10-Q 1 a10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR ------- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR ------- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-28340 AMERICAN TAX-EXEMPT BOND TRUST ------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-7033312 ---------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 625 Madison Avenue, New York, New York 10022 ---------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212)421-5333 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN TAX-EXEMPT BOND TRUST Balance Sheets (Unaudited)

See Accompanying Notes to Financial Statements. 2 AMERICAN TAX-EXEMPT BOND TRUST Statements of Operations (Unaudited)

See Accompanying Notes to Financial Statements. 3 AMERICAN TAX-EXEMPT BOND TRUST Statement of Changes in Shareholders' Equity (Unaudited)

See Accompanying Notes to Financial Statements. 4 AMERICAN TAX-EXEMPT BOND TRUST Statements of Cash Flows (Unaudited)

5 AMERICAN TAX-EXEMPT BOND TRUST Statements of Cash Flows (Unaudited) (continued)

See Accompanying Notes to Financial Statements. 6 AMERICAN TAX-EXEMPT BOND TRUST Notes to Financial Statements June 30, 2000 (Unaudited) Note 1 - General American Tax-Exempt Bond Trust (the "Trust") was formed on December 23, 1993 as a finite life, closed end Delaware business trust for the purpose of investing in tax-exempt first mortgage bonds ("First Mortgage Bonds") issued by various state or local governments or their agencies or authorities and secured by first mortgage loans on multifamily residential apartment and retirement community projects. The Trust operates in one segment, Investment in First Mortgage Bonds. Related AMI Associates, Inc. is the Manager ("Manager") of the Trust. Pursuant to the Redemption Plan which became effective October 15, 1996, the Trust is required to redeem eligible shares presented for redemption for cash to the extent it has sufficient Reinvestment Proceeds from the sale of shares under the Reinvestment Plan. The Redemption Plan has been suspended pending the vote on the Merger, described below. The Trust has invested the Net Proceeds in First Mortgage Bonds issued by various state or local governments or their agencies or authorities which are secured by first mortgages and related first mortgage loans financed by such bonds (collectively, "Mortgage Loans") on three multifamily residential apartment projects owned by third-party developers and one underlying property owned by RHA Inv., Inc. (the "Borrower") an affiliate of the Manager by virtue of the fact that Stephen Ross is on the Board of Trustees of both the Borrower and the Manager and owns 40% and 67.2% of each entity, respectively. The Trust is also permitted to invest in other tax-exempt securities which have shorter maturities than First Mortgage Bonds ("Tax-Exempt Securities"). However, all Tax-Exempt Securities owned by the Trust have matured and the Trust does not anticipate making additional investments in Tax-Exempt Securities. On November 2, 1999, the Trust, Charter Municipal Mortgage Acceptance Company, a Delaware business trust ("CharterMac"), and CM Holding Trust, a Delaware business trust, a wholly owned subsidiary of CharterMac ("CharterMac Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), providing for the merger of the Trust (the "Merger") with and into CharterMac Sub, with CharterMac Sub as the surviving entity in the Merger. Pursuant to the Merger Agreement and upon the terms and subject to the conditions and limitations 7 AMERICAN TAX-EXEMPT BOND TRUST Notes to Financial Statements June 30, 2000 (Unaudited) therein, each issued and outstanding share of beneficial interest in the Trust (the "Trust Shares") will be converted into the right to receive 1.43112 shares of beneficial interest in CharterMac (the "CharterMac Shares"). CharterMac and the Trust are both managed by affiliates of Related Capital Company. Consummation of the Merger, which is expected in the third quarter of 2000, is subject to various conditions, including approval of the Merger by the shareholders of the Trust. Prior to such shareholders' meeting, CharterMac will file a registration statement with the Securities and Exchange Commission registering under the Securities Act of 1933, as amended, the CharterMac Shares to be issued in exchange for the outstanding Trust Shares. Such CharterMac Shares will be offered to the Trust shareholders only pursuant to a prospectus that will also serve as a consent statement for the shareholders of the Trust. If the Merger is completed, CharterMac and the Trust will pay their own fees and expenses related to the Merger. The Trust has accrued all merger-related costs incurred as of June 30, 2000. If the Merger Agreement is terminated because the Trust shareholders do not approve the Merger, CharterMac will pay its own fees and expenses and the Manager, or one of its affiliates, will pay all fees and expenses incurred by the Trust. If the Merger Agreement is terminated for any reason other than the failure of the Trust shareholders to approve the Merger, CharterMac and the Trust will pay their own fees and expenses. If the Trust shareholders do not approve the Merger, it is expected the Manager would be paid all accrued and unpaid fees and special distributions thereby reducing the cash available for distribution. The Trust follows the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards ("SFAS") SFAS No. 115 ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. At June 30, 2000 and December 31, 1999, the Trust has classified its first mortgage bonds and marketable securities as available for sale. The books and records of the Trust are maintained on the accrual basis of accounting in accordance with Generally Accepted Accounting Principles. In the opinion of the Manager, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Trust as of June 30, 2000, the results of operations for the three and six months ended June 30, 2000 and 1999 and its cash flows for the six months ended June 30, 2000 and 1999. However, the operating 8 AMERICAN TAX-EXEMPT BOND TRUST Notes to Financial Statements June 30, 2000 (Unaudited) results for the six months ended June 30, 2000 may not be indicative of the results for the year. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Trust's Annual Report on Form 10-K for the year ended December 31, 1999. Note 2 - Investment in First Mortgage Bonds GENERAL The cost basis of the First Mortgage Bonds was $24,329,236 and $24,375,807 at June 30, 2000 and December 31, 1999. The net unrealized gain on First Mortgage Bonds of $1,618,628 and $2,815,760 as of June 30, 2000 and December 31, 1999, respectively, consists of gross unrealized gains and losses of $1,707,154 and $88,526, respectively, at June 30, 2000 and $2,834,868 and $19,108, respectively, as of December 31, 1999. 9 AMERICAN TAX-EXEMPT BOND TRUST Notes to Financial Statements June 30, 2000 (Unaudited) Note 2 - Investment in First Mortgage Bonds Information relating to investments in First Mortgage Bonds as of June 30, 2000 and December 31, 1999 are as follows:

(A) The interest rate for the Reflections is 9.00%. In addition to the interest rate the Trust will be entitled to 25% of the cash flow, as defined. (B) The interest rate for the Rolling Ridge is 9.00%. In addition to the interest rate the Trust will be entitled to 30% of the cash flow, as defined. (C) The interest rate for the Lexington Trails is 9.00%. (D) The interest rate for the Highpointe is 9.00%. 10 AMERICAN TAX-EXEMPT BOND TRUST Notes to Financial Statements June 30, 2000 (Unaudited) Note 3 - Related Party Transactions The costs incurred to related parties for the three and six months ended June 30, 2000 and 1999 were as follows:

In accordance with the Trust Agreement, the Manager received or is entitled to receive (i) special distributions calculated as a percentage of total assets invested by the Trust in its capacity as a general partner of the Trust; the total amount accrued and unpaid as of June 30, 2000 and December 31, 1999 amounted to $374,234 and $314,797, respectively; (ii) reimbursement of certain administrative costs incurred by the Manager or an affiliate on behalf of the Trust; the total amount accrued and unpaid as of June 30, 2000 and December 31, 1999 amounted to $521,737 and $459,368, respectively; (iii) loan servicing fees calculated as a percentage of total assets invested by the Trust, the total amounts accrued and unpaid as of June 30, 2000 and December 31, 2000 and December 31, 1999 amounted to $147,942 and $118,386, respectively; (iv) a subordinated incentive fee based on the gain on the sale of the tax-exempt First Mortgage Bonds. If the merger is consummated, the Manager will waive the payment of all deferred and unpaid fees, reimbursements and expenses due the Manager through June 30, 1999. The deferred fees, reimbursements and expenses due to the Manager totaled $755,747 at June 30, 1999. Note 4 - Subsequent Event In August 2000, distributions of approximately $585,000 and $6,000 will be paid to the Shareholders and the Manager, respectively, representing the 2000 second quarter distribution. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. LIQUIDITY AND CAPITAL RESOURCES The Trust has invested the Net Proceeds in First Mortgage Bonds issued by various state or local governments or their agencies or authorities which are secured by first mortgages and related first mortgage loans financed by such bonds (collectively, "Mortgage Loans") on three multifamily residential apartment projects owned by third-party developers and one underlying property owned by RHA Inv., Inc. (the "Borrower") an affiliate of the Manager by virtue of the fact that Stephen Ross is on the Board of Trustees of both the Borrower and the Manager and owns 40% and 67.2% of each entity, respectively. The First Mortgage Bonds have maturities ranging from June 2006 to August 2026, although the Trust anticipates holding the First Mortgage Bonds for approximately 10 to 12 years and has the right to cause repayment of the bonds at that time, unless the First Mortgage Bonds are repaid prior to maturity (in which event the Trust may seek to reinvest the repayment proceeds through September 2002). The Trust is also permitted to invest in Tax-Exempt Securities. However, all Tax-Exempt Securities owned by the Trust have matured and the Trust does not anticipate making additional investments in Tax-Exempt Securities. During the six months ended June 30, 2000, cash and cash equivalents decreased approximately $161,000 due to distributions to shareholders ($1,243,000) which exceeded cash provided by operating activities ($1,081,000). Included in the adjustments to reconcile the net income to cash provided by operating activities is amortization in the amount of approximately $47,000. Pursuant to the Redemption Plan which became effective October 15, 1996, the Trust is required to redeem eligible shares presented for redemption for cash to the extent it has sufficient net proceeds from the sale of shares under the Reinvestment Plan. The Redemption Plan has been suspended pending the vote on the Merger, described herein. The Trust expects that cash generated from its investments will no longer be sufficient to pay all of the Trust's operating expenses, including the special distribution, in both the short term and long term in the foreseeable future if the Trust were to continue to pay distributions to all shareholders at the current rate. Certain expense reimbursements totaling approximately $522,000 and $459,000 at June 30, 2000 and December 31, 1999, respectively, the payment of a portion of the special distribution totaling approximately $374,000 and $315,000 at June 30, 2000 and December 31, 1999, respectively, and loan servicing fees 12 totaling approximately $148,000 and $118,000 at June 30, 2000 and December 31, 1999, respectively, to the Manager have been accrued and are unpaid. The Manager has continued allowing the accrual without payment of these amounts but is under no obligation to continue to do so. If the merger is consummated, the Manager will waive the payment of all deferred and unpaid fees, reimbursements and expenses due the Manager through June 30, 1999. The deferred fees, reimbursements and expenses due to the Manager totaled $755,747 at June 30, 1999. If the Merger is completed, CharterMac and the Trust will pay their own fees and expenses related to the Merger. The Trust has accrued all merger-related costs incurred as of June 30, 2000. If the Merger Agreement is terminated because the Trust shareholders do not approve the Merger, CharterMac will pay its own fees and expenses and the Manager, or one of its affiliates, will pay all fees and expenses incurred by the Trust. If the Merger Agreement is terminated for any reason other than the failure of the Trust shareholders to approve the Merger, CharterMac and the Trust will pay their own fees and expenses. If the Trust shareholders do not approve the Merger, it is expected the Manager would be paid all accrued and unpaid fees and special distributions thereby reducing the cash available for distribution. The Trust anticipates that cash generated from the operations of the underlying properties (taking into account its preferred position relative to other creditors) will be sufficient to meet the required debt service payments to the Trust with respect to the First Mortgage Bonds for both the short term and long term foreseeable future. DISTRIBUTION POLICY Quarterly distributions were made 45 days following the close of the calendar quarter and were funded from cash provided from earnings through approximately the distribution dates and proceeds from the maturity of investments, together with the deferral by the Manager of amounts owed to it. There are no material legal restrictions on the Trust's present or future ability to make distributions in accordance with the provisions of the Trust Agreement. Distributions to the Trust shareholders are at the sole discretion of the Manager based on numerous factors. Throughout its offering and acquisition period, the Trust had established and maintained a distribution rate that the Trust expected to be able to pay after it had fully invested the proceeds of its initial offering, which required that distributions be supplemented by a return of capital until earnings from bonds acquired by the Trust stabilized. 13 When the Trust's acquisition stage was completed at the end of 1997, the Trust realized that the actual performance of its investment portfolio would not support the initial distribution rate that it had set based on its original internal assumptions. As a result, the Manager met and amended the distribution policy pursuant to the Trust Agreement. The Trust's new distribution policy, adopted in the first quarter of 1998, calls for quarterly distributions that more closely reflect the actual, rather than the originally expected, collections of interest payments on its portfolio. However, rather than implement this new policy immediately, the Trust sought alternative ways to maintain the current distribution rate. During this time, the Trust continued to pay distributions at the current rate by supplementing its interest receipts with the proceeds from repayment of its short-term investments in 1998 and 1997. In addition, although under no obligation to do so, over the last nine quarters, including the quarter ended June 30, 2000, the Manager has deferred payment of expenses, reimbursements and fees payable to it in order to further supplement the cash available to maintain the current distribution rate. The Trust will soon deplete the remaining repayment proceeds from its short-term investments. In addition, the Manager has indicated that it is no longer willing to continue to defer receipt of expenses, reimbursements and fees it is owed. As a result under this new distribution policy, the Manager believes that the Trust's future annual distributions to its shareholders will be less than the current level of $1.60 per share and a decrease in the annualized return based on the original per share purchase price of the Trust's shares. It is anticipated that, if approved and completed, the proposed Merger would enable the Trust shareholders to receive annual per share distributions from CharterMac which are expected to be only slightly less than the current level of distributions Trust shareholders receive, based upon the number of CharterMac common shares they will receive and the current distribution being paid on CharterMac common shares and greater than the distributions which would be paid to shareholders under the Trust's distribution policy going forward. Of the total distributions of $1,242,743 and $1,241,667 paid during the six months ended June 30, 2000 and 1999, $289,496 ($.19 per share or 23%) and $309,938 ($.21 per share or 25%) represents a return of capital determined in accordance with generally accepted accounting principles. As of June 30, 2000, the aggregate amount of the distributions made since the commencement of the Offering representing a return of capital, in accordance with generally accepted accounting principles, totaled $2,973,668. The portion of the distributions which constitute a return of capital was significant during the acquisition stage in order to maintain level distributions to shareholders. 14 RESULTS OF OPERATIONS The results of operations for the three and six months ended June 30, 2000 and 1999 consisted primarily of interest income earned on First Mortgage Bonds and marketable securities, net of general and administrative, general and administrative-related parties and loan servicing fees. Interest income from First Mortgage Bonds increased approximately $13,000 and $22,000 for the three and six months ended June 30, 2000 as compared to the corresponding periods in 1999 primarily due to an increase in contingent interest received at Reflections and Rolling Ridge in 2000. General and administrative expenses increased approximately $6,000 for the three months ended June 30, 2000 as compared to the corresponding period in 1999 primarily due to an increase in accounting and postage fees partially offset by a decrease in computer consulting fees. General and administrative-related parties increased approximately $18,000 and $14,000 for the three and six months ended June 30, 2000 as compared to the corresponding periods in 1999 primarily due to higher expense reimbursements to affiliates of the Manager. Amortization of organization costs decreased approximately $13,000 for the six months ended June 30, 2000 as compared to the corresponding period in 1999 due to the adoption of Statement of Position 98-5 REPORTING ON COSTS OF START-UP ACTIVITY, pursuant to which the Trust expensed all unamortized organization costs as of January 1, 1999. During the six months ended June 30, 2000, the Trust recognized a reduction in the fair market value of the First Mortgage Bonds in the amount of $1,197,132 to reflect the effects of revisions to the cash flow projection of the underlying properties as well as the Trust's assumptions relating to the timing of prepayment of the First Mortgage Bonds. For a description of the Trust's investments in First Mortgage Bonds see Note 2 of Notes to the Financial Statements. In the first quarter of 2000, the Trust received audited financial information from the owners of the underlying properties. On an aggregate basis, the net operating income of the underlying properties based on these reports was lower than the unaudited net operating income previously reported by the property owners. Accordingly, in the first quarter 2000, the Trust adjusted the underlining cash flow projections of the properties and the level of participation interest expected to be collected. In addition, the Trust evaluated the sale/refinance scenarios and adjusted the assumptions regarding the timing of the prepayment of certain of the 15 bonds. As a result of these adjustments in the assumptions with regard to the timing of prepayments of certain of the bonds, together with the property level cash flow adjustments noted above, the Trust adjusted the fair market value of the bonds by approximately $1.1 million. Approximately 75% of this adjustment is attributable to a decrease in anticipated cash flows of the underlying properties and the level of participation interest expected to be collected and 25% of the adjustment to fair market value of bonds is attributable to adjustments in the assumptions with regard to the timing of prepayments. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Trust is exposed to interest rate risk as it relates to its investments in First Mortgage Bonds. At June 30, 2000, 97% of the Trusts assets are invested in four First Mortgage Bonds, all of which have a fixed interest rate of 9% and maturities ranging from 10 to 30 years. The First Mortgage Bonds are classified as available for sale and are carried at fair value with a net unrealized gain of $1,618,628 reported as a separate component of accumulated other comprehensive income. Two First Mortgage Bonds, representing 67% of the total investment in First Mortgage Bonds, are also entitled to participation in the cash flow from operations of the underlying property. The fair value of the First Mortgage Bonds is estimated by the Manager based on the current interest rate environment for similar securities, cash flow projections for the underlying properties, a reversion estimate, prepayment assumptions and an estimate of cash flow participation, if and when applicable. A 1% increase in the current interest rate environment assumption at June 30, 2000 would result in a decrease of approximately $350,000 in the net unrealized gain on First Mortgage Bonds. The Trust's ultimate realized gain or loss as it relates to interest rate fluctuations is dependent on when, and if, the Trust disposes of the First Mortgage Bonds prior to maturity. The Trust has the right to call for mandatory redemption of the First Mortgage Bonds after a period of 10 to 12 years from the date of issuance or acquisition, generally, the First Mortgage Bonds are locked-out from prepayment during the first five years, and are subject to annually declining prepayment premiums in years six through ten. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) 3. EXHIBITS 3(a) Certificate of Trust and Certificate of Amendment of Certificate of Trust (incorporated by reference to Exhibit 3(a) to the Registration Statement on Form S-11, File No. 33-73688). 3(b), 4 Second Amended and Restated Business Trust (incorporated by reference to Exhibit 3(b), 4 to the Registration Statement on Form S-11, File No. 33-73688) 10(a) Escrow Agreement (incorporated by reference to Exhibit 10(a) to the Registration Statement on Form S-11, File No. 33-73688). 10(b) Fee Agreement (incorporated by reference to Exhibit 10 (b) to the Registration Statement on Form S-11, File No. 33-73688). 27 Financial Data Schedule (filed herewith) (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended June 30, 2000. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN TAX-EXEMPT BOND TRUST (Registrant) By: RELATED AMI ASSOCIATES, INC., as Manager Date: August 11, 2000 By: /s/ Alan P. Hirmes -------------------------------------- Alan P. Hirmes Senior Vice President, Principal Financial Officer, Treasurer and Principal Accounting Officer

AMERICAN TAX EXEMPT BOND TRUST 10-Q