).
Adding to the Company's overall stability is the fact the Revenue Bond
investments carry fixed interest rates and, generally, can not be repaid before
ten years, without substantial repayment penalties. This significantly reduces
the risk of repayment in markets where interest rates are declining.
The Company has sought to keep as much of the income, passed through to the
shareholders, tax-exempt, by investing mostly in tax-exempt Revenue Bonds. The
Company has begun to guarantee third party mortgage loans and tax credit yields,
through Charter Mac Corporation ("CM Corp."), its wholly-owned taxable
subsidiary. While these new lines of business will increase the Company's
taxable revenues, the Company is able to reduce taxable income by deducting
certain expenses which qualify for income tax purposes.
Proposed Acquisition of Related Capital Company
On January 14, 2002, the Company announced that its Board of Trustees had formed
a special committee to explore strategic alternatives for the Company's future
management structure, including internalization of management, and ways to
further diversify the Company's revenue sources. The special committee consists
of the independent members of the Board of Trustees, Peter T. Allen, Arthur P.
Fisch and Charles L. Edson. On December 18, 2002, the Company announced it had
entered into an agreement to acquire 100% of the ownership interests in and
substantially all of the businesses operated by Related. The acquisition will
enable the Company to terminate its outside management agreement with the
Manager and to become an internally-managed company.
Acquisition Terms
The acquisition will be structured so that the ownership interests held by the
Related principals in both Related and the other entities which control other
aspects of Related's business will be contributed into a newly-formed,
wholly-owned subsidiary of CharterMac (the "CharterMac Sub"). The selling
principals of Related include the four executive managing partners (Stuart J.
Boesky, Alan P. Hirmes, Marc D. Schnitzer and Denise L. Kiley) and an affiliate
of The Related Companies, L.P. ("TRCLP"), which is majority owned by Stephen M.
Ross (the "Related Principals"). Messrs. Boesky, Hirmes and Schnitzer and Ms.
Kiley have managed RCC over the past 15 years.
CharterMac will pay total consideration to the Related Principals of up to $338
million. The consideration will be paid as follows:
o The Initial Payment - $210 million consisting of $160 million in
special common units of the CharterMac Sub ("SCUs") and $50
million in cash (with the cash position being paid only to
TRCLP). The Initial Payment SCUs will be issued at $17.78 per
unit, which was the average closing price of CharterMac Common
Shares, for the 30 calendar days prior to this announcement (the
"Initial Payment SCUs");
o The Contingent Payment - Up to $128 million of additional SCUs
(the "Contingent Payment SCUs"), following the determination of
Related's adjusted audited earnings before interest, taxes,
depreciation and amortization, as well as certain other
adjustments, for the year ending December 31, 2002 ("Adjusted
Earnings"). The Contingent Payment SCUs will be issued in an
amount equal to 7.73x RCC 2002 Adjusted Earnings minus $210
million, subject to a cap of $338 million of total consideration.
The Contingent Payment SCUs are expected to be issued at the same
price as the Initial Payment SCUs, subject to a 17.5% symmetrical
collar.
In connection with the acquisition, CharterMac will establish a restricted share
program and will broadly issue to employees of Related, other than the Related
Principals, $15 million of CharterMac Common Shares. Following the completion of
the acquisition, TRCLP's economic interest in CharterMac will equal
approximately 19% and management and Related employees' economic interest in
CharterMac will equal approximately 11%.
On February 28, 2003, the Company filed a preliminary proxy regarding this
proposed acquisition.
The Predecessor
CharterMac was formed on October 1, 1997 as the result of the merger (the
"Merger") of three publicly registered limited partnerships: Summit Tax Exempt
Bond Fund, L.P., Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III (the
"Partnerships"). One of the general partners of the Partnerships was an
affiliate of Related. Pursuant to the Merger, CharterMac issued common shares of
beneficial interest ("Common Shares") to all partners in each of the
Partnerships in exchange for their proportionate interests. The Common Shares
commenced trading on the American Stock Exchange on October 1, 1997 under the
symbol "CHC."
-3-
Significant Subsidiaries
CharterMac Equity Issuer Trust
In 1999, CharterMac created CharterMac Equity Issuer Trust, a wholly-owned
subsidiary, (collectively, with its subsidiaries, "Equity Issuer") which holds a
substantial portion of the Company's Revenue Bonds. From time to time, Equity
Issuer may issue Series A and Series B Cumulative Preferred Shares
(cumulatively, "Preferred Shares") to institutional investors. The Preferred
Shares have a senior claim to the tax-exempt income derived from the investments
owned by Equity Issuer. Any income in Equity Issuer after the payment of the
cumulative distributions on its Preferred Shares, and after the fulfillment of
certain covenants, may then be allocated to CharterMac. The assets of Equity
Issuer, while included in the consolidated financial statements of the Company,
are legally owned by Equity Issuer and are not available to any creditors of the
Company outside of Equity Issuer.
CharterMac Corporation
In July 2001, the Company formed CM Corp. as a wholly-owned, consolidated
taxable subsidiary to help the Company more efficiently manage its taxable
business. CM Corp. allows the Company to better diversify its business lines to
include, among other things, mortgage origination and servicing on behalf of
third parties and guaranteeing mortgage loans for a fee. CM Corp. will conduct
most of the Company's taxable business, including any fee-generating activities
in which the Company may engage and provide management services to CharterMac
and its other subsidiaries. CM Corp. isolates a substantial portion of the
taxable income and expenses of the Company. Unlike CharterMac, CM Corp. is a
corporation which is subject to both Federal and State income tax. Any
distributions of net income from CM Corp. to CharterMac are taxable and are
passed through to the shareholders of CharterMac in its dividend.
PW Funding, Inc.
In December 2001, the Company, through CM Corp. acquired 80% of the outstanding
capital stock of PW Funding, Inc. and its subsidiaries ("PWF"), for
approximately $34.9 million, of which, approximately $21.6 million was financed
and $7.6 million was paid in cash. Additionally, the Company repaid a $5.7
million loan on behalf of PWF. It is anticipated that CM Corp. will acquire the
remaining 20% of the issued and outstanding capital stock of PWF over the next
12 to 24 months. Under the acquisition agreement, the stockholders of PWF were
granted the right to put their remaining 20% stock interest to CM Corp. after an
initial period of 24 to 36 months. The agreement also grants CM Corp. the right
to call the remaining 20% stock interest of PWF from PWF's stockholders after
the same initial period of 24 to 36 months. During the year ended December 31,
2002 and the three months ended March 31, 2003, the Company, pursuant to the
original acquisition agreement, paid approximately $3.6 million in "true-up"
payments representing payments due to the original PWF stockholders. These
true-up payments were based on i) the increase in the value of servicing rights
due to certain loans closing, ii) positive changes between the audited balance
sheet used for the initial purchase price and the audited balance sheet at
December 31, 2001, iii) payments of certain servicing fees, and iv) forward
conversions of loans previously committed. The acquisition agreement stipulates
additional true-up payments to be made periodically for a period of up to three
years from the acquisition date.
PWF is a national mortgage-banking firm which specializes in providing financing
and ancillary services to the multi-family housing industry, including
construction and permanent debt financing, mortgage loan servicing and asset
management. Founded in 1971, PWF became one of the original Federal National
Mortgage Association ("Fannie Mae") Delegated Underwriter and Servicers ("DUS")
and is a Federal Housing Administration ("FHA") approved mortgagor. In 2000, PWF
joined a select group of Federal Home Loan Mortgage Corporation ("Freddie Mac")
Program Plus lenders through the acquisition of Larson Financial Resources, Inc.
("Larson").
Since 1988, PWF has originated more than $2.8 billion in Fannie Mae loans and
currently services a $3.2 billion loan portfolio including about $1.8 billion in
Fannie Mae DUS loans, $337.2 million in FHA loans, and $548.3 million in Freddie
Mac loans. PWF and its subsidiaries provide a full range of financing services
to the conventional multi-family market and complements CharterMac's principal
business in the acquisition of tax-exempt affordable housing Revenue Bonds.
CharterMac is entitled to a cumulative preferential distribution from PWF's cash
available for distribution equal to 10% of its invested capital. The remaining
cash available for distribution will be distributed approximately 80% to
CharterMac and 20% to the other stockholders. CharterMac will also be entitled
to an additional cumulative priority return equal to 4.3% of its invested
capital prior to the purchase payments to PWF's stockholders on exercise of the
put or call options. The fee income generated by PWF is taxable income, which is
partially offset by tax-deductible expenses incurred by CM Corp.
Governance
The Company is governed by a board of trustees comprised of three independent
managing trustees and five managing trustees who are affiliated with Related.
The Company utilizes the services and advice provided by CM Corp. and the
Manager to operate its day-to-day activities and advise on the selection and
underwriting of investments. CM Corp. and the Manager provide these services
pursuant to management agreements between (i) CM Corp. and/or Related Charter LP
and CharterMac, and (ii) CM Corp. and each of the Company's subsidiaries. The
Manager has subcontracted its obligations under the management agreements to
Related and uses Related's resources and real estate and investment expertise to
advise the Company and provide it with services with a core group of experienced
staff and executive management. These services include, among other things,
acquisition, accounting, tax, capital markets, asset monitoring, portfolio
management, investor relations and public relations services.
-4-
Business Plan
The Company focuses its efforts on investing in Revenue Bonds that are secured
by multi-family affordable housing properties. Through PWF, the Company focuses
on originating and servicing multi-family mortgage loans on behalf of Government
Sponsored Enterprises ("GSEs") and government agencies such as Fannie Mae and
Freddie Mac and the FHA. Together, these components offer a full range of debt
capital solutions to developers of affordable and market rate multi-family
housing.
Investing in Tax-Exempt Revenue Bonds
The Company's primary business is investing in tax-exempt Revenue Bonds secured
by multi-family affordable housing properties. The Company has been successful,
using its Direct Purchase Program, in achieving above market interest rates on
its investments in Revenue Bonds, and the Manager believes this continues to be
a viable business model.
In addition to investing in tax-exempt Revenue Bonds secured by multi-family
properties producing tax credits, the Company may acquire other multi-family
tax-exempt bonds including those issued to finance affordable multi-family
projects and facilities for the elderly owned by Section 501(c)(3)
not-for-profit organizations. A portion of assets of the Company produce a small
amount of taxable income.
Credit Enhancement and Yield Guarantee Transactions
Through CM Corp., the Company has begun guaranteeing third party mortgage loans
and tax credit yields for a fee. In 2001, the Company executed its first
mortgage loan credit enhancement transaction. In 2002 the Company entered into
two transactions whereby it guaranteed an agreed upon internal rate of return
(IRR), for a pool of 11 properties owned by Related Capital Guaranteed Corporate
Partners II LP (RCGCP), an investment fund sponsored by Related, an affiliate of
the Manager. In such transactions, the Company will generally receive a
guarantee fee in return for guaranteeing an agreed upon IRR. The Company expects
to be able to selectively grow the value of this new fee business over time.
CMBS Investment
The Company owns 739,741 preferred equity units of ARCap Investors, L.L.C.
("ARCap"), with a face amount of $25 per unit, representing a 6.73% ownership
and voting interest. The preferred equity units are convertible, at the
Company's option, into ARCap common units. If converted into common units, the
conversion price is equivalent to $25 per unit, subject to certain adjustments.
Also, if not already converted, for a period of sixty days following the fifth
anniversary of the first closing date, which will be August 4, 2005, the
preferred equity units are convertible, at the Company's option, into a
three-year note bearing interest at 12% that would be junior to all of ARCap's
then existing indebtedness. The preferred equity units are also redeemable, at
the option of ARCap, up until the fifth anniversary of the first closing date.
As of December 31, 2002, ARCap had approximately $823 million in assets,
including investments of approximately $799 million of CMBS. Approximately
one-third of ARCap's CMBS are secured by multi-family properties.
Business Segments
As a result of the December 2001 acquisition of PWF, the Company has two
reportable business segments: an investing segment and an operating segment.
The investing segment consists of subsidiaries holding investments in Revenue
Bonds producing primarily tax-exempt interest income.
The operating segment generates taxable interest and fee income. Taxable
interest income is generated through the ownership of taxable bonds, certain
taxable loans and other investments. Taxable fee income includes loan
origination and loan servicing fees (through PWF) on portfolios for third
parties, fees earned and associated with the acquisition or origination of
Revenue Bonds, and fees for credit enhancement and the yield guaranty business.
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
These reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately. Segment reporting is applicable beginning with the acquisition of
PWF on December 31, 2001; prior to December 31, 2001, all of the Company's
operations were attributable to the investing segment.
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The following table provides more information regarding the Company's segments:
Year Ended December 31, 2002
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(Dollars in Thousands)
Investing Operating Total
--------- --------- -----
Revenues $ 98,208 $ 18,205 $ 116,413
Interest Revenues 94,683 3,409 98,092
Interest Expense 14,558 1,265 15,823
Depreciation and Amortization Expense 1,131 7,760 8,891
Equity in the net income of investees
accounted for by the equity method 2,219 -- 2,219
Income tax expense (benefit) (214) 1,498 1,284
Total Assets 1,729,194 123,674 1,852,868
Revenue Bonds
The Company accounts for its investments in Revenue Bonds as available-for-sale
debt securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Accordingly, the Revenue Bonds are carried at their
estimated fair values, with unrealized gains and losses reported in other
comprehensive income.
Generally, Revenue Bonds are secured by mortgage loans on Underlying Properties.
The Underlying Properties are primarily garden apartment complexes located in
major metropolitan markets in 25 states and the District of Columbia. The
following table summarizes the Company's portfolio at December 31, 2002.
Outstanding Fair Stated Occupancy Average
Balance at Value1 at Interest Rate at Rental Rate
Investments/Asset Type Units 12/31/2002 12/31/2002 Rate2 12/31/02 at 12/31/02
- -------------------------- -------- ------------ ------------- -------- --------- -----------
(Dollars in thousands)
Tax-Exempt First Mortgage Bonds
Stabilized:
Participating 3,874 $ 152,977 $ 154,440 6.9% 88.1% $711
Non-participating 10,463 414,859 445,723 7.2% 94.1% 684
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Total stabilized 14,337 567,836 600,163 7.2%
Lease-Up3 4,725 227,147 245,866 7.4%
Construction 9,779 512,668 532,669 7.0%
Rehabilitation 2,976 142,330 153,489 7.5%
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Subtotal/Weighted Average 31,817 $1,449,981 $1,532,187 7.2%
Tax-Exempt Subordinate Bonds
Stabilized 692 $ 17,000 $ 17,000 9.4%
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Taxable Bonds
First Mortgages * $ 28,368 $ 30,403 8.9%
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Total Revenue Bonds $1,495,349 $1,579,590 7.2%
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Notes:
* Not applicable to avoid duplication with Tax-Exempt First Mortgage Bonds
which are secured by the Underlying Property
1 The Revenue Bonds are deemed to be available-for-sale debt securities and,
accordingly, are carried at their estimated fair values.
2 The stated interest rate represents the weighted average coupon rates of
the Revenue Bonds, based on their face amounts at December 31, 2002.
3 Represents properties that have completed construction/rehabilitation and
have not achieved occupancy above 90% and/or debt coverage ratios of 1.10:1
or greater for three consecutive months. This lease-up definition may
differ from the definition of stabilization in individual Revenue Bond
documents.
The principal and interest payments on each Revenue Bond are payable only from
the cash flows of the Underlying Properties, including proceeds from a sale of
an Underlying Property or the refinancing of the mortgage loan securing such
Revenue Bonds (the "Mortgage Loans"). None of the Revenue Bonds constitute a
general obligation of any state or local government, agency or authority. The
structure of each Mortgage Loan mirrors the structure of the corresponding
Revenue Bond that it secures. In order to protect the tax-exempt status of the
Revenue Bonds, the owners of the Underlying Properties are required to enter
into certain agreements to own, manage and operate the Underlying Properties in
accordance with requirements of the Internal Revenue Code of 1986, as amended.
-6-
Revenue Bonds generally are not subject to optional prepayment during the first
five to ten years of the Company's ownership of the bonds and may carry
prepayment penalties thereafter generally beginning at 5% of the outstanding
principal balance, declining by 1% per annum. Certain Revenue Bonds may be
purchased at a discount from their face value. In selected circumstances and
generally only in connection with the acquisition of tax-exempt Revenue Bonds,
the Company may acquire a small amount of taxable bonds (i) which the Company
may be required to acquire in order to satisfy state regulations with respect to
the issuance of tax-exempt bonds and (ii) to fund certain costs associated with
the issuance of Revenue Bonds, that under current law cannot be funded by such
Revenue Bonds.
Modified Revenue Bonds
From time to time, the Company, as an alternative to foreclosure in the event of
default, enters into forbearance agreements and/or permanent modifications with
certain borrowers. The determination as to whether it is in the best interest of
the Company to enter into permanent modifications or forbearance agreements, to
advance second mortgages, or alternatively, to pursue its remedies under the
loan documents, including foreclosure, is based upon several factors. These
factors include, but are not limited to, Underlying Property operations and
performance, owner cooperation and projected costs of foreclosure and litigation
- - irrespective of whether or not the obligor has an affiliation with the
Manager. These modifications have generally encompassed an extension of the
maturity together with a prepayment lock out feature and/or prepayment penalties
together with an extension of the mandatory redemption feature (5-10 years from
modification). Stated interest rates have also been adjusted together with a
change in the participating interest features. Base interest rates,
participating interest, prepayment lock-outs, mandatory redemption and maturity
features are arrived at through negotiations between the Company and the owners
of the Underlying Properties and vary dependent on the facts of a particular
Revenue Bond, the owner of the Underlying Property, the Underlying Property's
performance and requirements of bond counsel and local issuers. Should
negotiations break down, the Company has the option to pursue its other remedies
including acceleration and foreclosure. The Company may agree to the
modification of other Revenue Bonds to generally reflect similar terms as those
modified previously, where and as appropriate. Significant modifications to
interest rates and maturity dates are subject to final approval of the local
issuers, bond counsel and indenture trustees. Since inception, the Company has
modified Revenue Bonds with an aggregate face amount of only $187 million.
With respect to Revenue Bonds which are subject to forbearance agreements with
their respective obligors, the difference between the stated interest rates and
the rates paid (whether deferred and payable out of available future cash flow
or, ultimately, from sale or refinancing proceeds) is not accrued for financial
statement purposes. The accrual of interest at the stated interest rate will
resume once an Underlying Property's ability to pay the stated rate has been
adequately demonstrated. Unrecorded contractual interest income was
approximately $434,500, $662,000 and $1.6 million for the years ended December
31, 2002, 2001 and 2000, respectively. Payments under each of the existing
forbearance agreements are current as of December 31, 2002.
Revenue Bonds with the Obligor as an Affiliate of the Manager
The obligors of Revenue Bonds with an aggregate original par amount of
approximately $1.1 billion are partnerships in which affiliates of the Manager
own a 1% general partner interest. In addition, the original owners of
Underlying Properties and obligors of approximately $12.2 million of Revenue
Bonds have been replaced with affiliates of the Manager who have not made equity
investments. Up to 15% of the Total Market Value of the Company (as defined in
its Trust Agreement) may be invested in Revenue Bonds secured by Underlying
Properties in which affiliates of the Manager have a controlling interest,
equity interest or security interest. The 15% limit is not applicable to
properties to which the Manager or its affiliates have taken title for the
benefit of the Company and only applies to Revenue Bonds acquired after the
Merger. These affiliate entities could have interests that do not coincide with,
and may be adverse to, the interests of the Company. Negotiations, if any, with
respect to modifications of Revenue Bonds between the Company and obligors who
are affiliates may be affected by these conflicts as the Manager determines the
appropriate terms and conditions of modifications or otherwise opts for some
other remedy including foreclosure.
The original obligor and owner of the Underlying Property of the Highpointe
Revenue Bond has been replaced with an affiliate of the Manager who has not made
an equity investment. This affiliate has assumed the day-to-day responsibilities
and obligations of the Underlying Property. A buyer is being sought for the
Underlying Property securing the Highpointe Revenue Bond. Highpointe is
generally paying as interest an amount equal to the net cash flow generated by
operations, which is less than the stated rate of the Revenue Bond. The Company
has no present intention of declaring default on this Revenue Bond. The
aggregate carrying value of Highpointe at December 31, 2002 and 2001 was
approximately $6.2 million and $5.7 million, respectively, and the income earned
from Highpointe for the years ended December 31, 2002 and 2001 was approximately
$322,000 and $315,000, respectively.
Impaired Revenue Bond
During 2002, the Company took a write down of approximately $920,000, on the
Lexington Trails Revenue Bond. This Revenue Bond initially became impaired in
the second quarter of 2001, at which time the Company took a write down of
$400,000. Subsequently, the Company caused the trustee, for the benefit of the
Company, to foreclose on the underlying property. Since the date of the
foreclosure, the Company has attempted to find a buyer for the underlying
property. Management believes it is likely that in connection with a sale of the
underlying property, the terms of this Revenue Bond may need to be modified. The
Company has therefore decided to write down the carrying value of the bond to
$4.5 million, the fair value of the Underlying Property.
-7-
Accessing Multiple Forms of Capital
In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company utilizes multiple sources of debt and equity capital. The
Company's access to multiple sources of debt and equity capital provides
financial flexibility and enables the Company to not have to rely on one single
source of capital. Further, the particular structure of each capital source has
attributes that may make it more accommodating to certain investors or more
favorably received in the then current climate of the capital markets.
The Company has collateralized debt securitizations and equity offerings to
raise capital. The most efficient and economical source of capital is
securitization. The Company has two primary securitization programs: the Private
Label Tender Option Program ("TOP") and the P-FLOATS/RITES program.
Securitizations continue to offer the lowest cost of capital, albeit with
certain covenants and leverage limits. Pursuant to its Trust Agreement, the
Company is only able to incur leverage or other financing up to 50% of the
Company's Total Market Value; this leverage restriction is generally consistent
or more conservative than leverage covenants on the Company's securitized debt.
The Company's conservative capital structure therefore requires periodic
preferred and common equity offerings to maintain leverage within required
limits.
During 2002, the Company's growth was financed by the TOP, an additional
offering of common share, two offerings of Convertible CRA Shares, preferred
share offerings by a subsidiary, and securitization transactions as well as
funds generated from operations in excess of distributions. The Company's
continued growth is expected to be financed by new issuances of Common Shares,
the TOP or similar programs, additional securitization transactions and funds
generated from operations in excess of distributions.
Public Offerings and Private Placements
In February 2002, the Company issued approximately 6.3 million Common Shares, at
$15.47 per share, raising proceeds net of underwriting discounts of
approximately $92.8 million. The Company used these proceeds to fund additional
investments in Revenue Bonds.
In July 2002, the Company issued approximately 1.4 million Convertible CRA
Shares, at $17.43 per share, raising proceeds net of underwriting discounts of
approximately $23 million. The Company used these proceeds to invest in
additional Revenue Bonds and for general Company purposes, including reduction
of the Company's indebtedness.
In November 2002, the Company completed a private placement of approximately
576,000 Convertible CRA Shares, at $17.37 per share, raising proceeds net of
underwriting discounts of approximately $9.6 million. The Company used these
proceeds to invest in additional Revenue Bonds.
Preferred Equity Issuances
One of CharterMac's subsidiaries, Equity Issuer, has issued preferred shares to
institutional investors with an aggregate liquidation preference of
approximately $273.5 million, issued as follows: $90 million in 1999, $79
million in 2000, $49.5 million in 2001 and $55 million in 2002. The Preferred
Shares are not convertible into Common Shares of Equity Issuer or the Company.
The preferred shares have an annual preferred dividend payable quarterly in
arrears, but only upon declaration thereof by Equity Issuer's board of trustees
and only to the extent of Equity Issuer's tax-exempt income (net of expenses)
for the particular quarter. Since inception, all quarterly distributions have
been declared at the stated annualized dividend rate for each respective series
and all distributions so declared have been paid. See Item 5, "Market for the
Company's Common Shares and Related Shareholder Matters" for more detailed
information.
The preferred shares issued during June 2002, consisted of 60 6.80% Series A-3
cumulative preferred shares and 50 7.20% Series B-2 subordinate cumulative
preferred shares, raising proceeds net of underwriting discounts of
approximately $53.1 million. Each of these preferred shares is subject to
mandatory repurchase in 2052 at a liquidation amount of $500,000 per share.
Private Label Tender Option Program
On May 21, 1998, the Company closed on its TOP. As of December 31, 1999, the
maximum amount of capital that could be raised under the TOP was $400 million.
On December 7, 2000, the Company refined the structure of the TOP for the
primary purpose of segregating Revenue Bonds issued by governmental entities in
California from the remainder of the Revenue Bonds under the TOP and to increase
the maximum amount of capital available under the program to $500 million.
As of December 31, 2002, the Company has contributed 83 issues of Revenue Bonds
in the aggregate outstanding bond amount of approximately $704 million to
CharterMac Origination Trust I (the "Origination Trust"), a wholly-owned,
indirect subsidiary of the Company. The Origination Trust then contributed 56 of
its Revenue Bonds, with an aggregate outstanding bond amount of approximately
$505 million, to CharterMac Owner Trust I (the "Owner Trust") which is
controlled by the Company. The Owner Trust contributes selected bonds to
specific "Series Trusts" in order to segregate Revenue Bonds issued by
governmental entities selected by state of origin. As of December 31, 2002, six
such Series Trusts had been created: two "California only" series that had 16
issues of Revenue Bonds in the aggregate outstanding bond amount of
approximately $118 million and four "National" (non-state specific) series that
had 40 issues of Revenue Bonds in the aggregate outstanding bond amount of
approximately $387 million.
Each Series Trust issues two equity certificates: (i) a Senior Certificate,
which has been deposited into another Delaware business trust (a "Certificate
Trust") which issues and sells "Floater Certificates" representing proportional
interests in the Senior Certificate to
-8-
new investors and (ii) a Residual Certificate representing the remaining
beneficial ownership interest in each Series Trust, which has been issued to the
Origination Trust. At December 31, 2002, the California only and National Series
Trusts had Floater Certificates with an outstanding amount of $115 million and
$341.5 million, respectively.
The Revenue Bonds remaining in the Origination Trust (aggregate principal amount
of approximately $199 million) are additional collateral for the Owner Trust's
obligations under the Senior Certificate. In addition, the Owner Trust obtained
a municipal bond insurance policy from MBIA to credit enhance Certificate
distributions for the benefit of the holders of the Floater Certificates and
arranged for a liquidity facility, issued by a consortium of highly-rated
European banks, with respect to the Floater Certificates. The Company owns no
beneficial interest in and does not control the Certificate Trusts.
The effect of the TOP structure is that a portion of the interest received by
the Owner Trust on the Revenue Bonds it holds is distributed through the Senior
Certificate to the holders of the Floater Certificates with the residual
interest remitted to the Origination Trust (and thus to the benefit of the
Company) via the Residual Certificate. The effect of the December 7, 2000
refinement of the TOP structure was to segregate the California-related Floater
Certificates as they generally will pay distributions at lower rates than
National (non-state specific) Floater Certificates and thus the yield on the
Residual Certificates owned by the Origination Trust is increased.
The Company's cost of funds relating to the TOP (calculated as interest expense
plus recurring fees as a percentage of the weighted average amount of the
outstanding Senior Certificate) was approximately 2.4%, 3.5% and 5.4% for the
years ended December 31, 2002, 2001 and 2000, respectively before the effects of
hedging.
P-FLOATs/RITES
Another source of financing for the Company's investments is the securitization
of selected Revenue Bonds through the Merrill Lynch Pierce Fenner & Smith
Incorporated ("Merrill Lynch") P-FLOATS/RITES program. Merrill Lynch deposits
each Revenue Bond into an individual special purpose trust together with a
Credit Enhancement Guarantee ("Guarantee"). Two types of securities are then
issued by each trust, (1) Puttable Floating Option Tax-Exempt Receipts
("P-FLOATS"), a short-term senior security which bears interest at a floating
rate that is reset weekly and (2) Residual Interest Tax Exempt Securities
("RITES"), a subordinate security which receives the residual interest payment
after payment of P-FLOAT interest and ongoing transaction fees. The P-FLOATS are
sold to qualified third party, tax-exempt investors and the RITES are generally
sold back to the Company. The Company has the right, with 14 days notice to the
trustee, to purchase the outstanding P-FLOATS and to withdraw the underlying
Revenue Bonds from the trust. When the Revenue Bonds are deposited into the
P-FLOAT Trust, the Company receives the proceeds from the sale of the P-FLOATS
less certain transaction costs. In certain other cases, Merrill Lynch may
directly buy the Revenue Bonds from local issuers, deposit them in the trust,
sell the P-FLOAT security to qualified investors and then sell the RITES to the
Company.
In order to facilitate the securitization under the P-FLOATS program, the
Company has pledged certain additional Revenue Bonds, cash and cash equivalents
and temporary investments as collateral for the benefit of the credit enhancer,
Merrill Lynch. At December 31, 2002, the total par amount of such additional
Revenue Bonds, cash and cash equivalents and temporary investments pledged as
collateral was approximately $180 million.
During the year 2002, the Company transferred six Revenue Bonds with an
aggregate par amount of approximately $91 million to the P-FLOATS/RITES program
and received proceeds of approximately $90.7 million. Additionally, the Company
repurchased eight Revenue Bonds with an aggregate par value of approximately $67
million.
The Company's cost of funds relating to its secured borrowings under the Merrill
Lynch P-FLOATS/RITES program (calculated as interest expense as a percentage of
the weighted average amount of the secured borrowings) was approximately 2.4%,
3.7% and 5.0%, for the years ended December 31, 2002, 2001 and 2000,
respectively before the effects of hedging.
Other Debt
In conjunction with the acquisition of PW Funding, the Company, through its
subsidiary CM Corp., borrowed approximately $27.3 million ("the PWF Acquisition
Loan"). CM Corp. may request a resizing of the loan, up to the maximum facility
size of $40 million, in order to generate additional funding ("Final Advance")
that may be required in connection with CM Corp.'s acquisitions of the remaining
20% stock ownership of PWF. The Final Advance would equal the lesser of 100% of
the cost of the remaining 20% equity interests of PWF or an amount that
represents an overall maximum advance of 75% of the value of the PWF mortgage
servicing portfolio at the time of the Final Advance.
The PWF Acquisition Loan has a term of five years with an interest rate of LIBOR
plus 2.25%. The loan was interest only for the first twelve months. Beginning in
January 2003 and through the remaining loan term, quarterly straight-line
principal amortization on the Initial Advance is paid based on a ten-year
amortization period. Additionally, after receiving the Final Advance, additional
quarterly straight-line principal amortization payments on the Final Advance
will be made based on the remaining years of the amortization period for the
Initial Advance.
PWF established a $100 million secured, revolving mortgage warehouse facility in
December 2001, subject to annual renewal during December of each year. CM Corp.
is a guarantor of this warehouse facility. The interest rate for each warehouse
advance is the federal funds rate plus 125 basis points. The interest rate as of
December 31, 2002 was 2.48%. At December 31, 2002, PWF had out-
-9-
standing borrowings under the facility of approximately $41.3 million. At
December 31, 2002, the Company was in compliance with all covenants of the
facility.
The $100 million facility replaced PWF's $50 million multi-family revolving
warehouse facility, which expired on May 31, 2002. At December 31, 2001, the $50
million facility had outstanding borrowings of $29.3 million at an interest rate
of 30-day LIBOR plus 1.00%, which at December 31, 2001, was 4.0%. Borrowings
under the $50 million facility were collateralized by PWF's ownership interests
in the original mortgage notes. At December 31, 2001, PWF was in compliance with
all covenants of the $50 million facility. This facility was repaid during the
first quarter of 2002.
PWF was the guarantor for a $35 million loan and security agreement for Larson,
which expired on May 31, 2002. The interest rate for the agreement was the lower
of 30 day LIBOR plus 209 basis points or the 30-day Treasury Bill rate plus 205
basis points. At December 31, 2001, there were no outstanding borrowings under
the agreement.
Competition
The Company, from time to time, may be in competition with private investors,
regional investment banks, mortgage banking companies, lending institutions,
quasi-governmental agencies such as Fannie Mae and Freddie Mac, trust funds,
mutual funds, domestic and foreign credit enhancers, bond insurers, investment
partnerships and other entities with objectives similar to the Company. Although
the Company operates in a competitive environment, competitors focused on
providing tax-exempt financing on multifamily housing consistent with the
Company's custom-designed programs are relatively few.
The Company's business is also affected by competition to the extent that the
Underlying Properties from which it derives interest and, ultimately, principal
payments may be subject to competition relating to rental rates and relative
levels of amenities from those offered by comparable neighboring properties. See
the comprehensive table under the heading "Revenue Bonds - Characteristics",
above, for additional competitive information.
In addition, through PWF, the Company is also in competition with 25 other
licensed DUS lenders which originate multi-family mortgages on behalf of Fannie
Mae. However, PWF through its affiliation with the Company, is better positioned
to offer a full range of financing programs on both affordable and market-rate
multi-family housing. PWF's origination groups are able to cross market the
Company's tax-exempt Revenue Bonds and Related Capital's Low Income Tax Credit
equity with its loan products, thereby offering developers a single, streamlined
execution.
The Manager and/or its affiliates have formed, and may continue to form, various
entities to engage in businesses that may be competitive with the Company. At
this time, there is no other such business that has a tax-exempt execution.
However, the Company's relationship with the Manager and its affiliates offers
developers different products for all their financing needs, including
pre-development loans, bridge loans and Low Income Housing Tax Credit Equity.
These "Capital Solutions" enable developers to have a single, streamlined
process, which reduces the time and cost of financing. As a result, the savings
in time and up-front costs and the certainty of execution that the Company
offers developers enables the Company to receive above-market rates of interest
on our Revenue Bonds.
Employees
CharterMac and each of its subsidiaries have entered into separate management
agreements with Related Charter L.P. and/or CM Corp. pursuant to which they
provide each respective entity with investment advice, portfolio management, and
all other services vital to such entity's operations.
Prior to the acquisition of PWF in December 2001, the Company had no employees.
PWF, which is a subsidiary of CM Corp., operates as a stand-alone entity and is
actively self-managed with its own employees. Thus on a consolidated basis, the
Company had 69 employees as of December 31, 2002. These employees are not a
party to any collective bargaining agreement.
Regulatory Matters
Neither CharterMac nor its subsidiaries are registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Company
would not be able to conduct its activities as it currently conducts them if it
was required to register.
CharterMac at all times intends to conduct its, and those of its subsidiaries'
activities, so as not to become regulated as an "investment company" under the
Investment Company Act. While CharterMac is not an "investment company" under
the Investment Company Act, if one of CharterMac's subsidiaries were deemed to
be an "investment company," CharterMac could also be subject to regulation under
the Investment Company Act. There are a number of exemptions from registration
under the Investment Company Act that CharterMac believes applies to it and its
subsidiaries, and which CharterMac believes make it possible for the Company not
to be subject to registration under the Investment Company Act.
Additional information about the Company is also available at
www.chartermac.com.
-10-
Item 2. Properties
The Company leases office space as follows (See Note 15 - Commitments and
Contingencies of Item 8. Financial Statements and Supplementary Data):
Mineola, New York. In 1997, PWF entered into a 10 year, 2 month lease for an
office facility. The lease expires in 2007.
Bernardsville, New Jersey. In 1999, Larson entered into a 5 year lease for an
office facility. The lease expires in 2004.
Dallas, Texas. In 2000, PWF entered into a 5 year lease for an office facility.
The lease expires in 2005.
The Manager leases office space located at 625 Madison Avenue, New York, New
York, 10022.
The Company and the Manager believe that these facilities are suitable for
current requirements and contemplated future operations.
Item 3. Legal Proceedings
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
On or about December 24, 2002, an alleged shareholder of the Company commenced a
stockholder's derivative action ostensibly on behalf of the Company in the
Supreme Court of the State of New York, County of Nassau, against each member of
the Company's Board of Trustees and Related Capital Company ("RCC"). The case is
entitled Dulitz v. Hirmes, et al., Index No. 02-020389, and the Company is named
as a nominal defendant in the action. The plaintiff alleges that each of the
members of the Board of Trustees and RCC allegedly breached fiduciary duties
and/or aided and abetted breaches of fiduciary duties owed to the Company and
its shareholders in approving the proposed acquisition of RCC by the Company.
The complaint alleges, among other things, that the purchase price for RCC is
excessive, the transaction has been pursued and structured solely for the
benefit of the Trustees that are affiliated with RCC and the members of the
Special Committee are not independent because they are supposedly "dominated or
controlled" by the Trustees that are affiliated with RCC. The complaint further
alleges that shareholder ratification of the proposed transaction supposedly
will not be effective because the Trustees allegedly will not "disclose the true
nature and purpose of the proposed transaction." The complaint seeks declaratory
and injunctive relief, including enjoining the consummation of the proposed
transaction, and unspecified amounts of compensatory damages, costs,
disbursements and attorneys' fees. The individual defendants and RCC have
informed the Company that they intend to defend against the claims vigorously.
Item 4. Submission of Matters to a Vote of Shareholders
None.
-11-
PART II
Item 5. Market for the Company's Common Shares and Related Shareholder Matters.
As of March 27, 2003, there were 3,383 registered shareholders owning
41,220,138. Common Shares. The Company's Common Shares have been listed on the
American Stock Exchange since October 1, 1997 under the symbol "CHC". Prior to
October 1, 1997, there was no established public trading market for the
Company's Common Shares.
The high and low prices for each quarterly period of the last two years during
which the Common Shares were traded are as follows:
2002 2001
---- ----
Quarter Ended Low High Low High
- ------------- --- ---- --- ----
March 31 $15.45 $16.79 $13.30 $16.10
June 30 $15.53 $18.20 $14.21 $15.95
September 30 $14.75 $18.19 $15.00 $15.99
December 31 $15.01 $18.44 $14.75 $16.48
The last reported sale price of Common Shares on the American Stock Exchange on
March 27, 2003 was $17.75
The following table provides information related to the Company's Incentive
Share Option Plan as of December 31, 2002:
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
remaining available
Number of securities Weighted-average for future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column a)
-----------------------------------------------------------------------------
Equity compensation plans
approved by security holders 263,509 $12.47 1,720,918(1)
Equity compensation plans
Not approved by security
holders -- -- --
Total 263,509 $12.47 1,720,918(1)
Notes:
(1) The Incentive Share Option Plan authorizes the issuance of options equal to
3% of the Common Shares outstanding as of December 31, of the preceding year,
for any year the Company's distribution is in excess of $0.9517 per share, up to
10% of the total Common Shares outstanding at October 1, 1997 (2,058,748). The
Company has reached the 10% cap.
-12-
Common Share Repurchase Plan
On October 9, 1998, the Board of Trustees authorized the implementation of a
Common Share repurchase plan, enabling the Company to repurchase, from time to
time, up to 1,500,000 of its Common Shares. The repurchases, if any, are to be
made in the open market and the timing is dependent on the availability of
Common Shares and other market conditions. As of December 31, 2002, the Company
has acquired 8,400 of its Common Shares for an aggregate purchase price of
$103,359 (including commissions and service charges). Repurchased Common Shares
are accounted for as treasury Common Shares of beneficial interest.
Other
Two of the Company's independent trustees are entitled to receive annual
compensation for serving as trustees in the aggregate amount of $17,500 payable
in cash (maximum of $7,500 per year) and/or Common Shares valued at their fair
market value on the date of issuance. The third independent trustee is entitled
to receive annual compensation in the aggregate amount of $30,000 payable in
cash (maximum of $20,000 per year) and/or Common Shares. As of December 31,
2002 and 2001, 1,830 and 2,001 Common Shares, respectively, having an aggregate
value on the date of issuance of $30,000 each year, were issued to the
independent trustees as compensation for services rendered during the years
ended December 31, 2001 and 2000. The independent trustees also received an
aggregate of 5,535 shares, worth $97,500 at the time of issuance, as payment for
their work on the special committee analyzing the proposed acquisition of
Related. An additional 1,728 shares, with an aggregate value of $30,000 at
issuance, were issued to the independent trustees in January 2003 as
compensation for their 2002 services.
Distribution Information
Distributions Per Share
The Company's earnings are allocated pro rata among the Common Shares and the
Convertible CRA Shares (collectively, "Shares"), and the Convertible CRA Shares
rank on parity with the Common Shares with respect to rights upon liquidation,
dissolution or winding up of the Company. Quarterly cash distributions per
Share for the years ended December 31, 2002 and 2001 were as follows:
Shareholders of the Company
Cash Distribution Date Per Total Amount
for Quarter Ended Paid Share Distributed
- --------------------- --------------- -------------- ----------------
March 31, 2002 5/15/02 $0.31 $13,340,885
June 30, 2002 8/14/02 0.31 13,342,358
September 30, 2002 11/14/02 0.32 14,139,587
December 31, 2002 2/14/03 0.32 14,296,126
---- ----------
Total for 2002 $1.26 $55,118,956
==== ==========
March 31, 2001 5/15/01 $0.275 $ 6,954,856
June 30, 2001 8/14/01 0.275 9,064,756
September 30, 2001 11/15/01 0.290 9,575,495
December 31, 2001 2/15/02 0.300 11,012,485
----- ----------
Total for 2001 $1.140 $36,607,592
===== ==========
In addition to the distributions set forth in the table above, the Company paid
Related Charter, as Manager a special distribution (equal to .375% per annum of
the total invested assets of the Company), which amounted to approximately $4.9
million and $3.6 million for the years ended December 31, 2002 and 2001,
respectively.
There are no material legal restrictions upon the Company's present or future
ability to make distributions in accordance with the provisions of the Company's
Amended and Restated Trust Agreement. Future distributions paid by the Company
will be at the discretion of the Trustees based upon evaluation of the actual
cash flow of the Company, its financial condition, capital requirements and such
other factors as the Trustees deem relevant.
-13-
Item 6. Selected Financial Data
The information set forth below presents selected financial data of the Company.
Additional financial information is set forth in the audited consolidated
financial statements and notes thereto contained in "Item 8. Financial
Statements and Supplementary Data".
For the Year Ended December 31, ($000s except for share data)
-------------------------------------------------------------
OPERATIONS 2002 2001 2000 1999 1998
- ---------- -------- -------- -------- --------- -------
Total revenues $116,413 $ 74,625 $ 59,091 $ 40,437 $ 27,940
Operating expenses (33,397) (6,074) (4,563) (3,151) (2,391)
Interest expense and financing costs (19,004) (16,132) (16,488) (8,768) (3,523)
Other-than-temporary impairments related
to investments in Revenue Bonds (920) (400) -- (1,859) --
Equity in earnings of ARCap 2,219 456 -- -- --
Gain/(Loss) on repayment of Revenue Bonds
and sales of loans 14,568 (912) 645 (463) --
------ ------- ------ ------- -------
Income before allocation to preferred
shareholders and minority interest 79,879 51,563 38,685 26,196 22,026
Income allocated to preferred shareholders
of subsidiary (17,266) (12,578) (8,594) (3,014) --
Income allocated to minority interest (496) -- -- -- --
------ ------- ------ ------- -------
Income before provision for income taxes 62,117 38,985 30,091 23,182 22,026
Provision for income taxes (1,284) -- -- -- --
------ ------- ------ ------- -------
Net income $ 60,833 $38,985 $30,091 $23,182 $22,026
======= ======= ======= ======= =======
Net income applicable to Shareholders (2) $ 55,905 $35,010 $27,074 $20,951 $20,343
======= ======= ======= ======= =======
Net income per Share (2)
Basic $ 1.31 $ 1.14 $ 1.22 $ 1.02 $ .99
======= ======= ======= ======= =======
Diluted $ 1.31 $ 1.14 $ 1.22 $ 1.02 $ .98
======= ======= ======= ======= =======
Weighted average Shares outstanding
Basic 42,697,195 30,782,161 22,140,576 20,580,756 20,587,151
========== ========== ========== ========== ==========
Diluted 42,768,139 30,837,340 22,152,239 20,580,756 20,740,641
========== ========== ========== ========== ==========
FINANCIAL POSITION
Total assets $ 1,852,868 $ 1,421,059 $ 925,236 $ 673,791 $ 492,586
========== =========== ========== =========== ==========
Financing arrangements $ 671,659 $ 541,796 $ 385,026 $ 257,770 $ 150,000
========== =========== ========== =========== ==========
Notes payable $ 68,556 $ 56,586 $ -- $ -- $ --
========== =========== ========== =========== ==========
Total liabilities $ 821,031 $ 663,659 $ 399,222 $ 268,239 $ 165,092
========== =========== ========== =========== ==========
Preferred shares of subsidiary (subject to
mandatory repurchase) $ 273,500 $ 218,500 $ 169,000 $ 90,000 $ --
========== =========== ========== =========== ==========
Total shareholders' equity/partners'
capital $ 753,515 $ 535,248 $ 357,014 $ 315,552 $ 327,494
========== =========== ========== =========== ==========
DISTRIBUTIONS
Distributions to Series A preferred
shareholders $ 5,962,500 $ 5,962,500 $ 5,962,500 $ 3,014,375 N/A
========== ========== =========== ==========
Distributions to Series A-1 preferred
shareholders $ 1,704,000 $ 1,704,000 $ 762,067 N/A N/A
========== ========== ===========
Distributions to Series B preferred
shareholders $ 4,180,000 $ 4,180,000 $ 1,869,389 N/A N/A
========== ========== ===========
Distributions to Series A-2 preferred
shareholders $ 1,953,000 $ 444,850 N/A N/A N/A
========== ==========
Distributions to Series B-1 preferred
shareholders $ 1,258,000 $ 286,544 N/A N/A N/A
========== ==========
Distributions to Series A-3 preferred
shareholders $ 1,173,000 N/A N/A N/A N/A
==========
Distributions to Series B-2 preferred
shareholders $ 1,035,000 N/A N/A N/A N/A
==========
Distributions to Shareholders (2) $55,118,956 $36,607,592 $23,973,872 $20,478,112 $19,144,597
========== ========== ========== ========== ==========
Distributions per share (1) $ 1.26 $ 1.14 $ 1.07 $ 1.00 $ .93
========== ========== ========== ========== ==========
-14-
Other Data
(1) Distributions per share are the same for both Common Shares and Convertible
CRA Shares.
(2) Includes common shareholders and Convertible CRA Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The following is a summary of the Company's results of operations for the years
ended December 31, 2002, 2001 and 2000. Net income for the years ended December
31, 2002, 2001 and 2000 was approximately $60.8 million, $39.0 million and $30.1
million, respectively.
2002 vs. 2001
For the year ended December 31, 2002 as compared to 2001, total revenues, total
expenses and net income increased due to the net result of the acquisition of 72
Revenue Bonds and the repayment of 11 Revenue Bonds and three notes. Total
revenues and expenses and net income also increased due to the December 2001
acquisition of PWF, the credit enhancement and yield guarantee transaction.
Interest income from Revenue Bonds increased approximately $21.2 million for the
year ended December 31, 2002 as compared to 2001. This increase was primarily
due to an increase in interest income of approximately $26.6 million from new
Revenue Bonds acquired during 2002 and 2001 and an increase of approximately
$1.6 million in contingent interest collections, partially off-set by a decrease
in interest income of approximately $3.2 million due to the sale or repayment of
Revenue Bonds.
Total revenues for the year ended December 31, 2002 increased by approximately
$41.8 million, including the increases in interest income from Revenue Bonds
noted above, approximately $18.2 million from PWF, $1.3 million in fees related
to the credit enhancement transaction and approximately $1.4 million in fees
from the LIHTC yield guarantee.
Interest expense and recurring fees increased approximately $2.9 million for the
year ended December 31, 2002 as compared to 2001, primarily due to higher
interest expense on the interest rate swaps and a higher level of borrowing
throughout the year.
General and administrative expenses increased approximately $18.2 million for
the year ended December 31, 2002 as compared to 2001 primarily due to the
addition of PWF's expenses and the growth of the Company.
Income allocated to minority interest of approximately $496,000 for the year
ended December 31, 2002 represents PWF's third party continued 20% ownership.
Amortization increased approximately $8 million for the year ended December 31,
2002 as compared to 2001 primarily due to amortization of mortgage servicing
rights at PWF.
Income allocated to preferred shareholders of subsidiary for the year ended
December 31, 2002 as compared to 2001 increased approximately $4.7 million due
to the preferred offerings consumated on October 9, 2001 and June 4, 2002.
During the year ended December 31, 2002, the Company recognized net gains on
repayments of Revenue Bonds of approximately $3.9 million, versus a net loss for
2001 of approximately $912,000, due to the number and size of Revenue Bonds
repaid or sold. Additionally, during the year end December 31, 2002, the Company
recognized gains on sales of loans of approximately $10.7 million due to PWF's
activities.
During the year ended December 31, 2001, the Company wrote down the Lexington
Trails Revenue Bond in the amount of $400,000. The Company has continued to seek
a buyer for the Lexington Trails property and feels it may be necessary to
restructure the debt on the Underlying Property, so felt it prudent to take a
further write down of approximately $920,000.
2001 vs. 2000
For the year ended December 31, 2001 as compared to 2000, total revenues, total
expenses and net income increased due to the net result of the acquisition of 42
Revenue Bonds and the repayment of three Revenue Bonds.
Interest income from Revenue Bonds increased approximately $15.8 million for the
year ended December 31, 2001 as compared to 2000. This increase was primarily
due to an increase in interest income of approximately $21.9 million on new
Revenue Bonds acquired during 2001 and 2000, partially offset by a decrease in
additional base interest, contingent interest and a decrease in interest income
due to Revenue Bond repayments.
Total revenues for the year ended December 31, 2001 increased by approximately
$16 million, including the net increase from Revenue Bonds noted above, the
equity in earnings of ARCap of approximately $456,000, an increase in other
income of approximately $627,000, which included a breakup fee of $250,000
related to the Country Lake repayment and a placement fee of $141,000 related
-15-
to Mayflower, partially offset by a decrease in interest income from temporary
investments of approximately $1.1 million due to lower cash balances and lower
interest rates.
Total expenses for the year ended December 31, 2001, increased by approximately
$1.6 million primarily due to increases in bond servicing costs, general and
administrative expenses and amortization due to the acquisition of 42 new
Revenue Bonds during the year and a loss on impairment of $400,000 taken against
the Lexington Trails Revenue Bond, partially offset by a decrease in interest
expense due to lower interest rates and the refinement of the Private Label
Tender Option Program. During 2001, Lexington Trails failed to make the regular
interest payments due of $210,000 for the period from April through September.
As a result this bond was written down to the estimated fair value of the
underlying property of approximately $4.5 million.
For the year ended December 31, 2001, the Company recognized a net loss on the
repayment of Revenue Bonds of approximately $912,000 as compared to a gain of
approximately $645,000 in 2000.
Income allocated to preferred shareholders of subsidiary for the year ended
December 31, 2001, increased by approximately $4.0 million related to the
preferred offerings executed on July 21, 2000 and October 9, 2001.
As of December 31, 2001, the Company recorded an unrealized gain on its Revenue
Bonds of approximately $262,000 versus a net unrealized loss in 2000 of
approximately $22.9 million. The large fluctuation between the years was due to
declining interest rates and is recorded as part of other comprehensive income
in the consolidated statements of changes in shareholders' equity.
Acquisitions and Dispositions of Revenue Bonds
During 2002, the Company acquired Revenue Bonds with an aggregate par value of
approximately $457 million, not including bond selection fees and expenses of
approximately $10 million.
Acquisitions for the Year Ended December 31, 2002
-------------------------------------------------
Bond
Aggregate Interest
Closing Purchase Rate
Property/Bond Name Date Par Amount Price (a) at 12/31/02
----------------------------- --------- ----------- -------------- ------------
West Oaks Feb-02 $10,150,000 $10,376,008 7.500%
Circle S Feb-02 9,300,000 9,511,859 7.500%
Circle S Feb-02 1,925,000 1,963,500 8.750%
Faircliff Mar-02 7,000,000 7,152,289 7.900%
Johnston Mill April-02 16,000,000 16,378,889 6.900%
Johnston Mill April-02 500,000 510,000 8.000%
Bryte Gardens April-02 5,358,800 5,501,960 7.000%
Meridian April-02 8,255,000 8,420,100 7.500%
Meridian April-02 375,000 382,500 8.750%
Stonebridge May-02 5,270,000 5,387,215 7.000%
Oaks At Brandlewood May-02 12,725,000 12,979,500 7.000%
Oaks At Brandlewood May-02 1,200,000 1,224,000 8.750%
Lansing Heights May-02 8,320,500 8,486,910 6.800%
Lansing Heights May-02 231,500 236,130 6.800%
Clearwood Villas May-02 15,000,000 15,311,843 7.000%
Clearwood Villas May-02 125,000 127,500 9.000%
Viewcrest Villages May-02 8,723,200 8,897,664 8.000%
Viewcrest Villages May-02 2,180,800 2,224,416 8.750%
Matthew Ridge May-02 10,968,000 11,187,360 7.150%
Cobblestone Landing May-02 11,500,000 11,740,399 6.900%
Lincoln Park May-02 4,900,000 4,998,364 7.750%
Georgia King May-02 16,075,000 16,484,823 8.000%
Georgia King May-02 8,925,000 9,103,500 7.000%
Colonial Park June-02 8,200,000 8,364,198 7.500%
Colonial Park June-02 375,000 382,500 8.750%
Willow Creek June-02 4,130,000 4,223,252 7.000%
Laguna Pointe June-02 13,300,000 13,584,323 7.500%
Lakeside Villas June-02 6,020,000 6,140,400 7.250%
Lakeside Villas June-02 2,600,000 2,652,000 7.000%
Lakeside Villas June-02 1,350,000 1,377,000 6.750%
Inverness Centre Aug-02 5,950,000 6,091,833 6.835%
Inverness Centre Aug-02 750,000 765,000 8.000%
Pleasant Valley Aug-02 15,000,000 15,317,330 6.750%
Pleasant Valley Aug-02 1,470,000 1,499,400 8.500%
Briarwood Apts. Aug-02 2,835,000 2,893,912 6.250%
Briarwood Apts. Aug-02 660,000 673,200 6.250%
Briarwood Apts. Aug-02 680,000 693,600 6.250%
-16-
Acquisitions for the Year Ended December 31, 2002
-------------------------------------------------
Bond
Aggregate Interest
Closing Purchase Rate
Property/Bond Name Date Par Amount Price (a) at 12/31/02
----------------------------- --------- ----------- -------------- ------------
Community Arms Aug-02 6,245,000 6,378,363 7.000%
Community Arms Aug-02 1,015,000 1,035,300 7.000%
Palm Terrace Sept-02 1,000,000 1,020,000 9.500%
Clarkridge Villas Sept-02 14,600,000 14,901,921 7.000%
Chapel Ridge Of Yukon Sept-02 7,000,000 7,140,000 7.000%
Pheasant Ridge Sept-02 9,000,000 9,195,287 7.400%
Pheasant Ridge Sept-02 1,900,000 1,938,000 8.500%
Emerald Bay Sept-02 10,570,000 10,789,678 5.500%
Emerald Bay Sept-02 1,330,000 1,356,600 9.000%
Magnolia Commons at
Vicksburg Oct-02 8,700,000 8,881,167 6.750%
Heatherwilde Villas Oct-02 13,500,000 13,785,942 5.500%
Heatherwilde Villas Oct-02 1,500,000 1,530,000 5.500%
Oak Hill Oct-02 8,300,000 8,473,590 6.500%
Waterford Place II Oct-02 2,102,000 2,319,413 6.500%
Hickory Trace Nov-02 11,920,000 12,158,400 7.000%
Allapatah Gardens Nov-02 4,850,000 4,956,774 7.150%
Green Crest Nov-02 12,500,000 12,759,348 7.000%
Ironwood Crossing Nov-02 15,000,000 15,300,000 5.500%
Ironwood Crossing Nov-02 1,970,000 2,009,400 8.750%
Park Center Nov-02 15,000,000 15,368,750 6.375%
Grove Apts Dec-02 8,270,000 8,441,114 4.000%
Grove Apts Dec-02 3,055,000 3,116,100 4.000%
Grove Apts Dec-02 1,475,000 1,504,500 4.000%
Kensington Court Dec-02 10,000,000 10,201,169 6.850%
Southern Oaks Dec-02 14,990,000 15,289,800 6.750%
Creekside Landing Dec-02 5,000,000 5,100,480 6.800%
Creekside Landing Dec-02 1,100,000 1,122,000 8.250%
Chapel Ridge Of Jackson Dec-02 5,000,000 5,101,489 6.750%
Chapel Ridge Of Jackson Dec-02 900,000 918,000 8.250%
Rosemont Dec-02 14,990,000 15,292,800 6.750%
Hickory Falls Apartment Dec-02 12,350,000 12,609,757 5.000%
Ecumenical Homes Dec-02 2,793,000 2,858,576 6.875%
Ecumenical Homes Dec-02 556,000 567,120 6.875%
Ecumenical Homes Dec-02 165,000 168,300 9.000%
Ecumenical Homes Dec-02 86,000 87,720 6.875%
----------------------------------
$457,059,800 $466,921,532
==================================
(a) Includes bond selection fees and other direct costs of acquiring the bond.
-17-
During 2001, the Company acquired 42 Revenue Bonds with an aggregate par value
of approximately $296 million, not including bond selection fees and expenses of
approximately $6.4 million.
Acquisitions for the Year Ended December 31, 2001
-------------------------------------------------
Bond
Aggregate Interest
Closing Purchase Rate at
Project Name Date Par Amount Price (a) 12/31/01
- ----------------------------- --------- ----------- ----------- ---------
Draper Lane Feb-28 $11,000,000 $ 11,260,970 10.000%
Sherwood Lake Apr-24 4,100,000 4,193,572 8.450%
Magnolia Arbors Apr-26 12,500,000 12,789,997 7.500%
Magnolia Arbors Apr-26 1,000,000 1,020,000 8.950%
Bluffview May-03 10,700,000 10,947,687 8.600%
Knollwood Villas May-03 13,750,000 14,068,044 8.600%
Chapel Ridge of Lowell May-18 5,500,000 5,613,165 5.500%
Belmont Heights Estates June-06 7,850,000 8,030,136 8.150%
Arbors at Creekside June-12 8,600,000 8,800,720 8.000%
Midtown Square June-13 5,600,000 5,732,024 7.400%
Midtown Square June-13 235,000 239,700 8.950%
Oakwood Manor June-26 5,010,000 5,144,488 8.500%
Oakwood Manor June-26 440,000 448,800 7.650%
Oakwood Manor June-26 765,000 780,300 9.500%
Cobb Park July-31 7,500,000 7,669,755 7.900%
Cobb Park July-31 285,000 290,700 9.500%
Palm Terrace Aug-15 4,460,000 4,564,483 8.400%
Palm Terrace Aug-15 1,542,381 1,573,229 9.500%
Lakewood Terrace Aug-21 7,650,000 7,814,099 7.900%
Blunn Creek Aug-28 15,000,000 15,355,213 7.900%
Valley View & Ridgecrest Oct-12 9,200,000 9,387,268 5.000%
Merchandise Mart Oct-24 25,000,000 25,505,683 8.000%
Lakeline Apartments Nov-06 21,000,000 21,442,825 8.100%
Lakeline Apartments Nov-06 550,000 561,000 9.650%
Rivers Edge Nov-20 15,000,000 15,306,040 7.700%
Mecca Vineyards Nov-29 13,040,000 13,300,800 7.750%
Mecca Vineyards Nov-29 1,500,000 1,530,000 7.250%
Mecca Vineyards Nov-29 360,000 367,200 9.000%
Westlake Village Nov-30 6,425,000 6,553,500 7.200%
Westlake Village Nov-30 575,000 586,500 8.000%
Silverwood Dec-11 3,300,000 3,366,000 8.000%
Silverwood Dec-11 525,000 535,500 8.750%
Riverside Meadows Dec-13 11,500,000 11,732,121 7.500%
Riverside Meadows Dec-13 200,000 204,000 8.750%
Oak Hollow Dec-18 8,625,000 8,797,500 7.900%
Hillside Apartments Dec-18 12,500,000 12,760,859 7.900%
Hillside Apartments Dec-18 400,000 408,000 9.250%
White Rock Dec-21 20,345,000 20,751,900 7.750%
White Rock Dec-21 430,000 438,600 9.500%
West Meadows Dec-21 13,000,000 13,262,208 5.000%
Ocean Ridge Dec-21 6,675,000 6,808,500 7.750%
Ocean Ridge Dec-21 2,325,000 2,371,500 8.750%
---------------------------
$295,962,381 $302,314,586
---------------------------
(a) Includes bonds selection fees and other direct costs of acquiring the bond.
-18-
During the period January 1, 2002 through December 31, 2002, eleven Revenue
Bonds and three notes were sold or repaid as described in the table below.
Dispositions for the Year Ended December 31, 2002
-------------------------------------------------
Realized
Par Amortized Gains/
Property/Bond Name Amount Cost (Losses)
- ------------------------ ------------ -------------- -----------
Bonds
- -----
Sunset Downs $15,000,000 $11,360,289 $ 389,711
Chandler Creek 15,850,000 15,915,839 (65,839)
Chandler Creek-
Taxable 350,000 350,000 --
Sunset Creek 8,275,000 6,155,801 326,199
Sunset Village 11,375,000 8,819,548 90,452
Sunset Terrace 10,350,000 8,014,072 93,928
River Run 7,200,000 7,238,328 (38,328)
Park at Landmark 9,500,000 9,619,990 260,010
Clarendon 17,600,000 14,684,445 2,915,555
Bristol Village 17,000,000 17,082,110 (82,110)
Chapel Ridge of
Lowell 5,500,000 5,609,166 (4,573)
Notes
- -----
Clarendon Hills 6,600,000 6,600,000 --
Bristol Village 200,000 200,000 --
Kingsbury 550,000 550,000 --
---------
$3,885,005
=========
During the period January 1, 2001 through December 31, 2001, three Revenue Bonds
and one note were repaid and one RITE was terminated as described in the table
below.
Dispositions for the Year Ended December 31, 2001
-------------------------------------------------
Realized
Par Amortized Gains/
Property/Bond Name Amount Cost (Losses)
- --------------------- --------------- -------------- -----------
Bonds
- -----
Greenway $12,850,000 $12,744,443 $ 105,557
Rolling Ridge 4,925,000 5,989,416 (867,416)
Country Lake 6,255,000 6,400,979 (145,979)
Note
- ----
Country Lake 2,540,000 2,540,000 -
RITE
- ----
Courtyard 5,000 8,766 (3,766)
---------
$(911,604)
=========
-19-
Liquidity and Capital Resources
In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company uses various sources of capital including two different
methods of collateralized debt securitizations and preferred and common equity
offerings. Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The following table summarizes, on a
gross basis, the Company's capital raising activities, which are described in
more detail below.
Amount of Capital Raised During (in $000's):
- ---------------------------------------------------------------------------------------------
Capital Source 2000 and prior 2001 2002
- ---------------------------------------------------------------------------------------------
Equity:
------
Preferred
---------
Series A $ 90,000 $ -- $ --
Series A-1 24,000 -- --
Series A-2 -- 31,000 --
Series A-3 -- -- 30,000
Series B 55,000 -- --
Series B-1 -- 18,500 --
Series B-2 -- -- 25,000
Convertible CRA 35,596 -- 34,000
------- -------- --------
Total $204,596 $ 49,500 $ 89,000
------- -------- --------
Common
------
May 2001 $ -- $ 122,683 $ --
November 2001 -- 55,140 --
February 2002 -- -- 92,835
-------- -------- --------
Total $ -- $ 177,823 $ 92,835
-------- -------- --------
Securitizations:
----------------
Private Label Tender Option
Program $ 275,000 $ 75,000 $ 106,500
P-Floats/RITES 110,117 81,770 23,272
------- -------- --------
Total $ 385,117 $ 156,770 $ 129,772
------- -------- --------
Fleet: PW Acquisition $ -- $ 27,261 $ --
--------------------- -------- -------- ---------
PW Warehouse Line $ -- $ 29,325 $ 11,969
----------------- ------- -------- --------
Total of all capital activity $ 589,713 $ 440,679 $ 323,576
======== ======== ========
Securitizations and Debt Financings
- -----------------------------------
The Company has two primary securitization programs: the TOP and the
P-FLOATS/RITES program. Securitizations continue to offer efficient execution
and the lowest cost of capital, albeit with certain covenants and leverage
limits. Pursuant to its Trust Agreement, the Company is only able to incur
leverage or other financing up to 50% of the Company's Total Market Value; such
terms are generally consistent or more conservative than leverage covenants on
the Company' s securitized debt.
Short-term liquidity is provided by interest income from Revenue Bonds and
promissory notes in excess of the related financing costs, and interest income
from cash and temporary investments. For the Company's PWF subsidiary,
short-term liquidity is provided by a $100 million revolving warehouse line to
fund loans prior to a committed take-out by Fannie Mae, Freddie Mac, Ginnie Mae
or FHA, under which PWF is the originator, underwriter, and servicer under
established programs with these entities.
The Company believes that its financing capacity and cash flow from current
operations are adequate to meet its current and projected liquidity
requirements. As of December 31, 2002, the Company has no off-balance sheet
debt.
-20-
(i) Preferred Equity Issuances By Subsidiary
Since June 1999, the Company, through a subsidiary, has issued multiple series
of Cumulative Preferred Shares. Proceeds from these offerings were used to
invest in or acquire additional tax-exempt assets for the Company.
Liquidation
Preferred Date of Mandatory Mandatory Number Preference Total Face Dividend
Series Issuance Tender Repurchase of Shares per Share Amount Rate
- ------ -------- ------ ---------- --------- --------- ---------- --------
Series A 06/29/99 06/30/09 06/30/49 45 $2,000,000 $90,000,000 6.625%
Series A-1 07/21/00 06/30/09 06/30/49 48 500,000 24,000,000 7.100%
Series A-2 10/09/01 06/30/09 06/30/49 62 500,000 31,000,000 6.300%
Series A-3 06/04/02 10/31/14 10/31/52 60 500,000 30,000,000 6.800%
Series B 07/21/00 11/30/10 11/30/50 110 500,000 55,000,000 7.600%
Series B-1 10/09/01 11/30/10 11/30/50 37 500,000 18,500,000 6.800%
Series B-2 06/04/02 10/31/14 10/31/52 50 500,000 25,000,000 7.200%
Each series of Cumulative Preferred Shares has an annual preferred dividend
payable quarterly in arrears upon declaration thereof by the Company's Board of
Trustees, but only to the extent of tax-exempt net income for the particular
quarter. All series of Cumulative Preferred Shares are subject to mandatory
tender by the holders thereof for remarketing and purchase on their respective
mandatory tender dates and each remarketing date thereafter at their respective
liquidation preference per share plus an amount equal to all distributions
accrued but unpaid.
Holders of Cumulative Preferred Shares may elect to retain their shares upon
remarketing, with a distribution rate to be determined immediately prior to the
remarketing date by the remarketing agent. Each holder of Cumulative Preferred
Shares will be required to tender its shares to the Issuer for mandatory
repurchase on the mandatory repurchase date, unless the Company decides to
remarket the shares on such date. Cumulative Preferred Shares are not
convertible into Common Shares of the Company.
The Series A, A-1, A-2 and A-3 Cumulative Preferred Shares rank, with respect to
payment of distributions and amounts upon liquidation, dissolution or winding-up
of the Company, senior to all classes or series of Convertible CRA Shares,
Series B, B-1 and B-2 Subordinate Cumulative Preferred Shares and Common Shares
of the of the Company. The Series B Subordinate Cumulative Preferred Shares
rank, with respect to payment of distributions and amounts upon liquidation,
dissolution or winding-up of the Company, senior to the Company's Common Shares
and the Company's Convertible CRA Shares and junior to the Issuer's Series A,
A-1, A-2 and A-3 Cumulative Preferred Shares.
Since inception, all quarterly distributions have been declared at each stated
annualized dividend rate for each respective series and all distributions due
have been paid. In February 2003, preferred shareholder distributions that were
declared in December 2002, were paid to the preferred shareholders from cash
flow from operations for the quarter ended December 31, 2002. The per share
distributions declared and paid for this period were as follows:
Dividend per Share Total Distribution
------------------ ------------------
Series A; 6.625% $ 33,125 $ 1,490,625
Series A-1; 7.100% $ 8,875 $ 426,000
Series A-2; 6.300% $ 7,878 $ 488,250
Series A-3; 6.800% $ 8,500 $ 510,000
Series B; 7.600% $ 9,500 $ 1,045,000
Series B-1; 6.800% $ 8,500 $ 1,258,000
Series B-2; 7.200% $ 9,000 $ 450,000
(ii) Convertible Community Reinvestment Act Preferred Share Offerings
On May 10, 2000, the Company completed an offering of approximately $26.4
million, net of underwriters discount, of Convertible Community Reinvestment Act
Preferred Shares ("Convertible CRA Shares") to three financial institutions
(1,946,000 Convertible CRA Shares priced at $14.13 per share). On December 14,
2000, the Company completed an additional offering of approximately $8.7
million, net of underwriters discount, of Convertible CRA Shares to three
additional financial institutions (644,000 Convertible CRA Shares priced at
$14.13 per share). On May 24, 2001, the Company bought back 707,636 Convertible
CRA Shares, issued May 10, 2000, at $12.70 per share for a total purchase price
of approximately $9.0 million.
During July and November 2002, the Company issued approximately 1.4 million and
576,000 Series A Convertible CRA Shares, respectively. The shares were priced at
$17.43 and $17.37, respectively, raising proceeds net of underwriters discount,
for the two issuances of approximately $32.5 million.
As of December 31, 2002, the Company had outstanding, 3,835,002 Convertible CRA
Shares, which are convertible at the holders option into 3,717,301 Common
Shares.
The Convertible CRA Shares enable financial institutions to receive certain
regulatory benefits in connection with their investment. The Company has
developed a proprietary method for specially allocating these regulatory
benefits to specific financial institutions that invest in the Convertible CRA
Shares. Other than the preferred allocation of regulatory benefits, the
preferred investors receive
-21-
the same economic benefits as Common Shareholders of the Company, including
receipt of the same dividends per share as those paid to Common Shareholders.
The Convertible CRA Shares have no voting rights, except on matters relating to
the terms of the Convertible CRA Shares or to amendments to the Company's Trust
Agreement which would adversely affect the Convertible CRA Shares. The Company's
earnings are allocated pro rata among the Common Shares and the Convertible CRA
Shares, and the Convertible CRA Shares rank on parity with the Common Shares
with respect to rights upon liquidation, dissolution or winding up of the
Company.
The investors, at their option, have the ability to convert their Convertible
CRA Shares into Common Shares at a predetermined conversion price. Upon
conversion, the investors will no longer be entitled to a special allocation of
the regulatory benefit. The conversion price is the greater of (i) the Company's
book value per Common Share as set forth in the Company's most recently issued
annual or quarterly report filed with the SEC prior to the respective
Convertible CRA Share issuance date or (ii) 110% of the closing price of a
Common Share on the respective Convertible CRA Share's pricing date. The
conversion price for each Convertible CRA Share offering is indicated on the
following table:
Issuance Date Conversion Price Conversion Ratio
- ------------- ---------------- ----------------
May 10, 2000 $15.33 0.9217
December 14, 2000 $14.60 0.9678
July 15, 2002 N/A 1.0000
November 21, 2002 N/A 1.0000
(iii) Private Label Tender Option Program
On May 21, 1998, the Company closed on its TOP in order to raise additional
capital to acquire additional Revenue Bonds. As of December 31, 1999, the
maximum amount of capital that could be raised under the TOP was $400 million.
On December 7, 2000, the Company refined the structure the TOP for the primary
purpose of segregating Revenue Bonds issued by governmental entities in
California from the remainder of the Revenue Bonds under the TOP and to increase
the maximum amount of capital available under the program to $500 million. In
addition, the TOP's surety commitment was extended for a five-year term. The
liquidity commitment is a one-year renewable commitment. The Company expects to
renew or replace such commitments upon expiration of their terms.
Under the TOP structure, the Company contributes Revenue Bonds to CharterMac
Origination Trust I (the "Origination Trust"), a wholly owned, indirect
subsidiary of the Company. The Origination Trust then contributes certain of
these Revenue Bonds to CharterMac Owner Trust I (the "Owner Trust") which is
controlled by the Company. The Owner Trust contributes selected bonds to
specific "Series Trusts" in order to segregate Revenue Bonds issued by
governmental entities selected by state of origin. As of December 31, 2000, four
such Series Trusts were created: two California only series and two National
(non-state specific) series.
Each Series Trust, issues two equity certificates: (i) a Senior Certificate
which has been deposited into a "Certificate Trust" which issues and sells
"Floater Certificates" representing proportional interests in the Senior
Certificate to new investors and (ii) a Residual Certificate, issued to the
Origination Trust which represents the remaining beneficial ownership interest
in each Series Trust.
The effect of the TOP structure is that a portion of the interest received on
Revenue Bonds in the Owner Trust is distributed through the Senior Certificate
to the holders of the Floater Certificates with any remaining interest remitted
to the Origination Trust (and thus to the benefit of the Company) via the
Residual Certificate. The effect of the December 7, 2000, refinement of the TOP
structure was to segregate the California related Floater Certificates as they
generally will pay distributions at lower rates than National (non-state
specific) Floater Certificates and thus the yield on the Residual Certificates
owned by the Origination Trust is increased. The Revenue Bonds remaining in the
Origination Trust (aggregate principal amount of approximately $150 million) are
an additional collateral pool for the Owner Trust's obligations under the Senior
Certificate.
The balance of the TOP at December 31, 2002 (the equity in the Owner Trust,
represented by the Senior Certificate), was $456.5 million. The Company's
floating rate cost of funds relating to the TOP (calculated as interest expense
plus recurring fees as a percentage of the weighted average amount of the
outstanding Senior Certificate) was approximately 2.4%, 3.5% and 5.4% for the
years ended December 31, 2002, 2001 and 2000, respectively.
(iv) P-FLOATs/RITES
Another source for financing the Company's investments is the securitization of
selected Revenue Bonds through the Merrill Lynch Pierce Fenner & Smith
Incorporated ("Merrill Lynch") P-FLOATS/RITES program. Merrill Lynch deposits
each Revenue Bond into an individual special purpose trust together with a
credit enhancement guarantee. Two types of securities are then issued by each
trust, (1) Puttable Floating Option Tax-Exempt Receipts ("P-FLOATS"), a
short-term senior security which bears interest at a floating rate that is reset
weekly and (2) Residual Interest Tax Exempt Securities ("RITES"), a subordinate
security which receives the residual interest payment after payment of P-FLOAT
interest and ongoing transaction fees. The P-FLOATS are sold to qualified third
party, tax-exempt investors and the RITES are generally sold back to the
Company.
During the year 2002, the Company transferred six Revenue Bonds with an
aggregate face amount of approximately $91 million to P-FLOATS/RITES program and
received proceeds of approximately $90.7 million. Additionally, the Company
repurchased eight Revenue Bonds with an aggregate face value of approximately
$67 million.
-22-
The Company's cost of funds relating to its secured borrowings under the Merrill
Lynch P-FLOATS/RITES program (calculated as interest expense as a percentage of
the weighted average amount of the secured borrowings) was approximately 2.4%,
3.7% and 5.0%, annualized, for the years ended December 31, 2002 and 2001 and
2000, respectively.
(v) Other Debt
In December 2001, CM Corp. acquired of 80% the outstanding capital stock of PWF
for approximately $34.9 million, of which approximately $21.6 million was
financed and $7.6 million was paid in cash. Additionally, the Company borrowed
$5.7 million to pay off loans held by PWF. The acquisition loan commitment ("PWF
Acquisition Loan") is $40 million, with an aggregate loan advance of up to $30
million during the first three months, subject to a maximum advance ratio of 80%
of the value of PWF's mortgage servicing portfolio, following the PWF
acquisition and loan closing. At the time of closing, $27.3 million ("Initial
Advance") of the facility was drawn. CM Corp. may request a resizing of the
loan, up to the maximum facility size of $40 million, in order to generate
additional funding ("Final Advance") that may be required the remaining 20%
stock ownership of PWF. The Final Advance would equal the lesser of 100% of the
cost of the remaining 20% equity interests of PWF or an amount that represents
an overall maximum advance of 75% of the value of the PWF mortgage servicing
portfolio at the time of the Final Advance.
The PWF Acquisition Loan has a term of five years with an interest rate of LIBOR
plus 2.25%. The loan is interest only for the first twelve months. Beginning in
January 2003 and through the remaining loan term, quarterly straight-line
principal amortization on the Initial Advance is paid based on a ten-year
amortization period. Additionally, after receiving the Final Advance, additional
quarterly straight-line principal amortization payments on the Final Advance
will be made based on the remaining years of the amortization period for the
Initial Advance.
PWF established a $100 million secured, revolving mortgage warehouse facility,
subject to annual renewal during December of each year. CM Corp is a guarantor
of this warehouse facility. The interest rate for each warehouse advance is the
Fed Funds rate plus 1.25% (2.48% at December 31, 2002). At December 31, 2002,
the amount outstanding was $41.3 million. There were no outstanding borrowings
under the facility at December 31, 2001. At December 31, 2002 the Company was in
compliance with all covenants of the facility.
The $100 million facility replaced PWF's $50 million multi-family revolving
warehouse facility, which expired on May 31, 2002. At December 31, 2001, the
facility was temporarily increased to $160 million and had outstanding
borrowings of $ 29.3 million at an interest rate of 30-day LIBOR plus 1.00%,
which resets daily, with a LIBOR floor of 3%. At December 31, 2001, the interest
rate was 4.0%. Borrowings under the line of credit are collateralized by PWF's
ownership interests in the original mortgage notes. At December 31, 2001, PWF
was in compliance with all covenants of the facility. This facility was repaid
during the first quarter of 2002.
PWF was the guarantor for a $35 million loan and security agreement for Larson,
which expired on May 31, 2002. The interest rate for the agreement was the lower
of 30 day LIBOR plus 209 basis points or the 30 day Treasury Bill rate plus 205
basis points. At December 31, 2001, there were no outstanding borrowings under
the agreement. At December 31, 2001, the Company and Larson were in compliance
with all covenants of the agreement.
Critical Accounting Policies
In preparing the consolidated financial statements, management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Set forth below is a summary of the accounting policies
that management believes are critical to the preparation of the consolidated
financial statements. The summary should be read in conjunction with the more
complete discussion of the Company's accounting policies included in Note 1 to
the consolidated financial statements in this annual report on Form 10-K.
Investment in Revenue Bonds and Promissory Notes Receivable
The Company accounts for its investments in Revenue Bonds as available-for-sale
debt securities under the provisions of SFAS 115.
In most cases the Company has a right to require redemption of the Revenue Bonds
prior to their maturity, although it can and may elect to hold them up to their
maturity dates unless otherwise modified. As such, SFAS 115 requires the Company
to classify these investments as "available-for-sale." Accordingly, investments
in Revenue Bonds are carried at their estimated fair values, with unrealized
gains and losses reported in other comprehensive income. Unrealized gains or
losses do not affect the cash flow generated from property operations,
distributions to shareholders, the characterization of the tax-exempt income
stream or the financial obligations under the Revenue Bonds.
The Manager's bond review committee which meets monthly to review the status of
the Revenue Bond portfolio. The committee maintains a "watch list" of Revenue
Bonds where the underlying property may be experiencing difficulties. These
underlying properties are identified taking into account a number of factors,
including but not limited to, construction cost overruns, delays in completing
construction, occupancy shortfalls and lower than expected debt service coverage
ratios. In those instances where an underlying property has been identified as
possibly experiencing problems, members of the review committee work with the
borrower to attempt to resolve any issues. Actions taken at this point could
include recommending a change in the property management agent or such actions
as extending the term of the bond, making additional advances, or reducing
required payments. If, in
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the judgment of the Manager, it is determined probable that the Company will not
receive all contractual payments required, when they are due, the bond is deemed
impaired and is written down to its then estimated fair value, with the amount
of the write-down accounted for as a realized loss.
For Revenue Bonds and promissory notes, interest income is recognized at the
stated rate as it accrues and when collectibility of future amounts is
reasonably ass